(Article from Insurance Law Alert, February 2020)
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Applying Connecticut law, a New York federal district court ruled that a policy exclusion did not bar coverage for cyber-fraud losses because a professional services exception to the exclusion restored such coverage. SS&C Technology Holdings, Inc. v. AIG Specialty Ins. Co., 2020 WL 509028 (S.D.N.Y. Jan. 31, 2020).
SS&C, a financial technology company, provided business processing management services to Tillage Commodities Fund. SS&C fell prey to an email phishing scheme in which “spoof” emails purportedly from Tillage requested wire transfers. Before the fraud was discovered, SS&C sent nearly $6 million of Tillage’s funds to bank accounts in Hong Kong. Tillage sued SS&C, alleging negligence and breach of contract, among other causes of action. SS&C sought defense and indemnity under a Specialty Risk Protector Policy. The insurer agreed to defend SS&C, but refused to indemnify the settlement between Tillage and SS&C.
The policy’s Modified Investment Advisor Exclusion applied to:
Loss in connection with a Claim made against an Insured alleging . . . the exercise of any authority or discretionary control by an Insured with respect to any client’s funds or accounts. Provided, however, that this exclusion shall not apply to any Claim arising out of your performance of Professional Services. Notwithstanding the foregoing sentence, it is expressly understood and agreed that there shall be no coverage for the monetary value of any funds lost due to the Insured’s exercise of such authority or discretionary control . . . .
The parties agreed that the “Provided, however” exception to the exclusion applied because the Tillage action arose out of SS&C’s professional services. The central issue in dispute was whether the “Notwithstanding” sentence, which operated as a “carve out” to the exception, was applicable. The court held that it was not. The court explained that the agreement between Tillage and SS&C did not give SS&C “authority or discretionary control” over Tillage’s funds. Although SS&C had administrative privileges (i.e., the ability to transfer funds at the direction of Tillage), SS&C had no independent authority to act without Tillage’s approval. Additionally, the court held that the “Notwithstanding” clause was ambiguous as to whether “funds lost” encompassed funds that were stolen. As such, the court resolved this ambiguity in SS&C’s favor and granted its summary judgment motion on its breach of contract claim.
However, the court dismissed SS&C’s claim alleging breach of the implied covenant of good faith and fair dealing. The court stated that while the insurer’s coverage position was found to be “lacking in merit,” it was “not so totally frivolous as to warrant the inference that it was made in bad faith.”