Unreported / Non-Citable
Background
Aurum Title, Inc., a real estate title and escrow company, suffered a loss of $247,881 after an employee, Shellie Haas, was tricked into sending a wire transfer to a fraudster during a property closing. Aurum held a crime protection policy with The Ohio Casualty Insurance Company and a professional liability (errors and omissions) policy with Richmond National Insurance Company. Both insurers denied Aurum’s claims for the loss.
Aurum initially sued both insurers in Texas state court. After the case was removed to federal court based on diversity of citizenship, Aurum sought to add four new, non-diverse defendants: its employee Haas and her company, as well as its insurance agent and his company. Adding these Texas-based defendants would have destroyed federal diversity jurisdiction and forced the case back to state court. Concurrently, Richmond National filed a motion to dismiss all claims against it, arguing its policy did not cover the loss.
The Court’s Holding
The court granted Richmond National’s motion to dismiss, finding that the loss was not covered under its professional liability policy. The policy contained a specific exclusion for “any claim based upon, directly or indirectly arising from… any social engineering fraud.” The court determined that the facts alleged by Aurum—that its employee was misled by a “fraudulent act, misrepresentation, scheme, trick, device, or false pretense” into wiring money—fell squarely within the policy’s definition of social engineering fraud. Because the exclusion clearly applied, Aurum failed to state a plausible claim for breach of contract.
The court also dismissed Aurum’s extra-contractual claims against Richmond for bad faith, unfair settlement practices under the Texas Insurance Code, and violations of the Texas Deceptive Trade Practices Act (DTPA). It reasoned that if a claim is not covered by the policy, an insurer generally cannot be liable for bad faith in denying it. Finally, the court denied Aurum’s motion to add the new, non-diverse defendants, scrutinizing the request and concluding that Aurum’s primary purpose was likely to defeat federal jurisdiction, as it knew about these parties before filing the lawsuit. Accordingly, Aurum’s motion to remand the case to state court was also denied. The court gave Aurum 30 days to amend its complaint against the original defendants.
Key Takeaways
- A specific “social engineering fraud” exclusion in an insurance policy can be a complete bar to coverage for losses stemming from fraudulent wire transfer schemes.
- Federal courts will closely examine a plaintiff’s motives for adding non-diverse defendants after a case has been removed from state court and may deny the request if the purpose appears to be defeating federal jurisdiction.
- An insurer who has a reasonable basis for denying a claim under a policy exclusion—such as the inapplicability of coverage—will likely not be found liable for bad faith, unfair settlement practices, or related statutory violations.
Why It Matters
This opinion underscores the power of specific policy exclusions in the context of cybercrime and wire fraud, which have become increasingly common. For businesses, particularly in the real estate and financial sectors, it highlights the critical need to understand the precise scope of their insurance coverage and the effect of exclusions for social engineering. The decision also serves as a procedural reminder to litigants that federal courts are protective of their jurisdiction and will look unfavorably upon tactical maneuvers, like adding parties late in the game, if they appear designed solely to secure a remand to state court.