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Court rules against Hartford unit in cyber scam case


A federal appeals court Thursday reversed a lower court and ruled a Hartford Financial Services Insurance Group Inc. unit must indemnify a financial services company that was victimized by a scammer.

In January 2015, Austin-based HM International LLC’s chief financial officer received an email from a fraudster purporting to be client Greg Geib instructing the company to wire transfer $1 million to another bank account, according to the ruling by the 5th U.S. Circuit Court of Appeals in New Orleans in HM International, LLC v. Twin City Fire Insurance Co.

HMI executed the order, which caused Mr. Geib and his wife to lose the $1 million, much of which they have been unable to recover, according to the ruling. The fraud was discovered two days later when the scammer tried the scheme a second time without success.

Three months later, the Geibs’ attorney sent HMI a letter accusing it of negligence and demanding compensation for the couple’s loss.

HMI sought coverage under its directors and officers liability policy with Hartford unit Twin City.

Twin City refused to provide coverage, based on policy exclusions, and HMI and the Geibs filed suit against the insurer seeking coverage.

While this litigation was ongoing, HMI and the Geibs settled their dispute, with HMI paying the couple $470,000 and receiving a complete release from any liability and the right to pursue recovery of the stolen funds.

The Geibs never filed their threatened negligence suit, and the settlement occurred more than two years after the negligence claim accrued, which was past the Twin City policy’s limitations period.

Both HMI and Twin City moved for summary judgment, and the U.S. District Court ruled in Twin City’s favor.

The ruling was overturned by a unanimous three-judge appeals court panel.

“The district court granted summary judgment to Twin City, concluding that the settlement payment was not a ‘loss’ because it was not an amount that HMI was ‘legally liable to pay solely as a result of a claim,” it said. 

The lower court misinterpreted the policy, the panel said. “The policy covers ‘Loss … resulting from an Entity Claim.’  The demand letter that the Geibs’ attorney sent to HMI constitutes an Entity Claim because it is a ‘written demand for monetary damages or other civil non-monetary relief,”  the ruling said, in quoting the policy.

“The HMI’s settlement payment constitutes a Loss because it is an amount that HMI is legally liable -  through contract – to pay to the Geibs as a result of the demand letter,” the panel said in vacating the lower court’s summary judgment and remanding the case for further proceedings.

A Hartford attorney had no comment while HMI’s attorneys did not respond to a request for comment.