No coverage for Bank under financial institution bond’s fraudulent telephonic voice instructions insuring clause for loss from wiring funds to imposter of Bank customer where customer didn’t qualify as “Customer” as defined under bond

by Christopher J. Graham and Joseph P. Kelly

First National Bank of Northern California v. St. Paul Mercury Insurance Company, (N.D. Cal., January 3, 2013):

Bank customer’s signature card for deposit account stated “With respect to wire transfers or other transfers of funds not governed by the Electronic Funds Transfer Act, [the account holder agrees] to enter into and comply with [Bank’s] wire transfer (if applicable) agreement and to comply with [Bank’s] security procedures.” Customer signed the signature card, but never signed the Wire Transfer Agreement and the security procedures were never provided to customer, but were on file at Bank.

Bank received a phone call from someone purporting to be customer, requesting a wire transfer of $412,876.18 to a bank in Bangkok. Bank’s employee asked for the date and amount of customer’s last deposit and the branch location of that account as verification. One day later there was another phone wire transfer request for $98,876.13, to a bank in Shanghai. Bank completed this transfer, asking for and receiving the same verification information as the first call.

Those transfers were part of a sophisticated international wire fraud scheme.

Bank’s Financial Institution Bond, subject to its terms, provided coverage for “loss directly from: . . . having in good faith . . . transferred funds on deposit in a Customer’s account in reliance upon a fraudulent telephonic voice instruction” transmitted to [Bank] ‘which purports to be from . . . [among others] an individual person who is a Customer of’ [Bank].

“Customer” was defined under the Fraudulent Instructions Insuring Clause as “an entity or natural person” that

(i) has a Written agreement with the Insured authorizing the Insured to rely on telephonic voice or Telefacsimile Device instructions to make transfers;

(ii) has provided the Insured with the names of persons authorized to initiate such transfers; and

(iii) with whom the Insured has established an instruction verification procedure other than voice recognition.

Bank timely filed a claim under the Bond, Insurer denied coverage, and Bank sued Insurer for breach of contract. Both sides moved for summary judgment and the Court granted summary judgment to Insurer.

Issue #1: Was the signature card the Bank’s customer signed a “Written agreement” so that the customer could qualify as a “Customer” under the bond’s telephonic voice instructions insuring clause? No.

Under California law:

A contract may validly include provisions of a document not physically part of the basic contract, so long as any incorporation by reference is “clear and unequivocal” and is “called to the attention of the other party” and the other party consents, and the terms of the incorporated document are “known or easily available to the contracting parties.”

But here the signature card was not accompanied by any copy of the Security Procedures, the wire transfer agreement, or even any document that detailed their terms. As such, the signature card was “nothing more than an agreement to agree, which is not enforceable under California law.”

Issue #2: Did the signature card provide Bank with “the names of persons authorized to initiate such transfers so that customer could qualify as a “Customer” under the bond’s telephonic voice instructions insuring clause? No.

The words “voice”, “verbal”, and “telephonic” did not appear on the Signature Card, and no term appeared to even mention wire transfers.

Issue #3: Did Bank establish an “instruction verification procedure other than voice recognition” with customer so that customer could qualify as a “Customer” under the bond’s telephonic voice instructions insuring clause? No.

Bank never gave Customer a copy of the Security Procedures which Bank purported to establish such a procedure.

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