INSURANCE-RELATED COURT CASES
Digested from case reports published online
COURT DECISIONS
Bond’s exclusion can’t be thwarted
An expensive fraud loss befell a nonprofit corporation called the Office of the Special Deputy Receiver (OSD). The OSD’s function is to assist insurance companies that are in poor financial condition, including those that become insolvent in the state of Illinois. Specifically, it administers the estates of such companies.
The loss involved the OSD’s chief financial officer, whose email account was accessed by a fraudulent party. Once the account was hacked, the results were severe. The communications that were created fooled various OSD employees to transfer millions of dollars into the hands of thieves.
Prior to their substantial loss of funds, OSD arranged for a Financial Institution Bond from the Hartford Fire Insurance Company (Hartford). Naturally, the OSD filed a claim for their loss. However, Hartford denied it. OSD decided to sue, but the trial court ruled in favor of Hartford. OSD then appealed.
The situation the court was asked to review was OSD’s arguments that Hartford’s denial of their $4 million loss constituted a breach of contract. That amount was lost due to emails from the hacked CFO’s email account which included transfer instructions to several OSD employees. The fraudulent use of the account included the ability to receive queries from the targeted employees and to send replies that reinforced the transfer instructions. Hartford maintained its position that no coverage was owed because the bond, via two endorsements, specifically excluded the loss.
Both courts focused on the parts of the policy they deemed central to Hartford’s rationale to decline coverage, riders (endorsements) 13 and 17. Rider 13 concerned computer systems fraud. It obligated Hartford to respond to losses from property that is delivered, paid or transferred. But such losses have to be the direct result of fraudulent entries or changes of data or programs within OCD’s computer system.
Rider 17 involved fraudulent transfers via the use of email. The first portion of the rider stated that protection existed for direct loss by OCD’s good faith transfer of funds/securities. The transfer could be due to receipt of instructions that appear to be from an OSD customer, an employer acting on instructions of such a customer or from another financial institution authorized to act on behalf of such a customer. Such transfers were eligible for coverage if it turns out that the instructions requesting transfers were fraudulent. In other words, the parties appeared to be legitimate, but they actually were imposters.
The latter part of Rider 17 stated that any such transfers of funds/securities caused by reliance on email sources sending fraudulent instructions to OSD other than the three stipulated in the first part of the rider were excluded.
OSD continued to press its original argument that ambiguity existed. In its opinion the hacked email account’s fraudulent instructions should be eligible for coverage because they were sent within rather than sent to OSD. Another argument was that the bond’s exclusion applied only to restrictions placed on senders existing outside of OSD. Finally, OSD pointed out that the policy was confusing since Rider 13’s wording did not contain a similar restriction.
The higher court did not see merit in OSD’s position. After its examination of the relevant bond language, it determined that the interpretation of the riders as a whole made sense in relation to the bond’s entire wording. The court’s determination was that, as written, the riders were clear regarding the coverage it affirmed along with situations that were ineligible. Exclusions that affected different parts of the policy routinely applied in different manners.
It found no conflicts that created coverage nullification (where coverage specifically provided is erased within the same contract, making coverage an illusion). The higher court affirmed the decision in favor of Hartford.
Office of the Special Deputy Receiver v. Hartford Fire Insurance Company—U.S. Court of Appeals for the Seventh Circuit—No. 25-2309—June 18, 2026.
