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Great American Insurance Co. is not obligated to reimburse a prepaid card processor for an $10.7 million loss under its computer fraud policy, because the theft did not result directly from the fraudulent use of its computer system, says a federal appeals court, in upholding a lower court ruling.
Atlanta-based Interactive Communications International Inc. sells “chits,” each of which has a specific monetary value, to consumers who then redeem them by loading their value onto a debit card, according to Thursday’s ruling by the 11th U.S. Circuit Court of Appeals in Atlanta in Interactive Communications International Inc. et al. v. Great American Insurance Co.
When a customer dials InComm’s 1-800 number to redeem a chit, he enters his debit card number and the PIN located on the back of the chit. The system then credits the value of the card to the chit, and the funds immediately become available to the cardholder, according to the ruling.
After making the funds available for use, InComm is then contractually obligated to transfer funds equivalent to the value of the redeemed chit to the bank that issued the debit card, according to the ruling. The funds are maintained in the card-issuing bank for the cardholder’s benefit until he uses the card to conduct a transaction.
Between November 2013 and May 2014, criminals exploited a vulnerability in InComm’s computer system that enabled multiple redemptions for a single chit, which resulted in $11.4 million in fraudulent redemptions, of which $10.7 million were redeemed on debit cards issued by Philadelphia-based Bancorp Inc., the focus of the lawsuit. Because InComm believed the transactions were legitimate, it had wired the funds to the bank to cover the purchasing power made available on the cards.
The computer fraud policy issued by Cincinnati-based Great American provides coverage for losses resulting “directly from the use of any computer to fraudulently cause a transfer” of property, according to the ruling.
After Great American denied coverage for the loss, InComm filed suit in U.S. District Court in Atlanta, which granted the insurer summary judgment dismissing the case.
That ruling was upheld by a unanimous three-judge appeals court. The loss did not occur until the last step, when Bancorp disbursed the money to pay the merchants, said the panel. “That was the point at which InComm could not recover its money, that was the point of no return.
“That being the case, it seems clear to us that InComm’s loss did not ‘result directly’ from the initial computer fraud,” and because of this, is not covered by its policy, said the ruling, in upholding the lower court’s decision.
In November, a federal court ruled that a Travelers Cos. Inc. unit’s crime policy does not cover a computer fraud case because its policyholder has not established the wired payments its supplier had inadvertently sent to an imposter can be considered its owned property under terms of its policy.
U.S.-based Great American Insurance Co. Inc. has opened its first office in Singapore and expects to generate annual revenue of $100 million by the end of 2017 from the branch, The Straits Times reported.