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State Bank of Bellingham v. BancInsure, Inc.

United States Court of Appeals, Eighth Circuit

May 20, 2016

State Bank of Bellingham, Plaintiff - Appellee
v.
BancInsure, Inc., now known as Red Rock Insurance Co., Defendant - Appellant

         Submitted October 21, 2015.

          Appeal from United States District Court for the District of Minnesota - Minneapolis.

         For State Bank of Bellingham, Plaintiff - Appellee: Jonathan Millea Bye, Bryan R. Freeman, LINDQUIST & VENNUM, Minneapolis, MN.

         For BancInsure, Inc., Now known as Red Rock Insurance Co., Defendant - Appellant: Mark J. Johnson, Joseph Arthur Nilan, Thomas James Power, GREGERSON & ROSOW, Minneapolis, MN.

         Before RILEY, Chief Judge, SMITH and SHEPHERD, Circuit Judges.

          OPINION

Page 457

          SHEPHERD, Circuit Judge.

         A 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[1] granted summary judgment in favor of Bellingham, and BancInsure appeals. We affirm.

         I.

         Bellingham, 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 and passphrases.

         On 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.

         In 2010, BankInsure, an Oklahoma company, sold a financial institution bond to Bellingham, which provided coverage for

Page 458

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.[2] 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).[3]

         Bellingham 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 ...


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