Losses Allegedly Caused by Debit Card Holders’ Use of Phones Rather Than Computers Were Not Covered by Policy’s Computer Fraud Provisions

April 21, 2017 | Insurance Coverage

The U.S. District Court for the Northern District of Georgia has ruled that a company that claimed it suffered losses resulting from the use of telephones to access its processing system could not recover from its insurer for “computer fraud.”

The Case

InComm Holdings, Inc., and Interactive Communications International, Inc. (together, “InComm”) provided a service enabling consumers to load funds onto prepaid debit cards issued by banks. Cardholders purchased “chits” from retailers to add prepaid funds onto their cards.

The InComm system, however, had a processing system vulnerability by which debit card holders caused credit to be loaded onto debit cards in multiples of the credit amounts they had purchased.

InComm sought to recover its losses from the insurer that had issued it a computer fraud policy.

The insurer denied InComm’s claim, asserting, among other things, that InComm’s alleged loss had not resulted from “the use of any computer” to access its system, which was designed to be accessed by telephone.

InComm sued and the insurer moved for summary judgment.

The District Court’s Decision

The district court granted the insurer’s motion.

In its decision, the district court explained that the policy provided coverage for “computer fraud,” specifically, a “loss of . . . money . . . resulting directly from the use of any computer to fraudulently cause a transfer of that [money] from inside the premises or banking premises” to a person or place “outside those premises.”

In this case, the district court continued, the cardholders had used telephones to provide information to InComm’s system, which then had processed the information incorrectly, resulting in multiple redemptions of a single chit.

The cardholders “used” telephones to provide responses to prompts from a computer that InComm owned and operated, the district court added. That the cardholders’ use of telephones ultimately led InComm’s computer to process multiple chit redemptions did not establish that InComm’s loss had resulted from the cardholders’ “use of a[] computer,” the district court ruled.

Accordingly, it concluded, the policy’s computer fraud provision did not cover InComm’s claimed losses resulting from the unauthorized redemptions, “because the cardholders used telephones, not computers, to perpetrate their scheme.”

The case is InComm Holdings, Inc. v. Great American Ins. Co., No. 1:15-cv-2671-WSD (N.D. Ga. March 16, 2017).

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