On November 19, 2018, 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.  The decision represents a “sequel” to the Court’s 2017 decision arising out of the same claim (see our November 6, 2017 post).  The 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 2017 decision dismissed the claim of the insured, Posco Daewoo America Corp. (“Daewoo”), under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief could be granted (this is similar to Ontario’s Rule 21.01(1)(b)).  However, the Court granted leave to Daewoo to re-plead its claim.  In so doing, Daewoo made some novel arguments concerning the scope of the ownership condition.

Continue Reading Posco Daewoo: U.S. District Court applies Ownership Condition in rejecting Creditor’s “Reverse” Social Engineering Fraud Claim under its own Crime Policy

Jump To: The Facts | The Ownership Condition | The Conclusion

On November 20, 2017, the Fifth Circuit Court of Appeals released its decision in Cooper Industries, Limited v. National Union Fire Insurance Company of Pittsburgh, PA.  The Court applied a crime policy’s ownership condition in ruling that the insured did not have coverage for the loss of funds incurred when an investment entity to which it had provided funds in exchange for promissory notes collapsed due to the entity’s principals’ Ponzi scheme.

The dispute arose out of the same Ponzi scheme that gave rise to the decision of the Eighth Circuit in 3M Company v. National Union Fire Insurance Company of Pittsburgh, PA (see our June 13, 2017 post).  Although there are important factual distinctions between the two losses, the Fifth Circuit reached the same conclusion as the Eighth Circuit in finding that the insured had not demonstrated that it owned the property in issue.

Continue Reading Cooper Industries: Fifth Circuit applies Crime Policy’s Ownership Condition in finding No Coverage for Loss of Funds in Ponzi Scheme

Jump To: The Facts | The Travelers Coverage | The Conclusion

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.

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

JUMP TO: THE FACTS | THE OWNERSHIP CONDITION | THE CONCLUSION

Guest Co-Author: John Tomaine

On May 31, 2017, the Eighth Circuit Court of Appeals released its decision in 3M Company v. National Union Fire Insurance Company of Pittsburgh, PA. The Court affirmed the decision of the U.S. District Court for the District of Minnesota (see our October 13, 2015 post), which had applied a crime policy’s ownership condition in ruling that the insured did not have coverage for the loss of investment earnings incurred when an investment entity in which it had a limited partnership interest collapsed due to the entity’s principals’ Ponzi scheme. The Eighth Circuit’s decision provides a good illustration of the interaction between the ownership condition and statutory and common law concepts of “ownership” as they relate to partnerships.

Continue Reading 3M: Eighth Circuit applies Crime Policy’s Ownership Condition in finding No Coverage for Loss of Undistributed Limited Partnership Earnings in Investment Fraud

Guest Co-Author: John Tomaine

[Editors’ note: Our guest co-author John Tomaine is the owner of John J. Tomaine LLC, a fidelity insurance and civil mediation consultancy in New Jersey. After over thirty-one years with the Chubb Group of Insurance Companies, he retired as a Vice President in 2009. He is an attorney admitted in Connecticut and New Jersey, and holds a Master’s Degree in Diplomacy and International Relations. He is available to serve as an expert witness in fidelity claim litigation and to consult on fidelity claim and underwriting matters. He will be a speaker at the FSLC’s Fall 2015 meeting in Washington D.C.]

In 3M Company v. National Union Fire Insurance Company of Pittsburgh, PA, the U.S. District Court for the District of Minnesota considered and applied a crime policy’s Ownership Provision in concluding that the insured did not have coverage for the loss of investment earnings suffered when an investment entity in which it had a limited partnership interest collapsed due to its principals’ Ponzi scheme. The decision provides an example of the interaction between the Ownership Provision and statutory and common law concepts of “ownership” as they relate to partnerships.

The Facts

In 1999, 3M began investing its employee benefit plan assets in WG Trading Company LP (“WG Trading”). 3M’s investment was structured as a limited partnership in WG Trading. The principals of WG Trading also maintained another entity, WG Trading Investors, LP (“WG Investors”), which was a limited partner in WG Trading. WG Trading was a regulated and audited entity, whereas WG Investors was not.

The principals of WG Trading and WG Investors were running a Ponzi scheme and, over the course of several years, diverted hundreds of millions of dollars from the two entities for their personal use. In 2009, the SEC and the CFTC initiated civil lawsuits against the WG entities and the principals, and obtained receivership orders. The receiver had considerable success in recovering assets; in fact, 3M was able to recover 100 per cent of its net capital contributions to WG Trading.

Nevertheless, 3M took the view that it had still suffered a loss, because at least some of its capital had been invested by WG Trading in legitimate vehicles and had produced legitimate earnings, but 3M was never paid those legitimate earnings.

The Ownership Provision

3M submitted a claim to National Union under its Blanket Crime Policy, and to its excess crime insurers under their follow-form excess policies. National Union determined that there was no coverage under the Crime Policy because, even if the invested funds generated legitimate earnings, the earnings did not fall within the condition of the Ownership Provision set out in Endorsement 8 to the policy, which provided that:

The insured property may be owned by the Insured, or held by the Insured in any capacity whether or not the Insured is legally liable, or may be property as respects which the Insured is legally liable.

National Union took the view that, even if 3M’s investment with WG Trading generated legitimate earnings that could be quantified and attributed to 3M, those earnings were neither owned by 3M nor held by 3M in any capacity, nor were they property for which 3M was legally liable. 3M argued that the Ownership Provision did not apply or, in the alternative, that it could be applied in a manner that would bring the claim within coverage.

3M initially contended that the Ownership Provision did not even apply to the claim, because it applied only to “insured property”, whereas the Employee Dishonesty insuring agreement encompassed “direct losses of Money, Securities or other property caused by Theft or forgery”. Similarly, Theft was defined as “the unlawful taking of Money, Securities or other property”. 3M contended that, because the Employee Dishonesty insuring agreement and the definition of Theft used the term “other property” rather than “insured property”, the Ownership Provision had no application in the circumstances.

The Court quickly dismissed this argument, holding that:

Clearly, then, Endorsement 8 is not intended to define “insured property,” as 3M’s argument implies. Instead, Endorsement 8 simply uses the term “insured property” to limit the coverage afforded under the “Employee Dishonesty” insuring agreement. And giving that phrase its plain and ordinary meaning, … the phrase “insured property” can only be understood as a shorthand way of saying “property whose loss is insured under this Policy”—that is, property that is insured under at least one of the insuring agreements in the Policy, such as the “Employee Dishonesty” insuring agreement.

Indeed, because “insured property” is not a defined term, the Court is at a loss to know what else it could mean. If it does not refer to property whose loss is insured under one or more of the various insuring agreements, then the Policy itself becomes nonsensical.

Did 3M “Own” the Earnings?

The more conceptually interesting ruling in the Court’s decision concerned whether 3M’s earnings came within the Ownership Provision. National Union contended that they did not, as 3M only owned a limited-partnership interest in WG Trading itself, rather than any of WG Trading’s assets. The Court accepted National Union’s position, holding that:

… what 3M owned was a limited-partnership interest in WG Trading. Up until the point at which earnings were distributed to the partners, the earnings of WG Trading were owned by WG Trading, and not by 3M or any of the other limited partners.

As noted, 3M’s investment was structured as a limited-partnership interest in WG Trading. WG Trading’s partnership agreements are governed by Delaware law [which] is crystal clear that a limited partner such as 3M has “no interest in specific limited partnership property.” The partner’s right to receive distributions of the partnership’s assets does not change this fact.

Consequently, the lost earnings were not “owned” by 3M within the meaning of the crime policy, and the insurers had no obligation to indemnify 3M.

“Legally Liable”

In a footnote, the Court noted that 3M had argued for the first time in its reply brief that it had fiduciary duties in respect of the lost earnings and, therefore, the earnings fell within the “property as respects which the Insured is legally liable” part of the Ownership Provision. The Court, relying on established authority, stated that it would not consider this argument, as it had been raised for the first time in 3M’s reply brief.

Conclusion

3M provides two key findings of assistance to fidelity insurers. First, it rejects the contention that the Ownership Provision acts as anything other than a pre-condition for recovery under the policy. In our view, 3M’s argument on this point was without merit, insofar as it attempted to draw an artificial distinction between the term “insured property” as used in the Provision, and the term “other property” as used in the relevant insuring agreement and the definition of Theft. A loss must fall within an insuring agreement and must also meet the Ownership Provision.

Second, and more importantly, the Court carefully analyzed the limited partnership agreements, and applied state law, in concluding that what 3M actually “owned” was not any of WG Trading’s assets, but rather a limited partnership interest in WG Trading itself, with only the possibility of future receipt of earnings upon distribution.

The same general principles of partnership law apply in Canadian common law jurisdictions such as Ontario. Subsection 7(2) of the Ontario Limited Partnerships Act states that a limited partner’s interest in the limited partnership is distinct personal property, while subsection 21(1) of the Ontario Partnerships Act makes it clear that partnership property is legally distinct from property owned by the partners themselves. Thus, it is arguable that the same result should follow, were such a claim to be litigated north of the border.

3M Company v. National Union Fire Insurance Company of Pittsburgh, PA., 2015 WL 5687879 (D. Minn.)