Commercial Division Blog

Posted: June 9, 2014 / Categories Commercial, Insurance

Court of Appeals Grants Leave To Appeal In Case of First Impression Regarding Interpretation of Computer System Fraud Insurance Policy

On June 5, 2014, the New York Court of Appeals granted the plaintiff’s motion for leave to appeal in Universal American Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., Mo. No. 2014-411, a case of first impression regarding the interpretation of a computer systems fraud insurance policy. (NOTE: We represent the plaintiff, Universal American Corp.)

Universal American, a large issuer of health insurance policies, purchased a crime fraud policy that protected it from any "loss resulting directly from a fraudulent . . . entry of Electronic Data" into Universal American's proprietary computer systems that causes "Property to be transferred, paid or delivered." Universal American was the victim of a massive fraud perpetrated by Medicare-eligible doctors and clinics, who submitted phony invoices for services never rendered, totaling over $18 million. Although some of the fraudsters were criminally prosecuted, none of the money was ever recovered. The trial court and the First Department held that the policy language only covered losses from "wrongful acts in manipulation of the computer system, i.e., by a hacker, and did not provide coverage for fraudulent content consisting of claims by bona fide doctors" for services not rendered. In its motion for leave to appeal, Universal American argued that this reading was not supported by the text of the policy (which makes no reference to "hackers," but instead provides broad coverage for any fraudulent entry of electronic data), and would render the policy useless as a practical matter. The briefs in support of, and opposition to, leave to appeal are here and here.

Given the prevalence of computer fraud in today's economy, a definitive ruling by the Court of Appeals that these policies have wide application beyond the 'hacker' scenario to which the lower courts' rulings restricted them will have a substantial impact on this area of insurance coverage. We expect that the appeal will be argued in the fall.