October 21, 2015.
from United States District Court for the District of
Minnesota - Minneapolis.
State Bank of Bellingham, Plaintiff - Appellee: Jonathan
Millea Bye, Bryan R. Freeman, LINDQUIST & VENNUM,
BancInsure, Inc., Now known as Red Rock Insurance Co.,
Defendant - Appellant: Mark J. Johnson, Joseph Arthur Nilan,
Thomas James Power, GREGERSON & ROSOW, Minneapolis, MN.
RILEY, Chief Judge, SMITH and SHEPHERD, Circuit Judges.
SHEPHERD, Circuit Judge.
computer at the State Bank of Bellingham (Bellingham) became
infected with malware, allowing a criminal third party to
transfer $485,000 from Bellingham to a foreign bank account.
Bellingham sought coverage for the loss under its Financial
Institution Bond (Bond) issued by BancInsure, Inc.
(BancInsure). BancInsure denied coverage based on exclusions
in the Bond. Bellingham filed this action, claiming breach of
contract. The district court granted summary judgment
in favor of Bellingham, and BancInsure appeals. We affirm.
a Minnesota state bank with five employees, used the Federal
Reserve's FedLine Advantage Plus system (FedLine) to make
wire transfers. Wire transfers were made through a desktop
computer connected to a Virtual Private Network device
provided by the Federal Reserve. In order to complete a wire
transfer via FedLine, two Bellingham employees had to enter
their individual user names, insert individual physical
tokens into the computer, and type in individual passwords
October 27, 2011, Sharon Kirchberg, a Bellingham employee,
completed a FedLine wire transfer. She completed the
transaction using her token, password, and passphrase as well
as the token, password, and passphrase of a second employee.
At the end of the work day, Kirchberg left the two tokens in
the computer and left the computer running. When she arrived
at work the next day, she discovered that two unauthorized
wire transfers had been made from Bellingham's Federal
Reserve account to two different banks in Poland. Kirchberg
was unable to reverse the transfers through the FedLine
system. Kirchberg immediately contacted the Federal Reserve
and requested reversal of the transfers, but the Federal
Reserve refused. The Federal Reserve, however, did contact
intermediary institutions to inform them that the transfers
were fraudulent, and one of the intermediary institutions was
able to reverse one of the transfers. The other fraudulent
transfer was not recovered.
2010, BankInsure, an Oklahoma company, sold a financial
institution bond to Bellingham, which provided coverage for
losses caused by such things as employee dishonesty and
forgery as well as computer system fraud. On the day of the
fraudulent transfer, Bellingham notified BancInsure of the
loss and provided a copy of the transaction details of the
two transfers. After an investigation, it was determined that
a " Zeus Trojan horse" virus had infected the
computer and permitted access to the computer for the
fraudulent transfers. After its investigation, BancInsure
determined the loss was not covered due to certain exclusions
in the Bond. Specifically, BancInsure claimed the
loss was not covered based on employee-caused loss exclusions
in sections 2(h) and 2(bb)(17), exclusions for theft of
confidential information in section 2(bb)(4), and exclusions
for mechanical breakdown or deterioration of a computer
system in section 2(bb)(12).
initiated this diversity action in federal court, alleging
BancInsure breached the contract when it denied coverage
under the Bond. BancInsure counterclaimed. In its
counterclaim, BancInsure (1) sought a declaratory judgment
that it owes no duty under the Bond to provide coverage, (2)
claimed Bellingham breached the contract when it ...