City of Unalaska v. Nat'l Union Fire Ins. Co.
| Docket Number | Case No. 3:21-cv-00096-SLG |
| Decision Date | 18 March 2022 |
| Citation | 591 F.Supp.3d 440 |
| Parties | CITY OF UNALASKA, Plaintiff, v. NATIONAL UNION FIRE INSURANCE COMPANY, Defendant. |
| Court | U.S. District Court — District of Alaska |
Brooks W. Chandler, Boyd, Chandler & Falconer, LLP, Anchorage, AK, for Plaintiff.
Everett W. Jack, Jr., Davis Wright Tremaine LLP, Portland, OR, Michael Scott Broadwell, Pro Hac Vice, Davis Wright Tremaine LLP, Anchorage, AK, for Defendant.
This order addresses two pending motions: (1) Defendant National Union Fire Insurance Company's ("National Union's") Motion for Judgment on the Pleadings at Docket 11;1 and (2) Plaintiff City of Unalaska's ("the City's") Motion for Summary Judgment at Docket 18.2 Oral argument was held on December 20, 2021.3
This action stems from an insurance dispute regarding coverage for computer fraud under the City of Unalaska's Government Crime Policy ("the Policy") with National Union Fire Insurance Company. The undisputed facts are as follows:
On April 11, 2019, the City's Accounts Payable Assistant received an email purportedly sent by one of the City's regular vendors, Northern Alaskan Contractors ("NAC"), requesting a copy of the City's "ACH/EFT form" in order to change its method of receiving payments for invoices from paper checks to electronic ACH transfers.4 The email was not in fact from NAC but rather from a person whom both parties term a "fraudster."5 On the same day, another City employee emailed the fraudster an ACH form and advised them that even after receipt of the completed form, it would take at least ten days for the City to process the request before issuing payments.6 The fraudster returned the completed ACH form by email, designating a Citibank Account in New York as the new method for receiving payments.7
The following day, the fraudster sent another email asking about receiving payment of an invoice, and the City responded by email that it could not yet make the payment because additional steps needed to be taken to process the request, as conveyed in its previous email.8 On April 18, 2019, the City advised the fraudster by email that its Controller had given verbal authorization for future payments by ACH.9 Between May 7, 2019 and July 9, 2019, the City initiated ACH payments for several NAC invoices totaling $2,985,406.10 to the fraudster's Citibank account.10
On July 10, 2019, the City discovered the fraud and reported it to the FBI.11 It was able to recover close to $2.35 million, resulting in a net loss of $637,861.67.12 The City submitted a claim for the loss to National Union, which accepted coverage under the Impersonation Fraud Coverage endorsement of the Policy and paid the City the $100,000 policy limits of that coverage, reducing the loss to $537,861.67.13 The City requested coverage for this remaining amount under the Computer Fraud Insuring Agreement ("CFIA") of the Policy, but National Union responded that no coverage was available under that provision because the City's claim "[did] not directly involve the use of any computer to fraudulently cause a transfer of property from inside the premises to a person or place outside the premises."14 Following National Union's partial denial of coverage, the City also received a $22,500 payment from Alaska Public Entity Insurance, reducing the total remaining loss to $515,631.67.15
The City filed this action for breach of contract and declaratory relief in Alaska state court on March 22, 2021, alleging that National Union breached its contractual duty to provide coverage for the City's loss under the CFIA.16 On April 15, 2021, National Union removed the case to federal court on the basis of diversity jurisdiction.17
The Government Crime Policy in question was issued to Alaska Public Entity Insurance with effective dates of July 1, 2019 to July 1, 2020 and extends coverage to the City as an additional insured.18 The Impersonation Fraud Coverage endorsement of the Policy amends the Funds Transfer Fraud Agreement to add:
The Policy also includes the aforementioned CFIA, which states:
[National Union] will pay for loss of or damage to "money," "securities" and "other property" resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the "premises" or "banking premises" ... [t]o a person (other than a "messenger") outside those "premises" [ ] or ... [t]o a place outside those "premises."20
The CFIA has a policy limit of $1 million, subject to a $25,000 deductible.21
The parties filed the instant motions in July and September 2021, each asserting that it is entitled to judgment as a matter of law. The parties agree that there are no disputed facts and that Alaska law applies.22
Federal Rule of Civil Procedure 12(c) provides that "[a]fter the pleadings are closed—but early enough not to delay trial—a party may move for judgment on the pleadings." "Judgment on the pleadings is properly granted when there is no issue of material fact in dispute, and the moving party is entitled to judgment as a matter of law."23 When deciding such a motion, the court "accept[s] all factual allegations in the complaint as true and construe[s] them in the light most favorable to the non-moving party."24 The court may consider documents relied on in a complaint without converting the motion for judgment on the pleadings to one for summary judgment.25
Federal Rule of Civil Procedure 56(a) directs a court to "grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." The burden of showing the absence of a genuine dispute of material fact lies with the movant.26 If the movant meets this burden, the non-moving party must demonstrate "specific facts showing that there is a genuine issue for trial."27 In deciding a motion for summary judgment, "a court must view the evidence ‘in the light most favorable to the opposing party.’ "28 Even when, as here, "both parties assert[ ] that there are no uncontested issues of material fact," a court still has the independent "responsibility to determine whether disputed issues of material fact are present."29
There are no genuine disputes of material fact regarding the events leading to Unalaska's loss, the amount of the loss, or the applicable policy language.30 The only dispute between the parties is whether the CFIA applies to the City's loss, resolution of which calls for interpretation of the Policy.
Because this is a diversity action, Alaska law applies to interpretation of the Policy.31 Generally, Alaska courts construe insurance contracts "so as to provide that coverage which a layperson would have reasonably expected from a lay interpretation of the policy terms."32 An insured's expectation of coverage must be "objectively reasonable."33 To determine an insured's reasonable expectations, Alaska courts look to: "1) the language of the disputed policy provisions; 2) the language of other policy provisions; 3) relevant extrinsic evidence; and 4) case law interpreting similar provisions."34 "Construction of an insurance policy under the principle of reasonable expectations does not depend on a prior determination of policy ambiguity," but "where a clause in an insurance policy is ambiguous the court accepts that interpretation which most favors the insured."35 However, "[t]he mere fact that the parties disagree about the proper interpretation of the contract does not mean the contract is ambiguous."36 Rather, an ambiguity exists only when "inconsistent, but reasonable, interpretations of the contract are possible."37
National Union contends that a reasonable insured would not expect coverage based on the language of the policy for two reasons. First, National Union asserts that a reasonable insured would not consider the "incidental" use of email to perpetuate a fraud to constitute "computer fraud."38 The insurer asserts that "[c]omputerization [has] become pervasive in nearly every method of human communication that is not in person," so the "incidental use of a computer as the means of communication does not turn every act of fraud that involves the incidental use of a computer into computer fraud."39 Rather, National Union maintains, "[t]he computer fraud insurer agreement covers computer hacking ‘like the introduction of malicious computer code.’ "40
Second, National Union contends that the City's loss is not covered under the CFIA because the use of a computer was not the "direct cause" of the loss.41 The insurer asserts that "directly" means "to ‘proceed’ ‘without deviation or interruption’ " and thus CFIA coverage is only triggered if "the Fraudster's use of a computer ... directly bring[s] about the funds transfer."42 National Union suggests that the Court should follow a "direct means direct" approach rather than a "proximate cause" approach, but maintains that Unalaska's claim would fail even under a proximate cause approach "because of the significant and substantial intervening acts and actors, between the fraudulent communication and the authorized transfers by Unalaska."43 Moreover, the insurer asserts that Unalaska's claim "lacks directness from a temporal standpoint."44 The insurer maintains that other sections of the Policy should have made this...
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