When a Customer is Not a Customer Bankers’ Bond Requires Loss to Bank’s Customer

In an unusually brief, succinct and intelligent decision the Ninth Circuit Court of Appeal interpreted an insurance contract, called a financial institution bond, as it was written in First Nat. Bank of Northern California v. St. Paul Mercury Ins. Co., — Fed.Appx. —, 2015 WL 2225044 (C.A.9 (Cal.) 5/11/15).

First National Bank of Northern California (“the Bank”) appealed from a grant of summary judgment against it and in favor of St. Paul Mercury Insurance Company (“the Insurer”).

This insurance coverage dispute arises from a loss caused by the Bank’s payment of two fraudulent wire transfers from the Edwards Living Trust, which the Bank reimbursed. The Bank seeks indemnity from the Insurer under its financial institution bond.

The critical question is whether the Edwardses, who created the Trust, were “customers” within the meaning of the bond. To qualify as a “customer” under the bond, among other things, an individual or entity is required to have a written agreement with the Bank to rely on wire transfer instructions communicated by phone or fax. The undisputed facts show that there was no written agreement.

The Bank argues that the signature card, account agreement, and security procedures may be combined under the incorporation by reference doctrine to establish a written agreement authorizing wire transfers on the basis of voice or fax authorization. Under California law, which governs this dispute, parties to a contract may validly incorporate by reference into their agreement the terms of another document when specific factors are met. The prerequisites for incorporation by reference are:

(1) a clear and unequivocal reference by the parties;

(2) the reference must be called to the attention of the other party;

(3) the party must consent; and

(4) the terms of the incorporated document must be known or easily available to the contracting parties.

The district court, according to the Ninth Circuit, properly concluded that, under California law, the signature card, account agreement, and security procedures did not qualify as a “written agreement” under the bond definition. The signature card, which is the only document that the Edwardses actually signed, does not refer to the account agreement or the security procedures. The security procedures were not provided to the Edwardses. The signature card does not contain any authorization for a wire transfer from the account by voice or fax authorization.

Under these undisputed facts the combined signature card, account agreement, and security procedures did not constitute a written agreement with the Bank authorizing it to rely on wire transfer instructions communicated by phone or fax. Therefore, the district court correctly concluded that the Edwardses did not qualify as “customers” within the meaning of the bond.

ZALMA OPINION

Financial Institution Bonds are insurance contracts where the insurer agrees to indemnify the bank if it is defrauded in the course of its business. In this case it only protected losses incurred by the bank’s customers, a term defined by the policy. The Ninth Circuit concluded that there was no written contract between the bank and the people whose funds the bank improperly transferred. Banks, like everyone who buys insurance, should carefully read the insurance contract and determine if its procedures will allow it to obtain the benefits of the insurance.