Hiscox Insurance Co. Inc. has been ordered to hand over its claims and underwriting files in a $6.8 mn coverage dispute tied to a string of fraudulent electronic transactions at Dwolla Inc.
The United States District Court for the Southern District of Iowa, Central Division, said the case revolves around two fraudulent transactions that exploited Dwolla’s payment network to move more than $8.7 mn through same-day Automated Clearing House transfers.
Dwolla held a Hiscox commercial crime policy that promised protection against direct losses from “computer fraud” – specifically, the use of a computer to transfer funds or property from an insured’s bank or premises to a third party. The policy carried a $5 mn limit per occurrence.
When the originating banks caught the scam, they clawed the funds back and demanded repayment from Dwolla.
Bound by its processing contracts, the payments company reimbursed them – a hit of roughly $6.9 mn.
Hiscox refused to cover the loss, arguing it didn’t qualify as “computer fraud” under the policy definition.
The insurer claimed Dwolla’s losses came not from the fraud itself but from its contractual duty to reimburse the banks.
Dwolla sued, pushing to obtain the insurer’s internal claims and underwriting documents through discovery. Hiscox resisted, saying the material was irrelevant and outside discovery’s limits.
Dwolla countered that it needed the files to see how Hiscox had interpreted “computer fraud” in similar claims going back to 2014.
Months passed. No records came. A magistrate judge finally ordered Hiscox to produce most of the requested materials and respond to interrogatories.
Hiscox appealed, asking the federal district court to overturn the decision, again citing relevance and proportionality.
The Central Division court sided with Dwolla. Chief Judge Stephanie M. Rose ruled that seven of the ten disputed requests involved prior coverage disputes over nearly identical policy language – squarely relevant to the case.
She also rejected Hiscox’s claims that the production imposed an excessive burden or exposed third-party privacy issues.
The court denied the insurer’s bid to challenge additional document requests, pointing out Hiscox never raised them before the magistrate judge.
Evidence of an insurer’s interpretation of disputed provisions in other contexts may reveal inconsistent positions or shed light on ambiguous terms
Chief Judge Stephanie M. Rose
We think the decision signals growing judicial impatience with insurers that try to wall off underwriting and interpretation records in fraud-related disputes.
Maybe a warning shot – policy language can’t hide behind itself forever.
