Blaneys partners David Wilson and Chris McKibbin will attend the joint FLA/ABA FSLC Conference in Philadelphia.  The FLA Conference on November 7 has a solid emphasis on cybercrime, while also addressing other important contemporary issues.  Program Chairs Theresa A. Gooley and Samuel J. Arena, Jr. have assembled a series of timely presentations, covering the impact of digital technology on forgery coverage; ERISA fidelity insurance; the continuing problem of the application of the tort concept of “proximate cause” to the interpretation of causation language in fidelity policies; comparing and contrasting Insuring Agreements (D) and (E); and a panel discussion on cybercrime, covering prevention, available products, coverages and claims.

Chris will co-present Tales From The Crypt: Cryptocurrency Is Here — How Will Crime Insurers Respond? which examines potential loss scenarios involving cryptocurrency and how they compare and contrast with traditional fidelity loss scenarios.

  • To register, or for more information, click here.
  • A copy of the conference brochure may be accessed here.

The ABA FSLC Fall Meeting on November 8 is entitled “An Analysis of Fidelity Claims for the Modern World.”  The program will address important substantive and practical issues germane to today’s fidelity claims handling.  Program Chairs Robin Segal-Gonzalez and Justin Wear have designed a lineup of presentations that will update participants on recent developments and claims handling strategies. The focus will be on a pragmatic discussion and implementation of specific skills with an eye toward pressing legal issues, ethical issues, and strategy. The topics include developments in cybercrime; a comparison of employee dishonesty vs. theft wordings; policy conditions regarding notice and proof of loss, as well as filing of suit; and causation in the context of fictitious collateral cases.

Chris will participate in the panel entitled The Fidelity Recovery Playbook: Practical Strategies for Maximizing Recovery, which canvasses litigation strategies and tools carriers can use to maximize recoveries against defaulters, confederates, third-party beneficiaries, auditors and banks.

  • To register, or for more information, click here.
  • A copy of the conference brochure may be accessed here.

 

Jump To: The Facts | The Tort of Conversion and the Bills of Exchange Act | The Conclusion

On October 27, 2017 the Supreme Court of Canada released its long-awaited decision in Teva Canada Ltd. v. TD Canada Trust. In a 5:4 decision, the Supreme Court held that two banks that accepted fraudulent cheques procured by a dishonest employee were strictly liable in conversion to the employer, and could not establish the “fictitious or non-existing payee” defence afforded by subsection 20(5) of the Bills of Exchange Act.

The decision is a welcome development for Canadian fidelity insurers who seek to subrogate against banks in respect of certain types of employee cheque frauds. The Supreme Court reversed the decision of the Court of Appeal for Ontario, which had found that the payees were either fictitious or non-existing. The Supreme Court’s decision places fidelity insurers in an excellent position to look to banks as subrogation targets in appropriate circumstances.

Continue Reading Teva: Supreme Court of Canada rejects Fictitious or Non-Existing Payee Defence in finding Collecting Banks Liable for Employee Cheque Fraud

Blaneys Fidelity Year in Review

In 2015, American and Canadian courts released a number of decisions of interest to fidelity claims professionals.   We are pleased to present Blaneys Fidelity Year in Review, which provides summaries of the decisions that appeared on Blaneys Fidelity Blog in 2015.  Blaneys Fidelity Year in Review is available here.

Blaneys Podcast: Fidelity Subrogation and Fraud Recovery

For those fidelity claims professionals dealing with fraud recovery and subrogation in Canada, the Blaneys Podcast series now features our podcast on fraud recovery and fidelity subrogation.  The podcast sets out the different strategies available for identifying and pursuing fraud recovery targets and for maximizing recoveries from defaulters, beneficiaries, co-conspirators, auditors and financial institutions.  The podcast is available here; SoundCloud users may access the podcast here.

Fidelity at the OBA: A Primer on Insurance Coverage (Toronto, May 12, 2016)

The Ontario Bar Association is presenting a program on insurance coverage issues on May 12 in Toronto.  Blaneys’ Chris McKibbin will be presenting on Computer Fraud and Funds Transfer Fraud Coverages in Fidelity and Commercial Crime Policies.  The program also includes presentations on recent developments regarding the duty of good faith and the duty to defend; the “lack of fortuity” defence; and a perspective from the Bench, presented by the Honourable Mr. Justice Jamie K. Trimble.  Co-chairs Laura Hodgins of Liberty and Andrew Mercer of Mercer Law have assembled a fantastic group of speakers, and the program is eligible for four substantive hours of CPD credit.  The program agenda is available here.

The recent decision of the British Columbia Supreme Court in D2 Contracting Ltd. v. Bank of Nova Scotia provides useful guidance for fidelity claims and subrogation professionals on dealing with cheque fraud losses arising from forged drawer signatures.  The Court’s decision demonstrates the necessity of ensuring that the insured’s bank has been notified of suspected fraud or irregularities immediately upon such issues being discovered.

The Facts

D2 Contracting Ltd (“D2”) was a contractor operating on Vancouver Island.  D2 had two principals, Copeman and Cooper.  In January 2006, D2 opened an account with the Bank of Nova Scotia (“BNS”) and agreed to BNS’s form of operation of account agreement (“OAA”).  The signature card provided that both of Copeman and Cooper had to sign any cheque drawn by D2 on the BNS account.

Commencing in 2006, Copeman wrote 594 cheques totalling almost $1.3 million.  On each of these cheques, Copeman forged Cooper’s signature as second signatory.  Cooper had learned of Copeman’s forging of his signature as early as August 2006, when Cooper received an ordinary-course cheque issued by D2 representing his salary, but noticed that Copeman had signed Cooper’s name along with his own.  Cooper did not raise the issue with BNS at the time.

In June 2007, Cooper reminded Copeman that Copeman should not be signing Cooper’s name to D2 cheques, even on cheques for legitimate D2 expenses.  Notwithstanding this admonition, Copeman continued to do so.  Cooper later admitted that he had been aware that Copeman had forged his signature on at least six cheques by mid-2008, and at least 10 cheques by February 2009.  Matters came to a head in March 2009, when a cheque payable to Cooper representing his monthly salary was returned NSF by BNS.  In April 2009, Cooper attended a BNS branch and reported the ongoing irregularities in the account.

D2’s Claim and BNS’s Contractual Defence

D2 commenced an action against BNS for recovery of the loss caused by Copeman’s fraud.  Under subsection 48(1) of Canada’s Bills of Exchange Act (BEA), a drawee bank will be liable to its customer where the bank pays a cheque that contains a forgery of the customer’s signature.

However, the statutory liability created by section 48 can be avoided by contractual verification provisions, and banks typically include provisions in OAAs which seek to accomplish exactly that.  The OAA in issue here contained a verification provision which obligated D2 to review each statement and notify BNS within 30 days of any errors or omissions.  D2’s failure to advise BNS within that time period was deemed by the OAA to constitute an acknowledgement of the accuracy of the account statement.

BNS brought a summary trial application under B.C. rule 9-7, asserting that the verification obligation, and Cooper’s failure to advise BNS of any problems between 2006 and 2009, represented a complete defence to D2’s claim.

The Court accepted BNS’s contention in respect of all loss preceding the 30 days immediately before Cooper attended the BNS branch in April 2009.  The Court accepted that the verification provision created a positive obligation on D2 to review each statement and to report any discrepancies within 30 days.  Failure to do so constituted an acknowledgement of the accuracy of the contents of the statement.  As such, the verification provision provided a complete contractual defence to BNS in respect of pre-March 2009 losses.

BNS’s Non-contractual Defence: section 48 of the BEA

BNS also asserted a non-contractual defence, asserting that subsection 48(1) of the BEA, as interpreted and applied in the Supreme Court of Canada’s 1987 CP Hotels decision, created a positive obligation on Cooper to promptly notify BNS about forgeries of which he had actual knowledge.  BNS contended that Cooper’s failure to do so precluded D2 from advancing any claim, even in the absence of the OAA.

The Court reviewed the CP Hotels decision and observed that the Supreme Court had recognized two existing duties of a bank customer: the duty to “use reasonable care to draw his cheques in such a manner as not to facilitate forgery or material alteration of them”; and the duty, “upon learning of forgery, to give the bank prompt notification of it”.  The Supreme Court had also affirmed that, even in the absence of a contractual verification obligation, a customer has a duty, upon learning of a forgery, to give the bank prompt notification of that forgery.

The Court accepted BNS’s submission on this point as well, holding that:

Contrary to D2’s submission, the common law duty articulated in CP Hotels to report forgeries known to the customer does not arise as an implied term of a contract between the bank and its customers. The Court clearly articulated that such a duty arose in the absence of any legally binding verification agreement. …

 In short, Mr. Cooper’s actual knowledge of Mr. Copeman’s forgeries and his flagrant failure to provide prompt notice to [BNS] of those forgeries are fatal to D2’s claim. 

 In all the circumstances, I conclude that D2 is precluded from setting up the forgery or want of authority against [BNS].  [emphasis added]

As a result, the Court dismissed D2’s claim in respect of all cheques predating the 30-day window prior to Cooper’s attendance in April 2009.

Implications for Fidelity Insurers

D2 Contracting provides valuable guidance to fidelity claims and subrogation professionals as to potential defences available to banks on forged drawer signature claims.  From a fidelity perspective, the lessons of D2 Contracting are:

  • in any claim arising from allegedly-forged drawer signatures, ensure that the insured has put its bank on notice of the potential forgeries, even if the total number of cheques, or the extent of the potential fraud, has not yet been ascertained;
  • obtain and review a copy of the insured’s OAA with its bank as soon as possible (this is essential in any cheque fraud claim);
  • obtain appropriate guidance with respect to the effectiveness of any potential contractual defences in the OAA; and,
  • obtain appropriate guidance with respect to the time limitations created by the BEA and the Automated Clearing Settlement System (ACSS) Rules and Standards promulgated by the Canadian Payments Association.

In a situation in which the defaulter has dissipated stolen funds, the insured’s bank may represent the only realistic avenue of recovery.  Taking these steps can preserve some or all of an insured’s (and, ultimately, the fidelity insurer’s) claim against the insured’s bank to the maximum extent possible.

D2 Contracting Ltd. v. Bank of Nova Scotia, 2015 BCSC 1634.