Imposter not a Customer

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In Civitas-IT, LLC v. Auto-Owners Insurance Company, No. 359731, Court of Appeals of Michigan (January 12, 2023) dealt with a claim for loss by fraud.

BASIC FACTS

Plaintiff, a company that provides information technology services, brought suit against defendant for breach of contract and bad-faith denial of a claim under MCL 500.2006 after defendant denied plaintiff’s insurance claim for computer equipment that was fraudulently procured by an imposter.

In July 2020, plaintiff received an inquiry from an individual purporting to be from the purchasing department for Macomb County. The individual stated that Macomb County was interested in purchasing new computer equipment and asked plaintiff to facilitate the transaction. Plaintiff did so only to later discover that Macomb County never ordered the equipment. Plaintiff submitted a claim for the loss to defendant for $165,195, which defendant denied.

In the trial court, defendant moved for summary disposition asserting that the insurance policy did not cover plaintiff’s loss because the policy explicitly excluded any loss that was the result of “[v]oluntary parting with any property by you to anyone else to whom you have entrusted the property if induced to do so by any fraudulent scheme, trick, device or false pretense.” Plaintiff argued that the loss was covered by the “accounts receivable” endorsement, which stated defendant would cover “[a]ll amounts your customers owe you that you cannot collect ….” In response, defendant asserted that the imposter that obtained the computer equipment was not a “customer” and, therefore, the endorsement did not apply.

The trial court concluded that the policy did not cover the loss because the account was not an “account receivable.” Thus, the court granted defendant’s motion for summary disposition. This appeal followed.

DISCUSSION

An insurance policy is read as a whole, and meaning should be attributed to all terms. Unambiguous insurance policy language must be enforced as written.

In the accounts receivable endorsement, defendant agreed to cover “[a]ll amounts your customers owe you that you cannot collect” and “[o]ther expenses you reasonably incur to reestablish your records which result from direct physical loss of or damage to your records of accounts receivable.” Thus, contrary to plaintiff’s argument, the term “accounts receivable” is more than just a label on the endorsement, it is a term itself in the language of the policy. For its part, the trial court defined the term as involving “a bill/statement, repeated billings followed by informal and friendly inquiries, and then stronger language and efforts.”

Under the trial court’s formulation, the account was an account receivable because plaintiff did record a statement for the transaction in its accounts, and made efforts to collect the money, at first with friendly inquiries and ultimately culminating in involving law enforcement and filing this lawsuit. Even though the account itself was an account receivable it was not an account receivable with a “customer.”

The question of whether the imposter was a “customer” under the policy required the Court of Appeal to address three questions.

If the insurance policy is not rendered ambiguous simply because the term “customer” is undefined.
If the relevant question is whether the policy, when read fairly and as a whole, permits differing interpretations as to whether coverage is afforded.
If the policy, in general, does not cover losses that are the result of fraud.

Specifically, in the exclusions for covered losses, the parties agreed that defendant would not be responsible to pay for losses that were the result of “[v]oluntary parting with any property by you or anyone else to whom you have entrusted the property if induced to do so by any fraudulent scheme, trick, device, or false pretense.” Plaintiff contends it negotiated around this provision by incorporating the accounts receivable endorsement, essentially arguing that because a customer can cause plaintiff to have a loss on an account by failing to pay, and because an imposter can be a customer, the imposter, by defrauding plaintiff, can cause the loss which must be covered by defendant. This is not a fair reading of the entire policy because an imposter is not a customer.

The term “customer” is defined in Black’s Law Dictionary (11th ed) as “[a] buyer or purchaser of goods or services; esp., the frequent or occasional patron of a business establishment.” The relevant terms in this definition are “buyer” and “purchaser,” both of which imply the exchange of money from the customer for goods or services from the business. In this case, not only was there not an exchange of money, but it is also clear that there never was an intent by the imposter to ever pay for the computer equipment. Thus, under the dictionary definition, the term “customer” does not encompass the imposter that defrauded plaintiff in this case.

Defendant issued the policy to plaintiff under which the parties agreed that defendant would not cover losses that resulted from any fraudulent scheme, trick, device, or false pretense.

Insurance is a contract designed to indemnify an insured against fortuitous losses. However, even if a fraudster obtains product by tricking the insured into believing they were selling to a City, it was defrauded and that person was not a “customer” because he or she never intended to purchase the computer equipment. The “fraudulent scheme, trick, device, or false pretense” exclusion is hoary with age and fits the facts of this claim perfectly.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com

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