The Fifth Circuit recently overturned a summary judgment in favor of a liability insurer on a claim involving a fraudulently-induced wire transfer of money.  In HM Int'l, L.L.C. v. Twin City Fire Ins. Co., No. 20-20122, 2021, -- F.4th --, WL 3928970 (5th Cir. Sept. 2, 2021), HM was a provider of accounting and financial services, and its CFO received a fraudulent email purporting to be from one of its clients, directing HM to transfer $1 million to another bank account.  HM wired the money without directly contacting the client to verify the request, and most of the money was lost to the fraudster.  When the client demanded compensation for the loss, HM reported the claim to its D&O insurer, Twin City.  After Twin City denied the claim, HM sued Twin City, and the client joined the suit, asserting independent coverage for the loss under the policy.  Significantly, the client never actually sued HM for negligence, although it threatened to do so.

More than two years later, and while the coverage litigation was ongoing, HM settled with the client and demanded Twin City reimburse the settlement amount.  Twin City sought and won summary judgment in the trial court on the ground that the settlement was not covered because the client’s negligence claim was barred by the two-year limitations period at the time of the settlement and thus the insured was not “legally liable to pay” any negligence claim that could have been brought by the client. 

On appeal, the Fifth Circuit disagreed, first finding that a “claim” could include a demand for money and not only a lawsuit, and that “legally liable to pay” could refer to contractual liability such as liability arising out of a settlement agreement, and not merely to judicially imposed liability resulting from a lawsuit.  While it was true that HM probably could have defeated a negligence suit in court on its limitations defense, it nevertheless became legally liable to pay the settlement amount specified in the settlement agreement it entered into with the client.  The court concluded nothing in the insuring agreement required the insured to actually win a judgment against the insured for a claim to be covered.  Twin City’s summary judgment was reversed and the case was remanded to the trial court.

Editor’s Note: It is not clear from the court’s opinion whether the policy included a voluntary payment clause, which is present in most CGL policies and which the settlement paid by HM probably would have violated if it were present in this policy.

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