250_C032

BOND’S EXCLUSION PROVISION WAS CONSPICUOUS, PLAIN, AND CLEAR

Crime/Dishonesty Insurance	Callback Procedure
Fraudulent Wire Transfer	Risk Alert

Universal City Studios Credit Union (Universal) processed a fraudulent wire transfer request. It sustained a loss of $243,700 and attempted to recover its loss under the credit union bond that Cumis Insurance Society (Cumis) issued. Cumis denied coverage and refused to pay. Universal sued Cumis, seeking to recover its monetary loss under the bond and also requested an award of punitive damages. The trial court granted summary judgment in favor of Cumis. It concluded that Universal did not comply with the security procedures detailed in the bond.

Cumis had written an annual credit union bond for Universal for more than ten years. The policy period was from February to February. Before it issued the February 2007 bond, Cumis notified Universal that the security procedure requirements on renewal would be different with respect to funds transfers. Cumis had previously notified Universal of the change in a two-page letter it sent in June 2006 and a three-page letter accompanied by a five-page Executive Summary in October 2006. Both communications essentially stated in part that “Funds Transfer Coverage is modified to require a callback procedure, or a signed written agreement with the member authorizing another commercially reasonable type of security procedure.”

The previous coverage required only a commercially reasonable security procedure. It did not require either a callback or a written agreement. The lack of specific guidelines had created misunderstandings and the change was consistent with the approach that other financial institution bond insurance companies used. Cumis’ policy clearly defined the callback procedure process and specified that the callback must be made to a designated secure telephone number.

Cumis emailed a “risk alert” to at least six of Universal’s employees, informing them of a sophisticated fraudulent funds transfer scheme. The credit union attempted to verify a funds transfer request by calling a member’s “secure telephone number” but the call was forwarded to a fraudster, even though the credit union’s “Caller ID” showed that the call went to the member’s telephone of record. According to the email, the scheme typically involved a member’s homeowner’s line of credit and frequently exceeded the transfer of $100,000. Cumis’ records indicated that five of the six Universal employees opened the email.

Cumis stated that it sent the email on January 8, 2008, before the fraudulent transfer in this case. Universal’s chief executive officer stated it was sent on January 16, 2008, two days after the fraudulent transfer. On January 9, 2008, Universal received a telephone call from an individual who identified himself as William Ryder, a credit union member, asking that Universal change his telephone number. Universal asked for Ryder’s Social Security Account Number, date of birth, mother’s maiden name, and current transaction activity. Universal changed the telephone number as requested after Ryder gave correct answers to all these questions.

Five days later, on January 14, 2008, Universal received via facsimile a completed wire transfer request directing that $243,700 be transferred from Ryder’s homeowner’s line of credit to an account held by Fuji Bullion Ltd. at HSBC Bank in Hong Kong. The form had a signature on the “Member’s Signature” line. Universal conducted its standard security procedure to verify the information on the form the very same day. Everything checked out perfectly. Two Universal employees reviewed the transaction according to its internal procedures, completed the security procedure without a hint of fraud, and transferred the funds.

On January 30, 2008, Ryder’s wife contacted Universal by telephone to ask about refinancing a loan. She was informed of the wire transaction during the conversation and she stated that neither she nor her husband requested a change of telephone number or a transfer of funds. Ryder submitted a sworn written statement that verified what his wife said. Universal investigated the transaction but did not recover the transferred funds. Universal submitted the claim to Cumis. Cumis investigated and declined coverage because Universal did not verify the wire transfer request by using a secure telephone number within the bond’s meaning.

Universal sued Cumis on February 3, 2009, seeking to recover its monetary loss and punitive damages. Cumis moved for summary judgment on both items. Universal filed opposition. The trial court concluded that Universal had not complied with the bond’s security procedures for funds transfers and that Cumis properly declined the loss. It entered judgment in favor of Cumis. Universal appealed.

The appellate court examined this complicated transaction in detail. It concluded that the funds transfer exclusion was conspicuous, plain, and clear. It appeared in the EXCLUSIONS section of the bond and used the same size and style of typeface that described the bond’s COVERAGES. The spacing in the bond was the same for both sections. The funds transfer exclusion was written with the same terminology as the funds transfer coverage. It concluded that a layperson would understand the coverage and exclusions provisions and affirmed that the trial court properly granted Cumis’ motion for summary judgment.

Court of Appeal, Second District, Division 1, California. Universal City Studios Credit Union, Plaintiff and Appellant, v. Cumis Insurance Society, Inc. Defendant and Respondent. No. B226868. July 31, 2012. 208 Cal.App.4^th 730, 145 Cal.Rptr.3d 650