Fidelity bonds are purchased primarily to protect against loss to the policyholder’s own assets, from things like employee theft or embezzlement. In Avon State Bank v. BancInsure, Inc., however, the Eighth Circuit interpreted the language of a bank’s fidelity bond to provide broader coverage, holding that the bond indemnified Avon State Bank for liability to third parties arising from an email scam.

The Avon State Bank decision arose from a fraudulent email scheme, in which an unknown scammer promised a share of a $9 million estate in exchange for help in transferring the funds from the Netherlands to the United States. An officer at Avon State Bank was drawn into the scam by one of his customers (another victim of the scam), sending some of his own money to the scammer to assist in transferring the estate. When the scammer demanded more, the bank officer grew skeptical of the authenticity of the transaction. To protect his own “investment,” the officer convinced two others to contribute a combined $485,000 to help transfer the estate.

When it became apparent that the whole thing was a scam, the two investors who had contributed $485,000 at the behest of the Avon State Bank officer successfully sued the bank for fraudulent misrepresentation. The bank subsequently settled with the investors. The bank’s insurer, BancInsure, refused to indemnify the bank, however, for the settlement under a fidelity bond. The fidelity bond insured Avon State Bank against “[l]oss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.” BancInsure argued that the phrase “direct loss” limited coverage to instances where the bank’s own assets were lost, not where the bank had to reimburse third parties for their loss, as a result of employee misconduct.

On appeal of the decision in the coverage action, the Eighth Circuit sided with the bank, holding that “under the loosely worded language of the Bond, no such limitation on third-party losses appears.” Because the bank’s liability to the two scammed investors was a loss resulting directly from its employee’s dishonesty and fraud, the loss was covered under the plain language of the bond.

Avon State Bank is an encouraging reminder to carefully review policy language when evaluating coverage. Even though certain types of insurance policies may be commonly thought to provide coverage that is limited to specific types of losses, the language of the policy may actually provide broader coverage.