The insurer on the receiving end of the recent Sixth Circuit ruling that the a payment instruction fraud loss is covered under the Computer Fraud section of a Commercial Crime policy has filed a petition for rehearing or rehearing en banc. In its July 27, 2018 petition (here), the insurer contends that in its decision, the Sixth Circuit’s analysis was at odds with its own prior precedent, and as a result the appellate court applied the wrong causation analysis in determining whether or not the fraudulent email “directly” caused the loss of the policyholder, American Tooling Center (ATC).
As discussed in detail here, in a decision written by Judge Karen Nelson Moore for a unanimous three-judge panel, the Sixth Circuit reversed the ruling of the district court and held that the Computer Fraud section of a commercial crime policy covered ATC’s losses from an email payment instruction fraud scheme. The policy’s Computer Fraud section provides, in relevant part, that the policy covers “direct loss … directly caused by Computer Fraud.” In reaching its decision that the Computer Fraud section applied to provide coverage, the appellate court specifically held that ATC’s loss was a “direct” loss that was “directly caused by” the phony email.
In its rehearing petition, the insurer argues that the appellate panel’s interpretation of the word “directly” ignored the Sixth Circuit’s own prior analysis of the same policy language in its 2012 decision in Tooling Manufacturing & Technologies Association v. Hartford Fire Ins. Co. (here). In that prior decision, the court had said that Michigan law requires that “direct mean direct” when determining whether the “directly caused by” requirement has been satisfied. The insurer argues that instead of applying this requirement from the prior case, the panel in the ATC case applied a tort-based “proximate cause standard,” while relying on a prior case that the Tooling Manufacturing opinion had expressly rejected. The ATC decision conflicts with the Tooling Manufacturing decision, the insurer contends, and so rehearing is required to “reconcile the conflicting opinions and restore uniformity.”
According to the insurer, under the standard that the ATC panel failed to consider and apply, the word “directly” means “immediately and without intervening space, time, agency, or instrumentality.” The insurer contends that under this standard, the “directly caused by” requirement has not been met because “numerous undisputed events occurred and time passed between the alleged fraud and ATC’s loss.” By its very nature, the insurer argued, a ‘chain of events’ is not ‘direct’ because there is no immediacy between the actual loss and the loss-inducing event.” Thus, the insurer argues, the ATC panel’s failure to apply the appropriate standard resulted in erroneous outcome, which further justifies rehearing or at least remand of the case to the district court for further consideration of whether the standards have been met.
As I noted at the time in my blog post about the Sixth Circuit’s decision, the ATC panel’s decision followed just days after a separate ruling in the Medidata case in which the Second Circuit also held that payment instruction fraud losses were covered by the Computer Fraud coverage section in a commercial crime policy. I discussed the Second Circuit’s decision in the Medidata case here. As it turns out, the insurer on the receiving end in the Medidata case has also filed a petition for rehearing. The insurer’s petition in the Medidata case also relies on arguments relating to the direct causation requirement.
It remains to be seen whether or not the rehearing petitions in either case will be granted. As a general matter, rehearing petitions are disfavored, for the practical reason that courts would quickly become highly inefficient if cases were frequently reheard.
The likelihood of a petition being granted is boosted when there was a dissenting opinion in the ruling of the initial panel or the initial case hearing resulted in a split decision. That is not the case with either the ATC or Medidata decision; the rulings in both cases were unanimous.
Rehearing petitions also are likelier to be considered where the panel ruling at issue involved matters of significant public interest or public policy. While insurance coverage issues are no doubt of importance for the insurance industry and for the participants in the insurance claims process, these two cases do not involve matters that generally would be considered of public interest.
The Medidata decision in the Second Circuit was issued in the form of a Summary Opinion, which for me would seem to make the likelihood of rehearing in that case even less likely.
Just the same, it could be that the one or the other, or even both, of the two appellate courts might treat the rehearing petition favorably, and so the rehearing petitions are worth watching.
As the Hunton Andrews Kirth law firm noted in its August 2, 2018 post on its Hunton Insurance Recovery blog about the rehearing petitions, both of these insurance coverage rulings, as well as the rehearing petitions that followed, “expose the fluctuating coverage interpretations as they relate to these prevalent fraudulent schemes” and underscore the critical importance of policy wording issues.
Sometimes, if you are really lucky, life actually is a day at the beach: