Shady Contractor Cashes Homeowner's Check and Skips Town – Claims Magazine

Issue:

A man came to the insured's home posing as a contractor. After a brief discussion and negotiation, the insured gave the imposter a personal check in the amount of $500 as a down payment for home repairs. The check was cashed but no repairs were made. The imposter disappeared. The insured filed a claim for theft under his Homeowners policy, an ISO HO 00 03 10 00. The insured claimed a loss of $500.Analysis:

Coverage might not be available for this $500 loss because it could be viewed as an indirect and intangible loss rather than a direct physical loss. Although on first impression it might appear that the insured simply suffered a covered loss due to theft by deception of personal property worth $500, the loss is actually more complicated.

Two events took place that caused the insured to suffer the loss. First, there was a direct physical loss of a check or negotiable instrument due to theft by deception. Second, there was a consequential or subsequent indirect loss of money from the insured's checking account. Consequential and indirect losses are not traditionally covered under first party property insurance policies.

Discussion:

Under the ISO HO 00 03 10 00, personal property is generally insured under the following language:

"We insure for direct physical loss to the property described in Coverage C caused by any of the following perils unless the loss is excluded in Section I – Exclusions."

A check — both as a tangible piece of paper and as a negotiable instrument representing the intangible right to collect money upon presentment — would generally qualify as covered property under Coverage C. Nevertheless, its loss would only be insured to the extent it is capable of and does in fact suffer "direct physical loss" by theft or one of the other named perils.

What does "direct physical loss" mean in this context? Coverage is easy to determine when dealing with property like bank notes or bullion. We can picture dollar bills going up in flames in Molly Brown's stove (a friendly or unfriendly fire?) or Harry Potter's gold being stolen from the family vault in Gringott's bank (assuming it is taken by ordinary physical means). But what happens if a personal check is destroyed or stolen?

If a check goes up in flames, an insured can always write another one, although there may be indirect or consequential losses such as payment of a penalty, late fees, or additional interest if the result is late payment of a bill or loan installment. In the event a check is stolen, the insured still may not suffer direct loss beyond the value of the paper unless stop payment fails or the thief manages to negotiate the check in some way that results in money being taken from the insured's account without recourse to the bank for accepting a forged instrument. Only in the event that the insured makes out a check in the name of the thief, and the thief negotiates it before the insured discovers the fraud, is the insured likely to suffer loss of the entire face value of the check.

In all these situations, the physical destruction or taking of the check does not coincide with the loss of money from the insured's checking account. Money in a bank account does not even "belong" to the insured in the conventional sense since the bank holds it for the insured under a contract that makes the bank owe the money to the insured as a debt rather than as a custodian or bailee of the insured's property. Travelers Indem. Co. v. Arizona, 680 P.2d 1255, 1257 (Ariz. App. 1984). Besides not being owned or used by the insured, such a debt is not physical or tangible property and therefore cannot suffer physical injury or loss. See Johnson v. Amica Mut. Ins. Co., 733 A.2d 977 (Maine 1999) (conversion of funds from a bank account not covered under Homeowners liability coverage); Travelers Indem. Co. v. Arizona, 680 P.2d 1255 (Ariz. App. 1984) (funds lost in failed thrift associations not covered under commercial general liability policy); Temco Metal Products Co. v. St. Paul Fire & Marine Ins. Co., 543 P.2d 1 (Ore. 1975); Degener v. Hartford Acc. & Indem. Co., 92 F.2d 959 (3rd Cir. Pa. 1937) (funds taken in a fraudulent stock transaction were not covered by an indemnity bond). See also, Kristo v. GRE Ins. Group, 1997 WL 222326 (Wis. App. 1997) (unpublished) ("money" invested in worthless second deeds of trust did not suffer "physical loss" under Homeowner's property coverage).

When an insured homeowner turns over a check in a fraudulent transaction, it certainly seems like his "money" has been stolen. What is gone, however, is nothing physical — only the intangible value of the check that comes from the rights the "payee" (the person to whom the check is made out) has under the law of commercial paper and negotiable instruments. By exercising those rights, the person who cashes the check can obtain "money" in a tangible form or deposit it as an intangible credit to his own account. Therefore, it can be argued that the charge to the insured's account that results is not a "direct physical loss" of covered property due to theft.

Under certain circumstances, theft of a check could be covered if loss of the tangible form were to result in direct loss to the insured. For example, a court found coverage when the check stolen was made out to the insured and was the only evidence that the person who wrote the check owed him money. Wilhite v. State Farm Fire & Cas. Co., 297 N.W.2d 517 (Wis. App. 1980) (unpublished). There also may be coverage when the instrument or paper has intrinsic value such that its physical loss would be the same as the insured's monetary loss. See Crunk v. State Farm Fire & Cas. Co., 719 P.2d 1338 (Wash. 1986) (cashiers check taken by fraudulent contractor was covered "loss" of "money" subject to the $100 special limit of liability); Globe Indem. Co. v. Brown, 364 So.2d 322 (Ala. App. 1978) (personal check cashed at gunpoint was covered "loss").

The few published cases on Homeowners property coverages, like Crunk and Brown, can be further distinguished on the basis that the policies insured against risk of "loss" rather than "physical loss." Similarly, fidelity bonds, bankers bonds, crime policies, and additional coverages for employee dishonesty and money and securities can be distinguished as not only insuring against "loss" instead of "physical loss," but also as specifying "checks" or "negotiable instruments" as items of covered property. See for example, ISO BP 00 02 12 99 (G.3 and G.4); Cumis Ins. Co. v. Republic Natl. Bank of Dallas, 480 S.W.2d 762 (Tex. Civ. App. 1972); Liberty Natl. Bank & Trust Co. v. Travelers Indem. Co., 295 N.Y.S.2d 983 (N.Y. Sup. Ct. 1968); Concordia Lutheran Evangelical Church v. U.S. Casualty Co., 115 A.2d 307 (D.C. 1955).

Some insureds may argue that the special limits of liability for "money" and "securities" in the HO-3 entitle them to recover for loss of both tangible and intangible property. These provisions, however, are not intended to grant coverage but only to limit recovery for covered losses. Of course, insurers may add on coverage for unauthorized credit card use, loss of ATM cards, or identity theft, but these exceptional coverages for loss of intangibles are only found under Additional Coverages that do not require "physical loss." If the insured's claim does not fall under these special coverages, then the insurer may reasonably argue that recovery is limited to property that loses its value when it is physically injured, destroyed, or taken from the insured.

[PLRB Editor's note: For further discussion of arguments in favor of coverage for this kind of loss, see PLRB, Q&A Ref. Serv. Issue 132 – Travel Agency Fraud and CQ-2000.08.04]