Posco Daewoo: U.S. District Court rejects Creditor’s “Reverse” Social Engineering Fraud Claim under its own Crime Policy

By David S. Wilson and Chris McKibbin

On October 31, 2017, the U.S. District Court for the District of New Jersey released its decision in Posco Daewoo America Corp. v. Allnex USA, Inc. and Travelers Casualty and Surety Company of America. This case features an interesting twist on the usual social engineering fraud claim scenario, in that it was the intended payee of the funds, not the payor, which asserted a claim under its own crime policy for recovery of funds which the payor had been duped into paying to an impostor. This type of claim has been referred to as a “reverse” social engineering fraud claim. Numerous such claims have been advanced by intended payees recently, typically when it comes to light that the payor did not maintain its own social engineering fraud coverage.

The Court applied traditional concepts of ownership in finding that the intended payee did not “own” the funds at any time, and thus could not establish that its claim met the ownership condition in its policy.

The Facts

Posco Daewoo America (“Daewoo”) is an importer and exporter of chemicals. Allnex USA (“Allnex”) is a vendor of specialty chemicals, and was a customer of Daewoo. Daewoo supplied Allnex with product for which Allnex owed payment. In early 2016, an impostor posing as an employee of Daewoo’s accounts receivable department sent emails to an employee of Allnex, requesting that payments to Daewoo on certain outstanding receivables be remitted to “new” Wells Fargo accounts.

Allnex paid $630,058 into the Wells Fargo accounts. By the time that the fraud was discovered, $367,613 had been transferred from the Wells Fargo accounts to accounts overseas. Daewoo never had possession of any of the funds owed to it by Allnex at any time.

The Travelers Coverage

Daewoo maintained a Wrap+ policy with Travelers. Daewoo submitted a claim to Travelers under its Computer Fraud coverage, asserting that the impostor’s emails to Allnex, coupled with Allnex’s transfers to the Wells Fargo accounts, constituted a Computer Fraud loss to Daewoo.

Travelers moved to dismiss the action pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief could be granted. While Travelers took the position that the substantive elements of the Computer Fraud coverage had not been established, Travelers also pointed out a more fundamental concern with the claim – Daewoo had not satisfied the ownership condition in the policy. This condition provided as follows:

Ownership of Property; Interests Covered

 The property covered under this Crime Policy … is limited to property:

 i. that the Insured owns or leases;

ii.  that the Insured holds for others:

     (a) on the Insured’s Premises or the Insured’s Financial Institution Premises; or

     (b) while in transit and in the care and custody of a Messenger; or

 iii. for which the Insured is legally liable, except for property located inside the Insured’s Client’s Premises or the Insured’s Client’s Financial Institution Premises.

Travelers took the view that, while Daewoo was undoubtedly owed money by Allnex, Daewoo never actually held the funds, nor had Daewoo been legally liable for them, nor had Daewoo owned the funds.

The Court agreed. In the Court’s view, Daewoo’s failure to meet the ownership condition was dispositive. Until such time as funds were actually transferred to Daewoo, Daewoo had, at most, a receivable and a chose in action (i.e., a right to sue) in the event that it was not paid. This was insufficient for the purposes of the ownership condition:

[Daewoo] has not plausibly pled sufficient facts for the Court to find that it rightfully … possessed or had legal title to the money Allnex transferred into the Wells Fargo accounts. [Daewoo]’s strongest claim to owning that money stems from Allnex’s intention. The parties do not dispute that Allnex intended [Daewoo] to receive the wired money as payment for a debt.   However, a party’s intention of transferring legal title does not equate to an actual transfer of legal title without more. …

 The Court agrees with Travelers that before Daewoo actually received the monies due, Daewoo owned a receivable, or a right to payment, as well as a potential cause of action for payment if it was not made. … In other words, Daewoo did “own” something of value, but it was not the cash in the Wells Fargo accounts. It owned a receivable and a potential cause of action if Allnex did not pay. [emphasis added]

As a result, the Court granted the motion.

Conclusion

Posco Daewoo represents a straightforward application of the ownership condition to a claim that was anything but straightforward. The Court’s analysis reaffirms the fundamental coverage requirement that an insured must own, hold or have antecedent legal liability for the property which forms the subject of a claim.

The Court’s decision provides helpful guidance to fidelity claims professionals in clarifying the distinction between funds which meet the ownership condition, and funds in respect of which the insured has only a right as creditor. The Court effectively rejected the notion that Daewoo’s status as creditor made it a “constructive” owner of the funds in Allnex’s possession. Fidelity insurers occasionally face creative arguments concerning “constructive” ownership, and Posco Daewoo is an example of a court rejecting such arguments.

The decision also reinforces the importance of social engineering fraud coverage – in this case, for companies in the position of Allnex. Although it is not clear from the Court’s reasons, one surmises that Allnex did not maintain social engineering fraud coverage, which might have responded to the loss in issue here. Given the increasing frequency of vendor impersonation and other social engineering fraud losses, insureds would be well-advised to consult with their brokers about the risks that social engineering fraud poses to their business, and the availability of social engineering fraud coverage.

Posco Daewoo America Corp. v. Allnex USA, Inc. and Travelers Casualty and Surety Company of America, 2017 WL 4922014 (D.N.J.)

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