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Proximate Cause Determination Kept from Jury in $1.7M Coverage Case

Written by: R. Wells Littlefield, Esq.

In Principle Solutions Group, LLC v. Ironshore Indemnity, Inc., 17-11703, 2019 WL 6691509, (11th Cir. Dec. 9, 2019), a split 11th Circuit Court of Appeals panel affirmed summary judgment in favor of Principle Solutions, providing coverage for the Atlanta-based IT staffing firm’s $1.7 million loss in a fraudulent instruction transfer scam, despite potential intervening events and questions as to foreseeability and causation. This case is noteworthy because is yet another example of the recent trend in the courts towards a more expansive view of foreseeability; however, in this case, the Court also made a finding as to proximate cause and took that determination out of the hands of a potential jury by affirming summary judgment.

The loss arose when a Principle Solutions’ controller received an email purporting to be from the company’s managing director informing her of a confidential international acquisition the firm had been working on, directing her to wire money in accordance with the agreement, to work solely with a partner in a UK-based law firm, Bird & Bird, in executing the transfer as soon as possible, and to do so discretely because the deal was not public. Over the course of the next few hours, Principle’s controller worked exclusively with the person she thought was the outside attorney, via phone and email, ultimately placing a transfer order for more than $1.7 million to a bank in China. Wells Fargo fraud prevention put a hold on the transaction and emailed the Principle employee and asked her contact a fraud prevention specialist. The employee immediately called Wells Fargo and then, as directed, spoke with the person posing as the attorney to verify that the order originated from the managing director, who he confirmed by name. That information was relayed to Wells Fargo, which then released the hold and transferred over $1.7 million dollars (in foreign currency) to the bank in China.

The following day, the managing director learned of the transfer, notified Wells Fargo of the fraud, an later filed a claim under the company’s commercial crime insurance policy with Ironshore Indemnity. Ironshore denied the claim on the basis that the fraudulent emails, independently, did fall within the policy’s requirements for coverage and that the employee’s communications with the outside attorney and the involvement of Wells Fargo’s fraud prevention severed the causal chain of the transfer from the initial email; consequently, the transfer was not a “direct” result of the initial email.

After the U.S. District Court for the Northern District of Georgia granted summary judgment in favor of Principle Solutions, Ironshore appealed. On de novo review, the majority interpreted the fraudulent emails and communications from the purported managing director and the outside attorney as “part of the same fraudulent instruction,” and therefore, fell unambiguously within the coverage provision. The majority then took the unusual step of finding the fraudulent instruction was the proximate cause of the loss, a determination normally left for a jury to decide. The Court reasoned that the involvement of Wells Fargo fraud prevention was entirely foreseeable, was a risk that was mitigated and planned for by the scammers, and since the loss would have occurred whether or not Wells Fargo became involved, it could not be an “intervening cause”. As a result, the Court held that it could decide the fraudulent instruction was the proximate cause of the loss because the evidence was clear and sufficient to lead to only one reasonable conclusion—that there was no intervening cause between the initial email and the loss.

Circuit Judge Gerald Tjoflat dissented, contesting the Court’s determination that the initial fraudulent email unambiguously fell within the policy and concluding that the determination of proximate case, particularly whether Wells Fargo’s intervention broke the chain of causation, was a question to be decided by a jury and not usurped by the Court. He argued that a court can only make a proximate cause determination as a matter of law only if reasonable persons would agree as to both the relevant facts and the application of legal standards, such as “foreseeability”, to the facts.

While we have increasingly seen appellate courts uphold verdicts and exorbitant damages despite questionable and tenuous foreseeability of the loss, this case is unique in that the Court made its own determination as to foreseeability, lack of intervening causes, and causation when there were facts which could have led a reasonable jury to a different finding. If other courts follow suit, insurance companies could now be left vulnerable coverage situations no matter how many steps it takes to safeguard itself and attorneys practicing insurance coverage and defense will continue to have an increasingly difficult task in successfully defending their clients.