State Bank of Bellingham v. BancInsure, Inc.

• Citation: 823 F.3d 456
• Decision Date: 20 May 2016
• Docket Number: No. 14–3432.,14–3432.
• Parties: STATE BANK OF BELLINGHAM, Plaintiff–Appellee v. BANCINSURE, INC., now known as Red Rock Insurance Co., Defendant–Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

823 F.3d 456

STATE BANK OF BELLINGHAM, Plaintiff–Appellee
v.
BANCINSURE, INC., now known as Red Rock Insurance Co., Defendant–Appellant.

No. 14–3432.

United States Court of Appeals, Eighth Circuit.

Submitted: Oct. 21, 2015.
Filed: May 20, 2016.

823 F.3d 457

Joseph Arthur Nilan, argued, Joseph Arthur Nilan, Mark J. Johnson, Thomas James Power, on the brief, Minneapolis, MN, for Defendant–Appellant.

Jonathan Millea Bye, argued, Jonathan Millea Bye, Bryan R. Freeman, on the brief, Minneapolis, MN, for Plaintiff–Appellee.

Before RILEY, Chief Judge, SMITH and SHEPHERD, Circuit Judges.

SHEPHERD, Circuit Judge.

A computer at the State Bank of Bellingham (Bellingham) became infected with malware, allowing a criminal third party to transfer $485,000 from Bellingham to a foreign bank account. Bellingham sought coverage for the loss under its Financial Institution Bond (Bond) issued by BancInsure, Inc. (BancInsure). BancInsure denied coverage based on exclusions in the Bond. Bellingham filed this action, claiming breach of contract. The district court¹ granted summary judgment in favor of Bellingham, and BancInsure appeals. We affirm.

I.

Bellingham, a Minnesota state bank with five employees, used the Federal Reserve's FedLine Advantage Plus system (FedLine) to make wire transfers. Wire transfers were made through a desktop computer connected to a Virtual Private Network device provided by the Federal Reserve. In order to complete a wire transfer via FedLine, two Bellingham employees had to enter their individual user names, insert individual physical tokens into the computer, and type in individual passwords and passphrases.

On October 27, 2011, Sharon Kirchberg, a Bellingham employee, completed a FedLine wire transfer. She completed the transaction using her token, password, and passphrase as well as the token, password, and passphrase of a second employee. At the end of the work day, Kirchberg left the two tokens in the computer and left the computer running. When she arrived at work the next day, she discovered that two unauthorized wire transfers had been made from Bellingham's Federal Reserve account to two different banks in Poland. Kirchberg was unable to reverse the transfers through the FedLine system. Kirchberg immediately contacted the Federal Reserve and requested reversal of the transfers, but the Federal Reserve refused. The Federal Reserve, however, did contact intermediary institutions to inform them that the transfers were fraudulent, and one of the intermediary institutions was able to reverse one of the transfers. The other fraudulent transfer was not recovered.

In 2010, BancInsure, an Oklahoma company, sold a financial institution bond to Bellingham, which provided coverage for

823 F.3d 458

losses caused by such things as employee dishonesty and forgery as well as computer system fraud. On the day of the fraudulent transfer, Bellingham notified BancInsure of the loss and provided a copy of the transaction details of the two transfers. After an investigation, it was determined that a “Zeus Trojan horse” virus had infected the computer and permitted access to the computer for the fraudulent transfers. After its investigation, BancInsure determined the loss was not covered due to certain exclusions in the Bond.² Specifically, BancInsure claimed the loss was not covered based on employee-caused loss exclusions in sections 2(h) and 2(bb)(17), exclusions for theft of confidential information in section 2(bb)(4), and exclusions for mechanical breakdown or deterioration of a computer system in section 2(bb)(12).³

Bellingham initiated this diversity action in federal court, alleging BancInsure breached the contract when it denied coverage under the Bond. BancInsure counterclaimed. In its counterclaim, BancInsure (1) sought a declaratory judgment that it owes no duty under the Bond to provide coverage, (2) claimed Bellingham breached the contract when it failed to provide a complete and accurate Proof of Loss and failed to cooperate with BancInsure,

823 F.3d 459

and (3) claimed that Bellingham engaged in malicious prosecution when it complained about BancInsure's actions to the Minnesota Department of Commerce.

Both parties moved for summary judgment. The district court granted summary judgment to Bellingham on its breach of contract claim. The district court held “that the computer systems fraud was the efficient and proximate cause of [Bellingham's] loss,” and “neither the employees' violations of policies and practices (no matter how numerous), the taking of confidential passwords, nor the failure to update the computer's antivirus software was the efficient and proximate cause of [Bellingham's] loss.” (Order at 39.) Further, the district court held “it was not then a ‘foreseeable and natural consequence’ that a hacker would make a fraudulent wire transfer. Thus even if those circumstances ‘played an essential role’ in the loss, they were not ‘independent and efficient causes' of the loss.” (Order at 39.) The district court awarded Bellingham $620,187.36, which included prejudgment interest. It denied summary judgment to BancInsure on its counterclaims for breach of contract and malicious prosecution. The court also awarded attorneys' fees to Bellingham based on the denial of summary judgment on the malicious prosecution claim.

BancInsure appeals, challenging only the district court's grant of summary judgment on Bellingham's breach of contract claim.

II.

We review the district court's grant of summary judgment de novo, viewing the record and drawing all reasonable inferences in the light most favorable to the nonmoving party. Shrable v. Eaton Corp., 695 F.3d 768, 770 (8th Cir.2012). Summary judgment is appropriate if “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a).

BancInsure challenges the district court's application of Minnesota's concurrent-causation doctrine in this circumstance. First, BancInsure argues the concurrent-causation doctrine does not apply to financial institution bonds. Second, assuming the concurrent-causation doctrine does apply, BancInsure claims that the parties here contracted around the...