Travel Agency Fraud – Claims Magazine

FOR FURTHER DISCUSSION, INCLUDING HOW USE OF A CREDIT CARD MAY AFFECT THIS SCENARIO, SEE PLRB, HOMEOWNERS ANNOT., HO17 – MONEY, BANK NOTES, ETC. (1991, REVISED 2002)

QUESTION:

The named insured under an ISO HO 00 03 04 91 Homeowners policy paid $4,000 in two installments to a travel agency for a trip to China. The first installment was paid in cash, the second was paid by personal check. The travel agency shut its doors and the insured has not been able to contact anyone connected with the agency who could give him information about the status of his upcoming trip. No tickets, airline or other type, were issued to the insured.

Does the insured have any coverage under his Homeowners form for this loss?

ANALYSIS:

No reported cases dealing with property insurance coverage for this type of loss have been found. This is surprising, judging from the regularity of the inquiries PLRB receives about such losses and the coverage issues they present. If the insured sustained a physical loss to property, that property was personal property. Any cash or check the insured gave the agent, as well as the value of any trip, would be personal property, if it is property at all. The policy covers unscheduled personal property under Coverage C "for direct physical loss" by named perils, the only relevant peril being theft.

There are thus four issues: First, did the insured sustain a "physical loss"? Second, if there was a "physical loss," what property did the insured lose? Third, if there was a "physical loss," was that loss caused by theft? Fourth, if there was a "physical loss" to covered property by the covered peril of theft, do any of the Special Limits of Liability apply?

As to the cash, the insured sustained a physical loss in excess of the value of the paper given the agent. Cash has an intrinsic value equal to its face amount. Since the insured did not receive value for any cash given to the agent, the insured sustained a physical loss equal to the face amount of the cash.

However, as to the check, an insurer could reasonably contend that the insured sustained merely an economic loss in excess of the value of the paper the check was written on. A personal check arguably has no intrinsic value and any loss to the insured resulted from a deductions from the insured's demand deposits at the bank. The insured arguably sustained only an economic loss due to a bad business deal with a

financially troubled travel agent. On the other hand, the policy places special limits of liability on various papers and documents, not all of which have inherent value beyond their paper content (e.g., accounts). It could thus be argued that the policy recognizes that physical loss to valuable papers includes the economic value represented by the paper and that, but for the special limit, that economic value would be insured as physical loss.

Assuming for purposes of analysis that the insured's entire loss was a physical loss, there are three possibilities as to what the insured lost: money, tickets, or a trip. The actual cash value of a trip may be greater than any tickets involved for a variety of reasons, one of which would be the inclusion of non-ticketed benefits in the tour package. However, as long as no tickets were issued and no valuable reservations or other arrangements were actually made, the argument that the insured lost tickets or a trip seems weak since the insured never had tickets in his possession and had been issued no papers specifically promising other benefits. The most reasonable characterization of the situation seems to be a loss of the value of the trip, represented by amount given to the travel agent. The insured gave the cash and the check to the travel agent without receiving value in return.

The question of whether the insured suffered a theft loss in this case depends on whether the travel agency closed due to business conditions or as part of a fraudulent scheme. If the agency merely failed financially, it is unlikely that any resulting loss to the insured would be considered a theft. A bankrupt business is not said to have stolen the cash it has on hand at the time it closes its doors. From the insured's point of view, such a loss is due to a bad business deal with a financially troubled business, an uninsurable risk which should not be considered a theft.

The legal bankruptcy procedures protect the rights of creditors to assets of a failed business and operate to distribute the assets fairly among creditors based on whether they are secured or unsecured. It is thus possible that the insured could recover all or part of the money given the travel agent by filing a claim in any bankruptcy proceeding which other creditors of the business may have started.

If, however, it is discovered that this travel agent was running a scam in which it accepted money for trips it had no intention of booking, then the resulting loss to the insured should probably be considered to result from theft. Since theft is not specifically defined in the policy, the common law definition applies. In the context of a coverage grant, the term is broadly interpreted so as to mean a taking of property belonging to another without authority. For example, in Crunk v. State Farm Fire & Cas. Co., 686 P.2d 1132 (Wash. App. 1984), the court held that theft includes a builder's act of absconding with a cashier's check tendered to him by the insured.

Finally, if there was a theft, was either the cash or the check subject to one of the policy's Special Limits of Liability? For the portion of the down payment which the insured gave to the ticket agent in cash, the amount of the direct physical loss suffered was the face amount of the cash. The policy contains a Special Limit of "$200" on money, and so the insurer's liability for the amount of cash the insured gave the travel agent would be a maximum of $200.

The check for the other half of the down payment should not be considered "money" since a check is not legal tender which is generally accepted as a medium of exchange. There is no specific Special Limit of Liability for checks. However, it is possible that a check might fit within the $1000 Special Limit of Liability for "securities" and "evidences of debt." The policy does not define either term. Webster's says that "securities" are any "evidence of debt or of ownership, esp[ecially] a stock certificate or bond." Black's Law Dictionary states that "evidence of debt" is "a term applied to written instruments or securities for the payment of money, importing on their face the existence of a debt." Webster's defines a "check" as "a written order directing a bank to pay money as stated on the face of the check." When a person makes a check out to a business or individual, this obligates the bank to pay the face amount of the check to the person to whom the check is written. The check evidences the fact that the writer of the check is indebted to the payee named on the check. It may thus be reasonable to apply the $1000 Special Limit of Liability for "securities" and "evidences of debt" to the $2000 check. However, no reported cases addressing whether such an insurance policy limitation or exclusion applies to personal checks have been found.