Does Insurance Cover Wire Fraud?

Due to the increase in velocity and sophistication of wire fraud cases over the past several years, insurance companies continue to pivot around coverages and indemnity protection found in professional liability (errors and omissions), cyber, crime and fraud insurance policies.  

It’s important that those in the real estate industry who want protection from the type of wire fraud detailed in this series of articles, confirm that their existing policies cover them from the types of claims and losses that may result from a wire fraud event.  

Coverage for these exposures is mixed and continues to be a moving target at each policy renewal. The insurance industry is reacting to two things that may affect coverage; first, there has been an exponential increase in the events and losses, and, second, recent court decisions have interpreted cyber losses to be covered under broad policy language where it was not intended to be covered or priced into the premium.

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As a result, the insurance industry has made adjustments to coverage types and amounts to mitigate losses in this area. These include, without limitation; excluding coverage, migrating specific risks to a new policy (or special endorsements) altogether, or placing a much lower limit on the specific cyber exposures. Many of these changes are in motion now, without a settled consensus as to where it will end up. Because of this, current policies may not carry the same coverage as those previously bound by insurance carriers - even those bound within the past twelve months.

From a risk management perspective, the best way to ensure you don’t lose out to wire fraud is to not get hit in the first place. Even if you have insurance coverage, collecting on claims and responding to lawsuits is difficult. To learn how to protect yourself, you can look at some of our previous articles. They discuss the following questions:

1. What is wire fraud?
2. Why fraud happens in real estate?
3. What real estate scams should I look out for?
4. How to prevent wire fraud
5. How to recover from wire fraud

Intro to cyber insurance

For real estate professionals—law firms, real estate agents, and escrow and closing agents—one trend is to migrate coverage for data breaches and loss of confidentiality to a separate cyber insurance policy. If coordinated correctly, that removes the coverage from a related professional liability policy and any other crime and fraud policies.  

We’ve spoken before about why having a cyber insurance policy is useful if you are in real estate. Cyber insurance protects businesses from internet-based risks and divides coverage into two types: first-party losses and reimbursements and third-party losses and claims payments.

A first-party loss is one which your business incurs. For instance, if your business stores data—such as payment records, bank information, birth dates, social security numbers, and state-issued identity documentation—on computers in the cloud, it is at risk of a data breach. If its data system is breached, then it may have various restoration losses, income losses, regulatory and notice costs, business reputation loss, and other expenses. All of these are incurred by your business and paid by your business – hence first-party. You can present these directly to your carrier under a cyber policy for reimbursement.  

The other type of loss is third-party claims made by another party against you. Often, this arises from a data breach that compromises someone. If a third party incurs damages due to a breach of data held on your computers, you may be held liable. Usually, the defense expenses alone are a large cost and courts and juries are finding liability with greater frequency. Cyber insurance is there to protect you from this.

In the insurance world, cyber insurance is one of the fastest growing coverages today. Demand for coverage is growing rapidly with the number of high-profile data breaches that have hit the news over the last few years.

As with all types of insurance, what specific plans cover will differ depending on the terms and conditions the insurer is offering. Because of this, it is best to look at what you need and pick an insurance provider based on that.

Wire fraud may not be covered

Wire fraud may, or may not, be covered in your cyber insurance policy. This is because the wire transfer is often made after a social engineering attack, not as a direct result of cybercrime or a direct breach to your computer network or attack on your personnel. The fraudster convinces the victim to voluntarily transfer money. Technically, the fraudster does not directly use your computer to steal the money. Often, the claim is made by a third-party such as a buyer who was tricked into wiring their “cash to close” to a fraudulent account. Given these claim features, the various policies may respond differently--which can lead to finger-pointing by the carriers if a claim is made and delay settlements.  

If wire fraud is covered, it may still be subject to a sub-limit. For example, socially engineered wire fraud may be specifically covered in a $1 million limit cyber policy. However, in that same policy, it may be limited to $100,000 or $250,000 in a specific sub-limit and also carry a higher deductible. In the wrong situation, the insured may still have a substantial loss even though they do have insurance in place.

Another trend that is in the market is a cyber “gap” policy which will add a limit to otherwise sub-limited policies on a secondary basis.

Given the rapid responses by insurance underwriters, anything we say today will have changed in the next year. Today, it is worthwhile to check with your insurance agent and underwriter to confirm several things:

1. Identify the policies that cover the type of wire fraud seen in real estate.
2. Review whether the limit of coverage for that exposure is adequate.
3. Review the claim triggers under which a loss will be covered by each policy.
4. Coordinate the various policies so that it is clear what will happen if a claim arises.

Prevention is the best way to be safe

Still, preventing an attack is the best way to ensure your business doesn’t lose money to wire fraud.

We have plenty of articles on our site about things you can do to protect your company and customers from falling victim to wire fraud.

Having a secure procedure in place when it comes to verifying wiring details can help stop those involved in real estate transactions wiring money to the wrong people.

An insurance plan that covers wire fraud should be in place but viewed as a last line of defense. For more on how your insurance may be impacted in 2024, read our article.

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