Life’s not always a box of chocolates
Rainforest Chocolate, LLC, was insured under a businessowners policy issued by Sentinel Insurance Company. In May 2016, a Rainforest employee received an email purporting to be from his manager. The email directed the employee to electronically transfer $19,875 to a specified outside bank account. Unbeknownst to the employee, an unknown individual had gained control of the manager’s email account and sent the email. The employee electronically transferred the money. When Rainforest learned that the manager had not sent the email, it contacted its bank, which froze its account and limited the loss to $10,261.36.
Rainforest reported the loss to Sentinel. Rainforest claimed the loss should be paid under policy provisions that covered losses that resulted from forgery, forged or altered instruments, and losses that resulted from computer fraud. Sentinel denied coverage.
Rainforest also claimed coverage under a policy provision for the loss of money or securities by theft. Sentinel again denied coverage, relying primarily on an exclusion (the false pretense exclusion) for physical loss or physical damage caused by or resulting from false pretense that concerned “voluntary parting” of the property.
The court denied Rainforest’s motion, granted Sentinel’s motion, and entered judgment in favor of Sentinel. Rainforest appealed.
On appeal, the court stated that the crux of the appeal was whether the false pretense exclusion barred coverage for Rainforest’s loss. Rainforest argued that the exclusion did not apply because it excluded only “physical loss or physical damages,” and Rainforest’s loss was not physical.
The court noted that the trial court conceded that other courts have held that losses arising from transfers of funds are not “physical” because they are the losses of funds on deposit in a bank rather than losses of cash, such as paper money or coins. The trial court explained that it was not persuaded by this rationale because funds held by a bank fell within the policy’s definition of “money,” which is defined as “[c]urrency, coins and bank notes whether or not in current use.”
The appellate court said the fact that funds fell under the policy’s definition of “money” did not automatically lead to the conclusion that “money” could be subjected only to “physical loss.”
The policy’s forgery provision stated that Sentinel “will pay for loss resulting directly from forgery … in ‘money,’” and the money and securities provision stated that Sentinel “will pay for loss of ‘money,’” while the computer fraud provision stated that Sentinel will pay “for physical loss or physical damage to ‘money.’”
This differing use of “physical loss” and simply “loss” led the court to conclude that it cannot be said that all “money” is subject solely to physical loss simply because funds, whether or not in current use, qualify as “money” under the policy. The court was convinced that the false pretense exclusion was subject to at least two reasonable interpretations and therefore held that it was ambiguous.
The court dismissed Rainforest’s claim under the policy’s computer fraud provision because it covered only “physical loss of or physical damage to ‘money’ … resulting directly from computer fraud” and because the court had concluded that Rainforest’s loss was not physical. The case was remanded to the trial court to determine whether Rainforest’s loss was covered under the policy’s forgery or money and securities provisions.
Rainforest Chocolate, LLC v. Sentinel Insurance Company, Ltd.-Supreme Court of Vermont-December 28, 2018-No. 2018-095.