Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca5-15-20499/USCOURTS-ca5-15-20499-0/pdf.json

Parties Involved:
Apache Corporation
Appellee Cross-Appellant
Great American Insurance Company
Appellant Cross-Appellee

Document Text:

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 15-20499

APACHE CORPORATION,

Plaintiff – Appellee Cross-Appellant

v.

GREAT AMERICAN INSURANCE COMPANY,

Defendant – Appellant Cross-Appellee

Appeals from the United States District Court

for the Southern District of Texas

USDC No. 4:14-CV-237

Before JOLLY, BARKSDALE, and SOUTHWICK, Circuit Judges.

PER CURIAM∗

Texas law controls this diversity action, which arises out of Apache

Corporation’s being defrauded by criminals, in part by their use of an email; as 

a result of the fraud, and a flawed follow-up investigation by Apache, it made 

authorized payments of legitimate invoices from its vendor to the criminals’

bank account, instead of to its vendor’s. Great American Insurance Company 

(GAIC), Apache’s insurer, denied its claim for coverage of its loss under GAIC’s 

“Computer Fraud” provision of Apache’s crime-protection insurance policy. At 

 

∗ Pursuant to 5th Cir. R. 47.5, the court has determined that this opinion should not 

be published and is not precedent except under the limited circumstances set forth in 5th Cir. 

R. 47.5.4.

United States Court of Appeals

Fifth Circuit

FILED

October 18, 2016

Lyle W. Cayce

Clerk

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issue is whether the district court correctly awarded summary judgment to

Apache, on the basis that its loss was covered under that provision; and, if so, 

whether the court properly denied statutory penalties, subject to Texas 

Insurance Code § 542.060. VACATED and RENDERED.

I.

GAIC is headquartered in Ohio; Apache is an oil-production company, 

with its principal place of business in Houston, Texas, but operating 

internationally. In March 2013, during the coverage period for Apache’s policy 

with GAIC, an Apache employee in Scotland received a telephone call from a 

person identifying herself as a representative of Petrofac, a vendor for Apache.

The caller instructed Apache to change the bank-account information for its 

payments to Petrofac. The Apache employee replied that the change-request 

could not be processed without a formal request on Petrofac letterhead.

A week later, Apache’s accounts-payable department received an email 

from a “petrofacltd.com” address. But, Petrofac’s authentic email domain 

name is “petrofac.com”; the criminals created “petrofacltd.com” to send the 

fraudulent email. The email advised: Petrofac’s “accounts details have now 

been changed”; and “[t]he new account takes . . . immediate effect and all future 

payments must now be made into this account”. As noted in the email, an 

attachment to it was a signed letter on Petrofac letterhead, providing both oldbank-account information and the new-bank-account number, with 

instructions to “use the new account with immediate effect”. In addition, the 

email stated: the “attached letter . . . has also been posted to you”. 

In response, an Apache employee called the telephone number provided 

on the letterhead to verify the request and concluded the call confirmed the 

authenticity of the change-request; next, a different Apache employee 

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approved and implemented the change. A week later, Apache was transferring 

funds for payment of Petrofac’s invoices to the new bank account. 

Within one month, however, Apache received notification Petrofac had 

not received the £4.3 million (approximately $7 million) Apache had 

transferred to the new (fraudulent) account. After an investigation determined 

the criminals were likely based in Latvia, Apache recouped a substantial 

portion of the funds. It contends, however, it suffered a loss, before the $1 

million policy deductible, of approximately £1.5 million (approximately $2.4 

million).

Apache submitted a claim to GAIC, asserting coverage under the 

“Computer Fraud” provision, which states: 

We will pay for loss of, and loss from damage to, 

money, securities and other property resulting directly 

from the use of any computer to fraudulently cause a 

transfer of that property from inside the premises or 

banking premises: 

a. to a person (other than a messenger) outside those 

premises; or 

b. to a place outside those premises.

In its denial letter, GAIC advised Apache’s “loss did not result directly from 

the use of a computer nor did the use of a computer cause the transfer of funds”.

Apache initiated this action in Texas state court in January 2014 against

GAIC for denying its claim under the computer-fraud provision. After GAIC 

removed the action to district court, both parties moved for summary 

judgment. 

The court denied GAIC’s motion and granted Apache’s, ruling, inter alia, 

“the intervening steps of the [post-email] confirmation phone call and 

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supervisory approval do not rise to the level of negating the email as being a 

‘substantial factor’”. Apache Corp. v. Great Am. Ins. Co., Civil Action No. 4:14-

CV-237, 2015 WL 7709584, at *3 (S.D. Tex. 7 Aug. 2015). Moreover, the court 

reasoned that, if the policy only covered losses due to computer hacking, such 

an interpretation would render the policy “pointless”. Id. 

Apache moved for entry of final judgment, and sought, inter alia, 

statutory penalties under Texas Insurance Code § 542.060. But, in entering 

judgment, the court denied the penalties. 

II.

GAIC challenges the summary judgment awarded Apache; 

on the other hand, Apache challenges the denial of statutory penalties. 

Because we vacate the judgment and render it for GAIC, we do not reach the 

penalties issue.

A summary judgment is reviewed de novo. E.g., Southern Ins. Co. v. 

Affiliated FM Ins. Co., 830 F.3d 337, 343 (5th Cir. 2016). Summary judgment 

is proper if the movant shows no genuine dispute as to any material fact and 

entitlement to judgment as a matter of law. Fed. R. Civ. P. 56(a). “The court 

must view the facts developed below in the light most favorable to the nonmoving party.” La. Generating, L.L.C. v. Ill. Union Ins. Co., No. 15-30914, ---

F.3d ----, 2016 WL 4150902, at *2 (5th Cir. 4 Aug. 2016). A genuine dispute of 

material fact exists “if the evidence is such that a reasonable jury could return 

a verdict for the nonmoving party”. Anderson v. Liberty Lobby, Inc., 477 U.S. 

242, 248 (1986). Interpretation of an insurance policy presents a question of 

law; therefore it is also reviewed de novo. E.g., Naquin v. Elevating Boats, 

L.L.C., 817 F.3d 235, 238 (5th Cir. 2016).

The summary-judgment record is very limited—there were no 

depositions or discovery responses. For its motion, GAIC attached: Apache’s 

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proof of loss and supporting documents, such as the email at issue and the 

letterhead attachment to it; the crime-protection policy; and Apache’s 

declination letter. Apache relied on GAIC’s exhibits, in addition to two very 

brief, self-serving declarations executed by two Apache employees. 

As noted, Texas law controls this diversity action. GAIC claims, inter 

alia, the loss was not a covered occurrence because: the email did not “cause a 

transfer”; and coverage under this provision is “unambiguously limited” to losses 

from “hacking and other incidents of unauthorized computer use”. GAIC notes 

that, under Texas law, insurance provisions are interpreted according to the same 

rules applicable to contracts generally; but, it also asserts the “Supreme Court of 

Texas has ‘repeatedly stressed the importance of uniformity when identical 

insurance provisions will necessarily be interpreted in various jurisdictions’”, 

citing McGinnes Indus. Maint. Corp. v. Phoenix Ins. Co., 477 S.W.3d 786, 794 (Tex. 

2015). According to GAIC, the weight of authorities interpreting similar 

computer-fraud language, considered with Texas’ policy goal of crossjurisdictional uniformity, persuades against coverage for Apache’s claim.

Apache counters that the plain meaning of the computer-fraud language 

covers its loss, and maintains any ambiguity in the terms should be resolved in 

favor of the insured’s reasonable interpretation, even if the insurer’s 

interpretation is more reasonable, relying on RSUI Indem. Co. v. Lynd Co., 466 

S.W.3d 113, 118 (Tex. 2015). Because the language of the provision says nothing 

about “hacking”, Apache asserts it only needs to show that “any computer was 

used to fraudulently cause the transfer of funds”. 

As noted, under Texas law, courts interpret insurance policies using the 

same rules of construction applicable to contracts generally. Tesoro Ref. & 

Mktg. Co., L.L.C. v. Nat’l Union Fire Ins. Co. of Pitt., Pa., No. 15-50405, --- F.3d 

----, 2016 WL 4166173, at *2 (5th Cir. 29 July 2016); Am. Mfrs. Mut. Ins. Co. v. 

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Schaefer, 124 S.W.3d 154, 157 (Tex. 2003). The policy must be construed such 

that no provision is rendered meaningless. Tesoro, 2016 WL 4166173, at *2 

(citing Schaefer, 124 S.W.3d at 157). 

Mere disagreement about the meaning of a contract does not render it 

ambiguous. Id. “A contract is ambiguous only when the application of 

pertinent rules of interpretation to the face of the instrument leaves it 

genuinely uncertain which one of two or more meanings is the proper 

meaning.” Id. (quoting RSUI Indem., 466 S.W.3d at 119). The ambiguity, vel 

non, of an insurance provision is a question of law; if ambiguity is found, the 

court must adopt the interpretation favoring the insured. Id. (citing RSUI 

Indem., 466 S.W.3d at 118; Schaefer, 124 S.W.3d at 157).

As also noted, the Texas Supreme Court has stressed its policy 

preference for “uniformity when identical insurance provisions will necessarily 

be interpreted in various jurisdictions”. McGinnes, 477 S.W.3d at 794 

(responding to fifth circuit certified question). And, even when uniformity is 

made impossible by jurisdictional splits, Texas courts “strive for uniformity as 

much as possible”. Id. (internal quotation marks omitted) (quoting Trinity 

Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 824 (Tex. 1997)).

For our Erie-guess, the parties agree that only the computer-fraud

provision is at issue. In contending Apache’s loss is not covered under it 

because the loss did not, as required by the provision, “result[] directly from

the use of any computer to fraudulently cause a transfer”, GAIC maintains the 

transfer of funds to the fraudulent bank account resulted from other events: 

before the email, the telephone call directing Apache to change the account 

information; and, after the email, the telephone call by Apache to the criminals

to confirm the change-request, followed by the Apache supervisor’s review and 

approval of the emailed request, Petrofac’s submission of invoices, the review 

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and approval of them by Apache employees, and Apache’s authorized and 

intentional transfer of funds, even though to the fraudulent bank account. (As 

discussed, the email stated that the attached letter on Petrofac letterhead “has 

also been posted [mailed] to” Apache. There is no evidence in the summaryjudgment record, however, that Apache received a hardcopy of the letter. Nor 

is there any evidence Apache relied on one, as opposed to the electronic version

attached to the fraudulent email, in telephoning to confirm the information 

provided. In any event, although this mailed-letter point was presented by 

GAIC at oral argument here, it is waived because it was not raised in district 

court or in GAIC’s opening brief on appeal, with the alleged mailing of the 

letter only noted belatedly in its reply brief.)

In response to GAIC’s position, Apache claims the loss is covered, based 

on the “commonly understood meaning” of the computer-fraud-provision’s 

terms. It asserts GAIC attempts to add terms it wishes had been included in 

the provision. 

The parties do not cite any Texas authority interpreting “the use of any 

computer to fraudulently cause a transfer” in the context of the computer-fraud 

provision, nor have we found any. Instead, GAIC relies primarily on 

unpublished opinions as persuasive authority; none are by Texas courts and 

almost all are outside our circuit. Apache attempts to distinguish them. 

Bearing in mind the limited weight accorded such non-binding authority, as 

well as Texas’ policy preference for cross-jurisdictional uniformity, a detailed—

albeit numbing—analysis of the cited authorities is required. See McGinnes, 

477 S.W.3d at 794.

GAIC cites the ninth circuit’s decision in Pestmaster Servs., Inc. v. 

Travelers Cas. & Sur. Co. of Am., affirming coverage-denial under a similarly

worded computer-fraud provision. (Pestmaster II), No. 14-56294, --- Fed. App’x 

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----, 2016 WL 4056068, at *1 (9th Cir. 29 July 2016), aff’g Pestmaster Servs., 

Inc. v. Travelers Cas. & Sur. Co. of Am. (Pestmaster I), No. CV 13-5039-JFW, 

2014 WL 3844627 (C.D. Cal. 17 July 2014) (unpublished). That policy defined 

“computer fraud” as “[t]he use of any computer to fraudulently cause a transfer 

of Money, Securities or Other Property”. Pestmaster I, 2014 WL 3844627, at 

*4. 

The underlying fraud was committed by a payroll contractor against the 

insured. Id. at *1. The contractor had been hired, inter alia, to withhold and 

submit payments for the insured’s payroll taxes. Id. To that end, the 

contractor prepared invoices for the insured, and was authorized to initiate 

transfers of funds from the insured to the contractor’s bank account, in order 

to pay invoices approved by the insured. Id. (The district court considered the 

contractor’s initiating the transfer of funds as the relevant “use of a computer”. 

Id. at *7–8.) Instead of paying the approved invoices, the contractor 

fraudulently used the insured’s funds to pay her own expenses, ultimately 

leaving the insured indebted to the Internal Revenue Service for payroll taxes. 

Id. at *2, 7–8.

The insured filed an action after being denied coverage under the crimeprotection policy for the tax debt; but, the district court rejected coverage under 

the computer-fraud provision because the “claimed losses did not ‘flow 

immediately’ and ‘directly’ from [the contractor’s] use of a computer”. Id. at *8. 

“[T]here was no loss when funds were initially transferred to [the contractor] 

because the transfers were authorized by [the insured]”. Id. 

In affirming, the ninth circuit interpreted “the phrase ‘fraudulently 

cause a transfer’ to require an unauthorized transfer of funds”. Pestmaster II, 

2016 WL 4056068, at *1. “Because computers are used in almost every 

business transaction, reading this provision to cover all transfers that involve 

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both a computer and fraud at some point in the transaction would convert this 

Crime Policy into a ‘General Fraud’ Policy”, essentially covering losses from all 

forms of fraud rather than a specified risk category. Id.

GAIC also cites Brightpoint, Inc. v. Zurich Am. Ins. Co., in which a 

district court ruled similar policy language did not cover a loss claimed by an 

insured distributor of prepaid mobile-telephone cards. No. 1:04-CV-2085-SEBJPG, 2006 WL 693377, at *7 (S.D. Ind. 10 March 2006) (unpublished). After 

the distributor received a facsimile-transmission of purchase orders, postdated checks, and bank guarantees from a purported customer, the distributor 

delivered the inventory in exchange for the original documents. Id. at *2. The 

transaction was a fraud, with the distributor’s never receiving payment. Id. at 

*3. 

The court assumed, without deciding, that the facsimile-transmission 

constituted “use of a computer”. In concluding the loss was not covered, it 

stated:

We do not view the faxed [documents] to have 

“fraudulently cause[d] a transfer” of the phone cards, 

as required under the policy definition of “Computer 

Fraud.” . . . [T]he facsimile simply alerted the [insured] 

to the fact that [the insured’s customer], or perhaps in 

this case some other person mimicking his methods, 

wished to place an order. Only after [the insured] 

received the physical documents would [it] release the 

phone cards and, based on established practices of [the 

insured], the cards would not have been turned over 

simply on the basis of the facsimile.

Id. at *7.

Additionally, GAIC points to a summary-judgment ruling in its favor by 

the Northern District of Texas. See GAIC v. AFS/IBEX Fin. Servs., Inc., No. 

3:07-CV-924-O, 2008 WL 2795205, at *2 (N.D. Tex. 21 July 2008) 

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(unpublished). There, an employee of the insured insurance-premium-finance 

company used a computer to submit more than 100 false loan applications to 

induce the insured to issue checks that the employee deposited for personal 

use. Id. The insured’s claim with GAIC sought coverage under, inter alia, the 

computer-fraud provision of a crime-protection insurance policy; the claim was 

denied. Id. 

As in this instance, the computer-fraud provision covered a loss 

“resulting directly from the use of any computer to fraudulently cause a 

transfer of . . . property”. Id. at *14. The court interpreted this language as 

being “designed to cover losses directly stemming from fraud perpetrated by 

use of a computer”. Id. (emphasis in original). Notably, the insured did not 

present “any evidence or arguments in opposition” to GAIC’s claiming the 

provision did not apply, but the court nonetheless determined the loss was not 

covered. Id. 

As GAIC notes, similar policy language was at issue in Vonage Holdings 

Corp. v. Hartford Fire Ins. Co., but the court denied the insurer’s motion to 

dismiss and allowed the insured’s claim to go forward. No. 11-6187, 2012 WL 

1067694, at *4 (D. N.J. 29 March 2012) (unpublished). The facts considered in 

Vonage, however, differ from those here, because the insured was 

unquestionably “hacked”—hackers gained access to the insured’s servers to 

fraudulently route international telephone calls. Id. at *1.

The only decision discussed by the parties which ruled the policy 

language covered computer-use limited to email communications was later 

vacated by the Superior Court of Connecticut. See Owens, Schine, & Nicola, 

P.C. v. Travelers Cas. & Sur. Co. of Am., 50 Conn. L. Rptr. 665, 2010 WL 

4226958, at *8 (Conn. Super. Ct. 20 Sept. 2010) (unpublished), vacated, 2012 

WL 12246940 (Conn. Super. Ct. 18 Apr. 2012) (unpublished). The policy at 

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issue defined “computer fraud” as “[t]he use of any computer to fraudulently 

cause a transfer”. Id. at *4. 

The insured, a law firm, was defrauded by criminals who sent emails to 

the firm, representing themselves as Chinese businessmen in need of legal 

services. Id. at *1. All communications between the firm and the criminals 

were carried out by email. Id. at *7. A retainer agreement was signed, 

scanned, and emailed to the firm by the criminals. Id. at *1. They claimed 

they needed the firm’s services to collect a debt owed by an American company. 

Id. After a fraudulent check was received by the firm from the supposed 

debtor, the firm deposited the check in its trust account. Id. The firm then 

successfully wired funds from that account to one in South Korea; but, after 

the firm’s bank discovered the fraud, it refused to honor the fraudulent check

provided by the criminals to the firm, resulting in its financial loss. Id. at *2. 

In denying the insurer’s summary-judgment motion, the court ruled

“[t]he emails were the proximate cause and ‘efficient cause’ of [the insured’s]

loss because the [emails] set the chain of events in motion that led to the entire 

loss”. Id. at *8. As discussed, the decision, however, was vacated by the very 

court that rendered it. 

Again, this vacated trial-court ruling is the only presented decision 

interpreting the computer-fraud policy language to cover a loss when the 

computer use at issue was limited to email correspondence. Therefore, with 

the exception of the district court’s ruling at issue, there is cross-jurisdictional 

uniformity in declining to extend coverage when the fraudulent transfer was 

the result of other events and not directly by the computer use. 

Here, the “computer use” was an email with instructions to change a 

vendor’s payment information and make “all future payments” to it; the email, 

with the letter on Petrofac letterhead as an attachment, followed the initial 

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telephone call from the criminals and was sent in response to Apache’s 

directive to send the request on the vendor’s letterhead. Once the email was 

received, an Apache employee called the telephone number provided on the 

fraudulent letterhead in the attachment to the email, instead of, for example, 

calling an independently-provided telephone contact for the vendor, such as

the pre-existing contact information Apache would have used in past 

communications. Doubtless, had the confirmation call been properly directed, 

or had Apache performed a more thorough investigation, it would never have 

changed the vendor-payment account information. Moreover, Apache changed 

the account information, and the transfers of money to the fraudulent account 

were initiated by Apache to pay legitimate invoices. 

The email was part of the scheme; but, the email was merely incidental 

to the occurrence of the authorized transfer of money. To interpret the 

computer-fraud provision as reaching any fraudulent scheme in which an 

email communication was part of the process would, as stated in Pestmaster II,

convert the computer-fraud provision to one for general fraud. See 2016 WL 

4056068, at *1. We take judicial notice that, when the policy was issued in 

2012, electronic communications were, as they are now, ubiquitous, and even 

the line between “computer” and “telephone” was already blurred. In short, 

few—if any—fraudulent schemes would not involve some form of computerfacilitated communication.

This is reflected in the evidence at hand. Arguably, Apache invited the 

computer-use at issue, through which it now seeks shelter under its policy, 

even though the computer-use was but one step in Apache’s multi-step, but 

flawed, process that ended in its making required and authorized, very large 

invoice-payments, but to a fraudulent bank account. 

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The email was sent only after Apache’s advising, in reply to the 

criminals’ change-request telephone call, that the request had to be made on 

Petrofac letterhead. The criminals complied: by attaching to the email (sent 

using a slightly different domain name) a letter on altered letterhead; and, as 

stated in the email, by allegedly mailing that letter to Apache. Accordingly, 

the computer-use was in response to Apache’s refusing, during the telephone 

call, to, for example, transcribe the change-request, which it could have then 

investigated with its records. 

No doubt, the better, safer procedure was to require the change-request 

to be made on letterhead, especially for future payment of Petrofac’s very large 

invoices. But the request must still be investigated properly to verify it is 

legitimate. In any event, based on the evidence in the summary-judgment 

record, Apache followed-up on the request in the email and its attachment. In

other words, the authorized transfer was made to the fraudulent account only 

because, after receiving the email, Apache failed to investigate accurately the 

new, but fraudulent, information provided to it. 

Moreover, viewing the multi-step process in its simplest form, the 

transfers were made not because of fraudulent information, but because 

Apache elected to pay legitimate invoices. Regrettably, it sent the payments

to the wrong bank account. Restated, the invoices, not the email, were the 

reason for the funds transfers. 

In sum, and applying Texas law in making this Erie guess, both the plain 

meaning of the policy language, as well as the uniform interpretations across 

jurisdictions, dictate Apache’s loss was not a covered occurrence under the 

computer-fraud provision. See McGinnes, 477 S.W.3d at 794.

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III.

For the foregoing reasons, the judgment is VACATED and judgment is 

RENDERED for Great American Insurance Company.

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