The Second Appellate District of the California Court of Appeal affirmed the trial court’s order granting summary judgment in favor of defendant bond insurer, CUMIS Insurance Society, Inc. (“CUMIS”). The Court agreed with the trial court’s holding that the loss sustained by the insured, Universal City Studios Credit Union (“Credit Union”), was uncovered because the Credit Union failed to comply with the bond’s new security measures applicable to funds transfers.
On January 9, 2008, the Credit Union received a call from an individual purporting to be a Credit Union member, William Ryder (“Ryder”). He asked to have Ryder’s phone number changed. Five days later, the Credit Union received a fax purportedly from Ryder requesting a $243,678 wire transfer from Ryder’s homeowner’s line of credit to a bank in Hong Kong. After a series of security questions were successfully answered, the money was transferred. The Credit Union later learned Ryder had neither requested the phone number change or the transfer of funds. After unsuccessfully trying to recover the funds, the Credit Union made a claim under its credit union bond for the loss. CUMIS investigated the claim and determined there was no coverage for the loss under either the “funds transfer coverage” or the “forgery and unauthorized signature coverage” portions of the bond.
CUMIS had issued bonds to the Credit Union for the past ten years. Prior to issuing the 2007 bond, CUMIS notified Credit Union that this bond implemented new security procedures for fund transfers involving a “callback verification” or a signed written agreement. CUMIS relied on these new procedures to deny coverage. The callback verification required the Credit Union to place an outgoing telephone call to the member’s “secure telephone number” to verify the transfer. The bond defined “secure telephone number” to include a replacement number for the member provided it was received at least 30 days prior to the receipt of the wire transfer instruction.
Since the wire transfer request was made only five days after Ryder’s phone number was changed, CUMIS concluded the “callback verification” was not satisfied. It also concluded the signed written agreement procedure had not been followed, and denied the claim.
The Credit Union filed suit, seeking monetary losses and punitive damages under breach of contract and bad faith claims. CUMIS filed a motion for summary judgment. The trial court granted the motion, concluding the Credit Union had not complied with the bond’s security procedures for funds transfers.
On appeal, the Credit Union did not argue it had complied with the Bond’s new security procedures requiring “callback verification.” Instead, it argued it was entitled to coverage under the alternative security measure permitted by the bond: the use of a “commercially reasonable security procedure set forth in a written funds transfer agreement, signed by the member or the member’s authorized representative, that governs the transaction and instruction.” The Court of Appeal rejected this argument because the written funds transfer was not signed by the member; it was a forgery. Nor could the account application, which Ryder did sign, satisfy this condition because it did not “set forth” the Credit Union’s security procedure for wire transfers.
The Court also rejected the Credit Union’s contention the loss was covered under the “forgery and unauthorized signature” coverage. This coverage contained a funds transfer exclusion which precluded coverage for any loss from a funds transfer instruction received via fax or e-mail, except to the extent that it was covered under the “funds transfer coverage.” Since there was no coverage under the bond’s funds transfer coverage, the exclusion applied.
Credit Union argued the funds transfer exclusion was not enforceable because it was not conspicuous, plain, and clear. The Court disagreed. The exclusion appeared in a section of the bond titled “EXCLUSIONS.” This section used the same font size and style of typeface that described the bond’s “COVERAGES.” It was exclusion number 14 of 35; the spacing of the two sections was identical; and the exclusion used the same terminology as the funds transfer coverage. A layperson would therefore have understood the exclusion and it was conspicuous, plain and clear.
This Court of Appeal therefore affirmed the trial court’s order granting CUMIS summary judgment.
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