EXCLUSION: “any defalcation, theft, embezzlement, conversion or misappropriation of client or customer funds by an Insured and/or by a Person or Entity Affiliated With An Insured”
A case in New Jersey ruled in favor of an insurance company regarding the policy conversion exclusion, exemplified above. When it comes to third-party liability, the exclusion applies.
In this case, the title agent paid out of their escrow account twice, which caused an overdraft and other real estate transactions to not go through. The overpayment was caused by the title agency receiving a request for a wire payment from what they thought was the seller’s attorney, which ended up being fraudulent.
Compounding the loss for this transaction and the others that did not go through, the title agency looked to their professional liability insurance for assistance. The policy would not respond as there is no coverage for “any insured’s commingling, loss of, failure to safeguard…customer funds”.
Most policies can be amended to include protection should funds be transferred due to cybercrime. Yet, even with this extension, there usually is verbiage clarifying that the coverage would only respond to the wire fraud for the insured, any further compounding loss to additional third parties would not be covered.
This confusion and ruling make clear that title agents and real estate professionals should review this portion of their coverage carefully with an agent. Liability for third-party losses due to wire fraud could fully rest on the agency issuing the conversion, not the bank, and not the insurance company.