Progress Made in Recovering Losses from 2019 Fraud Scheme

On Aug. 23, 2023, the U.S. District Court for the District of Colorado issued a significant ruling in the Town of Erie’s lawsuit against National Union Fire Insurance Company. Judge Daniel D. Domenico held that the loss of money stemming from a 2019 fraud scheme “resulted directly from the use of a computer,” thereby triggering the Town’s computer-fraud insurance coverage with National Union. Judge Domenico thus concluded that Erie is entitled to coverage and National Union breached its insurance contract with the Town to cover such losses. In accordance with this ruling, the Town will seek an award of $766,234 in damages, plus interest.

Before the court makes that award, it must also rule on Erie’s additional claim of bad-faith denial of benefits under its insurance policy. National Union asked the court to dismiss this claim, but Judge Domenico denied National Union’s motion and ordered the parties to prepare for a trial on this claim in early 2024. If the Town prevails on the bad-faith claim, it will seek additional damages, attorney’s fees, and costs on top of the $766,234 for breach-of-contract damages and interest.

Background

This court case stems from the Town of Erie’s 2019 insurance claim to cover the loss of $1,016,234 stolen by cyber criminals. The crime was perpetrated through a scheme in which the criminals misled Town staff into sending legitimate payments to the wrong bank account. These payments were intended for a contractor who built the Erie Parkway bridge. The Town’s primary insurer, CIRSA, paid what was due to the Town - $150,000 - under their portion of the insurance policy. National Union, the secondary insurer, paid the Town $100,000 on its claim, but denied the Town’s remaining portion of the claim. Since 2019, the Town has pursued full payment from National Union of the remaining $766,234 on the claim. Due to National Union’s refusal to honor that claim, the Town took the dispute to court. 

In addition to vigorously pursuing the insurance claim, the Town has taken—and continues to take—significant actions to prevent cyber fraud from ever happening again. “There are attempts every day to breach state and local governments’ cyber security defenses. In addition to maintaining the latest technical systems, all Town of Erie employees must complete monthly cyber security training to help us recognize and prevent the sophisticated techniques cyber criminals use to try and gain access to our systems,” said Town Administrator Malcolm Fleming. “Local governments must use multiple defenses against cyber criminals and plan for the worst-case scenario. Having insurance coverage is just one part of that planning, and we are happy the court decision will enable the Town to be fully reimbursed for the funds stolen by cyber criminals in 2019.”

In the United States, cybercrimes amount to hundreds of billions of dollars each year and local governments are just one of a multitude of regular targets for these crimes. The Town of Erie is following the latest best practices to mitigate the risk of future cyber attacks as much as possible and also maintains computer fraud insurance in the unlikely event that something new should occur.