DALLAS FEDERAL JUDGE FINDS NO COVERAGE FOR PHISHING SCHEME LOSSES UNDER COMMERCIAL CRIME POLICY

Last week, a federal district court in Dallas granted primary and excess insurers' motions for summary judgment under commercial crime policies. In RealPage, Inc. v. National Union Fire Insurance Co, et al., No. 3:19-CV-1350-B, 2020 WL 718366, (N.D. Tex.—Dallas, February 24, 2021) RealPage sought coverage under commercial-crime policies issued by National Union and Beazley when it fell victim to a phishing scheme. In May 2018, bad actors used a phishing scheme to obtain the account credentials of a RealPage employee. They then used those credentials to access a third-party payment processor and alter fund-disbursement instructions. Ultimately, the bad actors diverted over $10,000,000 that had not yet been disbursed to RealPage’s clients. RealPage reimbursed its clients for the lost funds. Prior to the phishing scheme, RealPage obtained a Commercial Crime Policy and an Excess Fidelity and Crime Policy.  RealPage sought coverage for its losses and National Union denied coverage for any funds that were owed to clients.  RealPage filed suit seeking a declaration under the policies and asserting insurance code violations. The parties filed cross motions for summary judgment. 

The Court first examined whether RealPage suffered a loss of property covered by the Policy by determining whether RealPage held the client funds. Based on a plain language reading of the term “hold” in the Policy, the Court concluded that RealPage did not hold the funds that were to be disbursed to their clients, and therefore did not suffer a direct loss as required under the Policy. Based on this finding, the court granted summary judgment in favor of the insurers on the declaratory-judgment, breach-of-contract, and anticipatory breach-of-contract claims.  Based on the finding that RealPage was not entitled to coverage of the claim, the court also dismissed all remaining insurance code claims.