Case information

Financial institutions - Banks - Line of credit - Fraud - Insurance - Property insurance - Plurality of policies - Electronic funds transfer made as result of fraudulent tactics or “phishing” - Legal nature of electronic funds transfer and impact on insurance coverage - Whether effect must be given to forged and unauthorized payment order - Whether bank customer must be treated differently depending on whether customer’s account has debit balance or credit balance - Whether it is financial institution or customer that must bear loss of amount that third party appropriated by phishing from bank account with line of credit - Whether insurance policy issued by CO-Operators is applicable - Bills of Exchange Act, R.S.C. 1985, c. B-4, ss. 16(1) and (2) and 48(1) - Civil Code of Québec, arts. 2314, 2316, 2327 and 2395.

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This case raises the interesting question of whether the holder of a bank account (or, by extension, the holder’s insurer) must bear the losses resulting from bank fraud committed by means of an electronic funds transfer at the hands of a third party, or whether the loss must be borne by the bank. La Coop fédérée (“La Coop”) is a customer of the National Bank of Canada (“NBC”) that was a victim of phishing, that is, Internet fraud aimed at obtaining confidential information through messages that appear to come from an institutional body or a third party that is trustworthy. That fraud, which was carried out through a payment order, resulted in the electronic transfer of US$4,946,355.26 out of La Coop’s account. La Coop holds two insurance policies that might apply to the loss incurred: (1) a property and business interruption policy for up to $15 million issued by the appellant, CO-Operators General Insurance Company (“CO-Operators”); and (2) a $1 million fidelity and crime policy issued by the intervener, Liberty International Underwriters (“Liberty”). Liberty paid La Coop the coverage limit provided for in the contract, but CO-Operators denied coverage. In its opinion, it was NBC’s money that had been misappropriated, not La Coop’s money. La Coop instituted proceedings for a declaratory judgment in order to have its rights and obligations under the two policies determined, among other things. In that context, CO-Operators served a declaration of intervention to force NBC to pay the award sought against it by La Coop. Essentially, CO-Operators is seeking a declaration that it is NBC’s responsibility, not CO-Operator’s, to credit La Coop’s bank account.