Rainforest Chocolate, LLC v. Sentinel Insurance Company, Ltd. ( 2018 )

NOTICE: This opinion is subject to motions for reargument under V.R.A.P. 40 as well as formal
revision before publication in the Vermont Reports. Readers are requested to notify the Reporter
of Decisions by email at: JUD.Reporter@vermont.gov or by mail at: Vermont Supreme Court, 109
State Street, Montpelier, Vermont 05609-0801, of any errors in order that corrections may be made
before this opinion goes to press.
2018 VT 140
No. 2018-095
Rainforest Chocolate, LLC Supreme Court
On Appeal from
v. Superior Court, Addison Unit,
Civil Division
Sentinel Insurance Company, Ltd. September Term, 2018
Helen M. Toor, J.
James W. Runcie of Ouimette & Runcie, Vergennes, for Plaintiff-Appellant.
Richard Windish of Hayes, Windish & Badgewick, Woodstock, for Defendant-Appellee.
PRESENT: Reiber, C.J., Skoglund, Robinson and Carroll, JJ., and Davenport, Supr. J. (Ret.),
Specially Assigned
¶ 1. SKOGLUND, J. In this insurance dispute, appellant, Rainforest Chocolate, LLC
(Rainforest), appeals the summary judgment motion granted in favor of appellee, Sentinel
Insurance Company, Ltd. (Sentinel). Rainforest argues that the trial court erred in its interpretation
of the insurance policy and its conclusion that Rainforest’s loss was not covered. We reverse.
¶ 2. The facts are undisputed. Rainforest was insured under a business-owner policy
offered by Sentinel. In May 2016, Rainforest’s employee received an email purporting to be from
his manager. The email directed the employee to transfer $19,875 to a specified outside bank
account through an electronic-funds transfer. Unbeknownst to the employee, an unknown
individual had gained control of the manager’s email account and sent the email. The employee
electronically transferred the money. Shortly thereafter when Rainforest learned that the manager
had not sent the email, it contacted its bank, which froze its account and limited the loss to
$10,261.36.
¶ 3. Rainforest reported the loss to Sentinel. In a series of letters exchanged concerning
coverage for the loss, Rainforest claimed the loss should be covered under provisions of the policy
covering losses due to Forgery, for Forged or Altered Instruments, and for losses resulting from
Computer Fraud. Sentinel denied coverage. In a continuing attempt to obtain coverage for the
loss, Rainforest also claimed coverage under a provision of the policy for the loss of Money or
Securities by theft. Sentinel again denied coverage, primarily relying on an exclusion for physical
loss or physical damage caused by or resulting from False Pretense that concerned “voluntary
parting” of the property—the False Pretense Exclusion.
¶ 4. After cross-motions for summary judgment, based on a statement of agreed facts,
the trial court denied Rainforest’s motion, granted Sentinel’s motion, and entered judgment in
favor of Sentinel. In its conclusion, the court stated:
The complicated nature of this policy, with its layers of coverages
and exclusions, is almost impossible to follow without a compass
and a guide. It took the court many hours of reading and rereading
the policy and the briefs to reach a clear understanding of how the
various provisions fit together. How any insured, however
sophisticated, is supposed to determine that it is getting what it paid
for with a policy like this is a mystery to the court. Nonetheless, the
court concludes that the terms of the policy, while confusing, are not
ambiguous and must be enforced as written.
The court held that Sentinel was correct in denying coverage under the False Pretense Exclusion.
Rainforest timely appealed.
¶ 5. “This Court reviews summary judgment rulings de novo, applying the same
standard as the trial court.” Jadallah v. Town of Fairfax, 2018 VT 34, ¶ 14, __ Vt. __, 186 A.3d
1111. Summary judgment is appropriate “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.” V.R.C.P. 56(a).
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Here, there is no dispute over material facts. Instead, this dispute arises around the interpretation
of the insurance policy at issue.
¶ 6. When interpreting an insurance policy, this Court follows well-established
principles—our “review is nondeferential and plenary.” Shriner v. Amica Mut. Ins., 2017 VT 23,
¶ 6, 204 Vt. 321, 167 A.3d 326. “An insurance policy is construed according to ‘its terms and the
evident intent of the parties as expressed in the policy language.’ ” Cincinnati Specialty
Underwriters Ins. v. Energy Wise Homes, Inc., 2015 VT 52, ¶ 16, 199 Vt. 104, 120 A.3d 1160
(quoting Sperling v. Allstate Indem. Co., 2007 VT 126, ¶ 8, 182 Vt. 521, 944 A.2d 210). An
insurance policy “is to be strictly construed against the insurer.” Simpson v. State Mut. Life
Assurance Co. of Am., 135 Vt. 554, 556, 382 A.2d 198, 199 (1977). “The insurer bears the burden
of showing that an insured’s claim is excluded by the policy.” Shriner, 2017 VT 23, ¶ 6.
¶ 7. Vermont law “requires that policy language be accorded its plain, ordinary meaning
consistent with the reasonable expectation of the insured, and that terms that are ambiguous or
unclear be construed broadly in favor of coverage.” Towns v. N. Sec. Ins., 2008 VT 98, ¶ 21, 184
Vt. 322, 964 A.2d 1150; see also Shriner, 2017 VT 23, ¶ 6 (“We give effect to the terms in an
insurance policy according to their plain, ordinary and popular meaning, and our interpretation of
an insurance policy is guided by a review of the language from the perspective of what a reasonably
prudent person applying for insurance would have understood it to mean.” (quotation and
alteration omitted)). “Words or phrases in an insurance policy are ambiguous if they are fairly
susceptible to more than one reasonable interpretation.” Whitney v. Vt. Mut. Ins., 2015 VT 140,
¶ 16, 201 Vt. 29, 135 A.3d 272. Further, “[w]hen a provision is ambiguous or may reasonably be
interpreted in more than one way, then we will construe it according to the reasonable expectations
of the insured, based on the policy language.” Vt. Mut. Ins. v. Parsons Hill P’ship, 2010 VT 44,
¶ 21, 188 Vt. 80, 1 A.3d 1016. However, “the fact that a dispute has arisen as to proper
interpretation does not automatically render the language ambiguous.” Isbrandtsen v. N. Branch
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Corp., 150 Vt. 575, 581, 556 A.2d 81, 85 (1988). And, “we will not deprive the insurer of
unambiguous terms placed in the contract for its benefit.” Shriner, 2017 VT 23, ¶ 6 (quotation
omitted).
¶ 8. With these interpretation principles in mind, we turn to the insurance policy at hand.
As the trial court noted, there are several subsections of the policy at the center of our analysis.
First, the Special Property Coverage Form (SPC Form) outlines the general “rights, duties, and
what is and is not covered” and the additional coverage areas in Section A, and then defines several
terms in Section G.
A. COVERAGE
We will pay for direct physical loss of or physical damage to
Covered Property at the premises described in the Declarations (also
called “scheduled premises” in this policy) caused by or resulting
from a Covered Cause of Loss.
....
2. Property Not Covered
Covered Property does not include:
....
c. “Money,” bullion, numismatic and philatelic property and
bank notes or “securities” except as provided in any Additional
Coverages or Optional Coverages.
....
5. Additional Coverages
....
f. Forgery
(1) We will pay for loss resulting directly from forgery or
alteration of any check, draft, promissory note, or similar
written promises, orders or directions to pay a sum certain in
“money” that you or your agent has issued, or that was issued
by someone who impersonates you or your agent.
....
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i. Money and Securities
(1) We will pay for loss of “money” and “securities” used in
your business while at a bank or savings institution, within
your living quarters or the living quarters of your partners or
any employee having use and custody of the property, at the
“scheduled premises,” or in transit between any of these
places, resulting directly from:
(a) “Theft”
....
G. PROPERTY DEFINITIONS
....
10. “Money” means:
a. Currency, coins and bank notes whether or not in current use
....
22. “Theft” means the act of stealing.
¶ 9. The policy also contains several exclusions, outlined in Section B of the policy.
B. EXCLUSIONS
....
2. We will not pay for physical loss or physical damage caused
by or resulting from:
....
f. False Pretense: Voluntarily parting with any property by you
or anyone else to whom you have entrusted the property if
induced to do so by any fraudulent scheme, trick, device or false
pretense.
¶ 10. Two endorsements supplement the policy and provide coverage in several areas,
including additional forgery coverage and coverage for computer fraud.
A. The following changes apply . . . to the Special Property
Coverage Form, Additional Coverages:
....
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1. Covered Property [under forged or altered instrument
coverage]
....
a. Checks, drafts, promissory notes, or similar written promises,
orders or directions to pay a sum certain in “money” that are:
(1) Made or drawn by or drawn upon by you;
(2) Made or drawn by one acting as your agent;
or that are purported to have been so made or drawn
....
4. Computer Fraud
The following Additional Coverage is added: We will pay up to
$10,000 in any one occurrence for physical loss of or physical
damage to “money,” “securities,” and other property having
intrinsic value resulting directly from computer fraud. Computer
fraud means any act of stealing property following and directly
related to the use of any computer to fraudulently cause a transfer
of that property from inside your premises or from a banking
institution or similar safe depository, to a person (other than a
“messenger”) outside those premises or to a place outside those
premises.
¶ 11. The crux of this case is whether the False Pretense Exclusion bars coverage for the
loss experienced by Rainforest. Rainforest argues that the False Pretense Exclusion does not apply
because it only excludes “physical loss or physical damages” and the loss here was not a physical
loss.
¶ 12. Recently, the U.S. District Court for the District of Montana interpreted this exact
provision in the context of a procedural history, fact pattern, and insurance policy that is virtually
the same as the instant case. See Ad Advert. Design, Inc. v. Sentinel Ins., No. CV 17-140-BLG-
TJC, 2018 WL 4621744 (D. Mont. Sept. 26, 2018). We find its reasoning and interpretation of
the policy sound and convincing, and thus adopt it here.
¶ 13. In Ad Design, an employee received several emails from a supervisor’s email
account requesting that specific sums be transferred to an outside bank account. Believing the
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emails were legitimate, the employee wired money from the business’s (Ad Design’s) account into
the specified accounts only to find out, after the transfers were complete, that the emails were
fraudulent. Ad Design filed a claim with its insurer, Sentinel, seeking coverage for the loss, but
Sentinel denied the claim, explaining that the policy excluded coverage under the False Pretense
Exclusion. The only apparent differences between the Ad Design facts and the facts at issue here
are: (1) Ad Design made four distinct transfers for a total of $115,595, where Rainforest only made
one transfer of $19,875; and (2) Ad Design was not able to limit its loss by freezing its account
and thus lost the entirety of the transferred amount, where Rainforest’s bank was able to
successfully freeze the transfer and limit its loss to $10,261.
¶ 14. The relevant provisions of the insurance policies in Ad Design and here are
identical. The District Court of Montana outlined the same provisions that are at issue here: the
SPC Form generally explaining the policy’s coverage; additional coverage forms extending
coverage for Forgery, Money and Securities, and Computer Fraud; and the False Pretense
Exclusion. The court focused on the False Pretense Exclusion, identifying it as the critical issue
in the case. Id. at *4. The arguments presented by Ad Design and Sentinel also mirror the
arguments advanced by Rainforest and Sentinel here. Ad Design did not dispute that it voluntarily
parted with its money as contemplated by the False Pretense Exclusion. It instead asserted that
“because electronic funds are intangible, it could not have suffered a ‘physical loss.’ ” Id. Sentinel
countered and asserted that the business “lost actual, physical control and possession of its money
that it otherwise could have withdrawn from its bank account,” and therefore Ad Design was
precluded from coverage under the False Pretense Exclusion. Id.
¶ 15. The District Court of Montana analyzed each of these arguments, starting with
Sentinel’s. It cited several cases that supported the interpretation that “intangible funds [are]
interchangeable with and represent[] what is tangible, i.e. money.” Id. (citing In re Oakley, 344
F.3d 709, 713 (7th Cir. 2003) (“[T]hings that are interchangeable should normally be treated the
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same by the law in order to prevent evasion through easy substitution.”); Robben & Sons Heating,
Inc. v. Mid-Century Ins., 74 P.3d 1141, 1145 (Or. Ct. App. 2003) (“We think that the ordinary
meaning of the word ‘money’ includes money held in a bank account subject to withdrawal by
check.”)). The District Court of Montana reasoned that “there is a practical reality that Ad
Design’s loss of electronic funds was essentially the same as if Ad Design lost an equivalent
amount of cash.” Ad Design, 2018 WL 4621744, at *4. Thus, it concluded that “it would be
reasonable to interpret the Policy to find a physical loss of money occurred based on the facts of
this case.” Id.
¶ 16. The District Court of Montana then directed its analysis to Ad Design’s argument.
It agreed with Ad Design that the policy seemed to “make[] a distinction between ‘loss or damage’
and ‘physical loss or physical damage.’ ” Id. The District Court of Montana further noted that
“those terms, and how they are to be applied, are not defined in the policy” and as a result “the
[p]olicy is confusing as to what risks are covered and what risks are excluded.” Id.
¶ 17. It distinguished three cases with similar fact patterns—business loses money after
employee receives email from account purporting to be from supervisor and transfers money as
directed—to which Sentinel pointed for support that the exclusion was unambiguous. The District
Court of Montana explained that “none of those cases involved an exclusion which required
‘physical loss’—they all had exclusions which applied simply to ‘loss or damage.’ ” Id. at *5
(citing Schweet Linde & Coulson, PLLC v. Travelers Cas. Ins. of Am., No. C14-1883RSL, 2015
WL 3447242, at *2 (W.D. Wash. May 28, 2015); Schmidt v. Travelers Indem. Co. of Am., 101 F.
Supp. 3d 768, 775 (S.D. Ohio 2015); Martin, Shudt, Wallace, Dilorenzo & Johnson v. Travelers
Indem. Co. of Conn., No. 1:13-CV-0498 LEK/CFH, 2014 WL 460045, at *3 (N.D.N.Y. Feb. 5,
2014)).
¶ 18. The District Court of Montana then noted that many courts have found that physical
loss “ ‘means that the Covered Property must be tangible; “physical” loss cannot occur to the
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intangible.’ ” Ad Design, 2018 WL 4621744, at *5 (quoting Sentience Studio, LLC v. Travelers
Ins., 102 Fed. Appx. 77, 81 (9th Cir. 2004)) (citing Harvard St. Neighborhood Health Ctr., Inc. v.
Hartford Fire Ins., No. CV 14-13649-JCB, 2015 WL 13234578, at *8 (D. Mass. Sept. 22, 2015)
(finding “funds deposited into a bank account do not have a physical or material existence and
thus, are not susceptible to ‘physical loss or damage’ ”); Florists’ Mut. Ins. v. Ludy Greenhouse
Mfg. Corp., 521 F. Supp. 2d 661, 680 (S.D. Ohio 2007) (holding “funds deposited into a bank
account do not have a ‘physical’ existence and, thus, are not susceptible to physical loss or
damage”); Johnson v. Amica Mut. Ins., 1999 ME 106, ¶ 4, 733 A.2d 977 (collecting cases and
stating “[b]ank account funds are not ‘tangible property,’ because they have no physical presence”
and “[r]ather, bank account funds are ‘intangible property,’ because they have no intrinsic value
and merely represent, or are evidence of, value”)).
¶ 19. The District Court of Montana concluded that “[i]n light of this authority and the
Policy language, it would [also] be reasonable to interpret the Policy to find Ad Design did not
suffer a ‘physical loss.’ ” Ad Design, 2018 WL 4621744, at *5. Because there were two
reasonable interpretations of the policy, the District Court of Montana found the False Pretense
Exclusion ambiguous and thus construed it against Sentinel. Accordingly, the District Court of
Montana “construe[d] the Policy to mean Ad Design did not suffer a physical loss, and therefore,
the False Pretense [E]xclusion d[id] not bar coverage.” Id. This Court agrees with the District
Court of Montana’s analysis and concludes that the trial court erred when it determined that the
False Pretense Exclusion was unambiguous.
¶ 20. Here, the trial court conceded that other courts have held transfers of funds are not
“physical” because they are the losses of funds on deposit in a bank, rather than losses of cash,
such as paper money or coins. But the trial court explained that it was not persuaded by this
rationale because funds held by a bank fell within the policy’s definition of “money,” which is
defined as “[c]urrency, coins and bank notes whether or not in current use.” (Emphasis added.)
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This is true. See also Town of Ira v. Vt. League of Cities & Towns, 2014 VT 115, ¶ 11, 198 Vt.
12, 109 A.3d 893 (analyzing whether “interest” qualified for coverage under insurance policy that
covered loss of “money” via embezzlement and concluding that “the use of the term ‘money’ refers
to liquidity, not to the form of the asset”).
¶ 21. But just because funds, whether or not in current use, fall under the policy’s
definition of “money” does not then lend itself to the automatic conclusion that “money” can only
be subject to “physical loss.” We find support for this conclusion by comparing the Forgery,
Money and Securities, and Computer Fraud provisions. The Forgery provision states that Sentinel
“will pay for loss resulting directly from forgery . . . in ‘money’ ” and the Money and Securities
provision states that Sentinel “will pay for loss of ‘money,’ ” while the Computer Fraud provision
states that Sentinel will pay “for physical loss or physical damage to ‘money.’ ” (Emphases
added.) This differing use of “physical loss” and simply “loss” leads this Court to conclude that it
cannot be said that all “money” is subject solely to physical loss simply because funds, whether or
not in current use, qualify as “money” under the policy.
¶ 22. If Rainforest or another insured business sought to clarify the extent of its coverage,
it would likely turn toward the policy language itself and perhaps existing case law interpreting
similar policies. However, this search would not have produced a clear, unambiguous answer for
a reasonably prudent person. See State Farm Mut. Auto. Ins. v. Colby, 2013 VT 80, ¶ 11, 194 Vt.
532, 82 A.3d 1174 (“We . . . are guided by a review of the language of an insurance contract from
the perspective of what a reasonably prudent person applying for insurance would have understood
it to mean.” (quotation and alteration omitted)). The policy uses the two distinct phrases—
“physical loss and physical damage” and “loss and damage”—within different sections throughout
the policy, sometimes switching between the two sentence to sentence, which would lead the
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average reader to assume there was some difference between them.* But, the policy itself does not
define or explain the difference between the two phrases. The trial court dismissed this as “sloppy
drafting” but sloppiness should not excuse an insurer from covering losses that a reasonable
insured party would expect to be covered, based on a reasonable reading and interpretation of the
policy language. See Fish v. Nationwide Mut. Ins., 126 Vt. 487, 492, 236 A.2d 648, 652 (1967)
(“The insurer most familiar with the subject chooses the words of his undertaking, and it is not
unjust to take them in the sense conveyed to the ordinary reader, nor to hold against him in case
of real substantial doubt.” (quotation omitted)).
¶ 23. And further, if Rainforest or another insured business looked to caselaw, they
would have been met with a similarly opaque answer because for every court that has analyzed a
similar issue, there is a different conclusion. As shown by the District of Montana in Ad Design,
there is case law that supports both Sentinel’s and Rainforest’s interpretations. Compare In re
Oakley, 344 F.3d at 713 (supporting assertion funds in bank are subject to physical loss by finding
funds in banks are interchangeable with cash and tangible), and Robben & Sons Heating, Inc., 74
P.3d at 1145 (same), with Sentience Studio, LCC, 102 Fed. Appx. at 81 (“The Property Coverage
Form requires that there be ‘direct physical loss’ of the Covered Property. This language means
that the Covered Property must be tangible; ‘physical’ loss cannot occur to the intangible.”), and
Florists’ Mut. Ins., 521 F. Supp. 2d at 680 (concluding that “funds deposited into a bank account
do not have a ‘physical’ existence and, thus, are not susceptible to physical loss or damage”).
¶ 24. So, while this Court “will not deprive the insurer of unambiguous terms placed in
the contract for its benefit,” that is not the case here. Shriner, 2017 VT 23, ¶ 6. Although this
*
Subsection three of the exclusions is not at issue in this case, but exemplifies the differing
uses of “physical loss and physical damage” and “loss and damage” throughout the policy. It
reads: “We will not pay for loss or damage caused by or resulting from any of the following. But
if physical loss or physical damage by a Covered Cause of Loss results, we will pay for that
resulting physical loss or physical damage.” (Emphases added.)
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Court has not previously adopted one interpretation over another, we are convinced that the False
Pretense Exclusion is subject to at least two reasonable interpretations, and thus is ambiguous.
Therefore, we are bound to interpret it in Rainforest’s favor—the loss suffered was not physical,
and thus coverage is not barred by the False Pretense Exclusion.
¶ 25. The question remains whether the loss is covered by any of the provisions, which
Rainforest claims provide coverage: Forgery, Money and Securities, and Computer Fraud. We
can quickly dismiss the Computer Fraud provision because it only provides coverage “for physical
loss of or physical damage to ‘money’ . . . resulting directly from computer fraud,” and because
we concluded that Rainforest’s loss was not physical, it is not covered under this provision.
However, we remand to the trial court to determine in the first instance whether the remaining
provisions provide coverage for Rainforest’s loss.
Reversed and remanded.
FOR THE COURT:
Associate Justice
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