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Principle Solutions Group, LLC v. Ironshore Indemnity, Inc.

United States Court of Appeals, Eleventh Circuit

December 9, 2019

IRONSHORE INDEMNITY, INC., Defendant-Appellant.

          Appeal from the United States District Court No. 1:15-cv-04130-RWS for the Northern District of Georgia

          Before WILLIAM PRYOR, TJOFLAT, and GILMAN, [*] Circuit Judges.


         This appeal requires us to decide whether a loss of more than $1.7 million to scammers was covered under a commercial crime insurance policy. The loss stemmed from a sophisticated phishing scheme in which a scammer posing as an executive of Principle Solutions Group, LLC, persuaded an employee to wire money to a foreign bank account. After Principle discovered the fraud and determined that it could not recover the funds, it sought coverage under the "fraudulent instruction" provision of its policy with Ironshore Indemnity, Inc., which then denied Principle's claim. Ironshore asserted that the scammer's communications with the employee did not meet the conditions for a fraudulent instruction under the policy and that the loss did not result directly from the alleged fraudulent instruction, as the policy required. Principle filed a complaint against Ironshore to enforce the policy. The district court concluded that the policy covered the loss and granted summary judgment to Principle. Because we also conclude that the policy unambiguously covers Principle's claim, we affirm.

         I. BACKGROUND

         On the morning of July 8, 2015, Principle lost over $1.7 million in a fraud scheme. It began at 9:10 a.m., when Loann Lien, the controller for Principle, received an email purporting to be from Josh Nazarian, a managing director of Principle. The email informed Lien that Principle had been secretly working on a "key acquisition" and asked her to wire money "in line with the terms agreed . . . as soon as possible." As for the details of the wire transfer, the email told Lien to give her "full attention" to "attorney Mark Leach," who would provide further information. Because the purported deal was not public, Lien was to "treat [the] matter with the upmost discretion and deal solely with" Leach. Lien responded to Nazarian's purported email that she would give her "total attention" to Leach.

         Lien received an email five minutes later from someone purporting to be Leach, a partner at the London-based law firm Bird & Bird. After Lien confirmed that Principle could wire the money, Leach sent Lien remittance details for a bank in China. Leach later reiterated to Lien over the phone that Nazarian approved the wire transfer.

         Lien worked with another Principle employee to create and approve the transfer, but a fraud prevention service, Wells Fargo, asked for verification that the wire transfer was legitimate. Lien then confirmed with Leach that Nazarian had approved the transaction. Lien relayed this information to Wells Fargo, which released the hold. At 11:21 a.m., about two hours after Lien received the first email, Principle wired more than $1.7 million to the scammers.

         Lien discovered that the request was fraudulent a day later when she spoke with Nazarian, who told her that he was not even in the office that day. Nazarian promptly called Wells Fargo to report the fraud, but neither Principle nor law enforcement could recover the funds.

         Principle sought coverage for the loss under its insurance policy with Ironshore. The policy covered "[l]oss resulting directly from a fraudulent instruction directing a financial institution to debit [Principle's] transfer account and transfer, pay or deliver money or securities from that account." Ironshore denied coverage. It asserted that Nazarian's purported email did not "direct[] a financial institution to debit [Principle's] transfer account" because it only told Lien to await instructions from Leach. Ironshore also argued that the asserted loss did not "result[] directly from" a fraudulent instruction because Leach conveyed necessary details to Lien after the initial email and Wells Fargo held the transaction, both of which were intervening events between the instruction and the loss.

         Principle filed a complaint against Ironshore in state court seeking payment under the policy and alleging that Ironshore had acted in bad faith. Ironshore removed the case to federal court based on diversity jurisdiction. 28 U.S.C. §§ 1332(a)(1), 1441(a). The parties filed competing motions for summary judgment. Although the district court concluded that the policy provision was ambiguous, it held that Georgia's rule requiring construction of insurance policies in favor of policyholders required it to grant partial summary judgment to Principle on its coverage claim. The district court also granted partial summary judgment to Ironshore on Principle's claim of bad faith. Only Ironshore appealed.


         We review a summary judgment de novo. Regions Bank v. Legal Outsource PA, 936 F.3d 1184, 1189 (11th Cir. 2019). Summary judgment is warranted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a).


         Under Georgia law, which the parties agree governs, we use a three-step approach to interpret insurance policies. As with any contract, we first look to the text of the policy and, if it is "explicit and unambiguous, [our] job is simply to apply the terms of the contract as written, regardless of whether doing so benefits the carrier or the insured." Ga. Farm Bureau Mut. Ins. Co. v. Smith, 784 S.E.2d 422, 424 (Ga. 2016) (citation and internal quotation marks omitted). But "if a provision of an insurance contract is susceptible of two or more constructions, even when the multiple constructions are all logical and reasonable, it is ambiguous," and we must move to the second step of applying Georgia's "statutory rules of contract construction." Hurst v. Grange Mut. Cas. Co., 470 S.E.2d 659, 663 (Ga. 1996). And if the ambiguity "cannot be resolved through the rules of construction," we may, at the third step, look to parol evidence. Coppedge v. Coppedge, 783 S.E.2d 94, 97 n.3 (Ga. 2016) (citation and internal quotation marks omitted). But "if the parol evidence is in conflict, the question of what the parties intended becomes a factual issue for the jury." Id. (citation and internal quotation marks omitted); see also Ga. Code Ann. § 13-2-1 ("The construction of a contract is a question of law for the court. Where any matter of fact is involved, the jury should find the fact.").

         Ironshore repeats its twin justifications for denying coverage: no communication between the scammers and Lien triggered the fraudulent-instruction provision, and the loss did not "result[] directly from" any alleged fraudulent instruction. Both fail. We address each argument in turn.

         A. The Loss Involved a Fraudulent Instruction Directing a Financial Institution to Transfer Funds.

         To receive coverage, Principle had to identify a "fraudulent instruction" that "direct[ed] a financial institution to debit [Principle's] transfer account and transfer, pay or deliver money or securities from that account." As relevant here, the policy defines a "fraudulent instruction" as an "electronic or written instruction initially received by [Principle], which instruction purports to have been issued by an employee, but which in fact was fraudulently issued by someone else without [Principle's] or the employee's knowledge or consent." Ironshore contends that no communication satisfied both conditions of the coverage provision, but we disagree.

         As Ironshore concedes, the email purporting to be from Nazarian, which informed Lien of the need to wire money and told her to await further instructions from Leach, qualifies as a fraudulent instruction. It was, after all, a "fraudulently issued" "electronic . . . instruction" that "purport[ed] to have been issued by an employee . . . without [Principle's] or the employee's knowledge or consent." But Ironshore asserts that the email instructed Lien only to work with Leach to wire funds later in the day, not to wire a specific amount of money to a specific recipient. So, it explains, the email did not "direct[]" Principle to pay money out of its accounts, as the coverage provision required.

         This argument is unpersuasive. As an initial matter, we are hard pressed to construe the email as doing anything but "directing a financial institution to debit [Principle's] transfer account and transfer . . . money . . . from that account." The email told Lien, "I will need you to make the initial wire as soon as possible, for which you have my full approval to execute." But even if we assume that the email needed additional details before we could fairly construe it as "directing" a wire transfer, a later email from Leach identified the amount of the wire transfer, the recipient bank, and the purported beneficiary of the transfer. That email remedied any possible lack of detail.

         Ironshore agrees that Leach's email was sufficiently detailed, but it contends that the email was not a "fraudulent instruction" under the policy because someone purporting to be an outside attorney, not a Principle employee, sent it. In other words, Ironshore contends that Leach's email, though fraudulent and specific, was not a "fraudulent instruction," and that Nazarian's purported email, though a "fraudulent instruction," was not specific enough to meet the provision's other requirements.

         We disagree with Ironshore's divide-and-conquer approach. Nothing in the policy language warrants the assumption that the two emails could not be part of the same fraudulent instruction. Although the policy defines a fraudulent instruction as a singular "electronic or written instruction," Georgia adopts the longstanding rule of construction that the "singular or plural number each includes the other, unless the other is expressly excluded." Ga. Code Ann. § 1-3-1(d)(6); see also Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts § 14, at 130 (2012). And reading the emails together leaves no doubt that they were part of the same fraudulent instruction. Leach's email supplemented the email purporting to be from Nazarian, which cloaked Leach with the authority to give additional details. That email told Lien to "deal solely" with Leach and to "give [Leach her] full attention" to make sure "the wire goes out today." And Leach's email informed Lien that the additional remittance details were "requested by" Nazarian. Viewing the emails together, the sole purpose of Leach's email was to provide details to effectuate an explicit instruction to make a wire transfer. So the fraudulent instruction from the scammer purporting to be Nazarian unambiguously falls within the coverage provision.

         B. The Loss Resulted Directly from a Fraudulent Instruction.

         Ironshore next contends that Principle's losses did not "result[] directly from" a fraudulent instruction as the policy required. Citing dictionary definitions, it interprets the policy's use of "directly" to require an "immediate" link between a fraudulent instruction and a loss. Because the loss depended on Lien's conversations with Leach and Wells Fargo, which occurred after Nazarian's purported email told Lien to wire money, Ironshore concludes that no immediate link existed between the instruction and the loss.

         We again disagree with Ironshore. Georgia gives terms in insurance contracts their ordinary meaning. See Ga. Code Ann. § 13-2-2(2). And the ordinary meaning of the phrase "resulting directly from" requires proximate causation between a covered event and a loss, not an "immediate" link. To be sure, the definitions that Ironshore cites reveal that "directly" can sometimes mean "immediately." See, e.g., Directly, Black's Law Dictionary (10th ed. 2014) ("immediately"). But discerning the ordinary meaning of a term requires more than uncritically citing dictionaries. By isolating "directly" from the surrounding language, Ironshore erroneously defined the term "without accounting for its semantic nuances." Scalia & Garner, Reading Law app. A, at 418.

         Situating "directly" within the phrase "resulting directly from" reveals a different meaning. When used with the preposition "from," "resulting" means "to proceed, spring, or arise as a consequence, effect or conclusion." Result/-ing, Webster's Third New International Dictionary (1993); see also Resulting, The American Heritage Dictionary (5th ed. 2012) ("[t]o happen as a consequence"). "'Results from' imposes, in other words, a requirement of actual causality." Burrage v. United States, 571 U.S. 204, 211 (2014); see also Blockum v. Fieldale Farms Corp., 573 S.E.2d 36, 39 (Ga. 2002) (using "causes" and "resulting from" interchangeably). So reading the phrase "resulting directly from" as a whole requires us to define "directly" within the context of causation. And in that context, "directly" means "proximately." See Directly, Webster's Third New International Dictionary ("in close relational proximity"); Direct Cause, Black's Law Dictionary (11th ed. 2019) ("proximate cause"); cf. Proximate Cause, Webster's Third New International Dictionary ("a cause that directly or with no mediate agency produces an effect"). In short, the ordinary meaning of "resulting directly from" requires us to determine whether the fraudulent instruction here proximately caused Principle's loss.

         In Georgia, a "[p]roximate cause is not necessarily the last act or cause, or the nearest act to the injury." Sprayberry Crossing P'ship v. Phenix Supply Co., 617 S.E.2d 622, 624 (Ga.Ct.App. 2005) (citation and internal quotation marks omitted). Instead, it encompasses "all of the natural and probable consequences" of an action, "unless there is a sufficient and independent intervening cause." Cowart v. Widener, 697 S.E.2d 779, 784 (Ga. 2010) (emphasis added). An intervening cause is not sufficient and independent if "its probable or natural consequences could reasonably have been anticipated, apprehended, or foreseen by the original wrong-doer." Goldstein Garber & Salama, LLC v. J.B., 797 S.E.2d 87, 89 (Ga. 2017) (citation omitted).

         Neither of the two "causes" that Ironshore asserts intervened between Nazarian's purported email and Principle's loss-Lien's communications with Leach and Wells Fargo's involvement-can sever the causal chain. Both were foreseeable consequences of the email. Nazarian's purported email told Lien that Leach would contact her and provide further details on the wire request. And although Wells Fargo's involvement was not inevitable, it was certainly foreseeable. The email proactively sought to avoid third-party interference by requiring Lien to "deal solely" with Leach. Because of this instruction, the scammers could circumvent Wells Fargo's fraud-prevention process; through a series of phone calls and emails between Leach and Lien, they fabricated the precise information that Wells Fargo required to release the hold. So not only did the scammers foresee that a fraud prevention service might get involved, they put a system in place to circumvent that risk. Georgia courts have held that intervening acts were foreseeable in more attenuated circumstances. See, e.g., Imperial Foods Supply, Inc. v. Purvis, 580 S.E.2d 342, 345 (Ga.Ct.App. 2003) (holding that it was foreseeable that the driver of a borrowed car would try to fix a broken door latch with a "makeshift, rigged mechanism" that did not perform reliably and caused injury).

         For the same reason, we are not persuaded by the dissent's enumeration of eleven events that occurred between the fraudulent instruction and loss, such as each call that Lien made to Leach and Lien's approval of the wire transfer. Each of these events was either a necessary action to transfer the money or falls under one of the two ostensible intervening causes that Ironshore proposes-Lien's communication with the scammers and Wells Fargo's involvement. Although the dissent parses the events more finely than Ironshore, each of its eleven events was still a foreseeable consequence of the fraudulent instruction.

         We also cannot agree with the dissent that Rustin Stamp & Coin Shop, Inc. v. Ray Brothers Roofing & Sheet Metal Co., 332 S.E.2d 341 (Ga.Ct.App. 1985), controls this appeal. Rustin held that no proximate causation existed between a roofing company's negligent decision to leave unmarked holes on a roof covered by fiberglass and rain damage to the interior of the building. Id. at 342-44. The court found that the causal chain was severed by the actions of an air-conditioning repairman, who exposed the building's interior to rain by perforating the fiberglass covering and failed to notify the roofing company about the problem. Id. It concluded that the defendant could not foresee that someone would both expose the interior of the building to outside rain and fail to notify anyone else about it. Id. at 344. But a fraudulent instruction necessarily contemplates that an unwitting employee will negligently transfer money. And unlike the intervening act in Rustin, Wells Fargo did not cause Principle's loss, which would have occurred whether or not it became involved. Needless to say, something that is not a cause of damage cannot be an intervening cause. See Ga. Bank & Tr. v. Cin. Ins. Co., 538 S.E.2d 764, 765-66 (Ga.Ct.App. 2000) (holding that a financial loss did not "result[] directly from" a forged signature when the loss would have occurred "[e]ven if the signature . . . was authentic").

         Nor can we agree with the dissent's argument that the ostensibly "suspicious nature of the entire transaction" severed the causal chain because it gave Principle "notice that the wire transfer may be fraudulent" and the "opportunity to prevent the loss." Dissenting Op. at 27. To start, the record does not support the assumption that the entire transaction was "suspicious." The scammers' interactions with Lien revealed that they had a sophisticated knowledge of Principle's operations and personnel. Without the benefit of hindsight, we cannot say that the transaction was inherently suspicious. And in any event, whether various red flags "arguably should have triggered a deeper investigation," id. at 28, is not the relevant question. Instead, the relevant question is whether Lien's failure to verify the transfer in the ways the dissent ...

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