In the recent case of Rainforest Chocolate, LLC v. Sentinel Insurance Company, Ltd.,1 the Supreme Court of Vermont found coverage for Rainforest where Sentinel’s “false pretense” exclusion turned out to be ambiguous as there were at least two reasonable interpretations of what constituted “physical loss or physical damages.”2

The underlying action stemmed from Sentinel’s claim denial where one of Rainforest’s employees transferred money through an electric funds transfer, purportedly at the direction of his manager via email. As it turns out, the manager’s email had been hacked. Rainforest reported the claim to Sentinel claiming coverage under a few different policy provisions, including the Forgery, for Forged or Altered Instruments clause, the Computer Fraud provision along with the Money or Securities by Theft clause. Sentinel, in turn, denied coverage primarily based on the False Pretense Exclusion that read:

We will not pay for physical loss or physical damage caused by or resulting from:
False Pretense: Voluntarily parting with any property by you or anyone else to whom you have entrusted the property if induced to do so by any fraudulent scheme, trick, device or false pretense.

The trial court ruled in favor of Sentinel, but it wasn’t without criticism of how the policy was written:

The complicated nature of this policy, with its layers of coverages and exclusion, is almost impossible to follow without a compass s and a guide. It took the court many hours of reading and rereading the policy and the briefs to reach a clear understanding of how the various provisions fit together. How any insured, however sophisticated, is supposed to determine that it is getting what it paid for with a policy like this is a mystery to the court. Nonetheless the court concludes that the terms of the policy, while confusing, are not ambiguous and must be enforced as written.

Rainforest appealed the trial court’s ruling advancing the position that the False Pretense Exclusion did not apply because it only excludes “physical loss or physical damages” and the loss at issue was not a physical loss. The court analyzed Ad Advert. Design, Inc. v. Sentinel Insurance Company,3 for guidance. In nearly parallel facts, the court in Ad Design found the term “physical loss or damage” to be ambiguous as other courts that have interpreted the same or similar language have found at least two reasonable interpretations. For instance, while some courts found “physical loss or physical damage” to only mean “tangible” property, others were able to expand the definition to include an electronic loss of money instead of just the “physical loss” of actual cash.

Ultimately the supreme court in Rainforest found the reasoning in Ad. Design persuasive and adopted their rationale, finding the false pretense language ambiguous. Further supporting a finding of ambiguity was the fact that Sentinel’s policy interchangeably used the terms “physical loss and physical damage” and “loss and damage” which would lead the average reader to assume there was some difference between them, but without ever actually defining or explaining the difference.

This is an example of how technological advances such as increased use of email and electronic money transfers provide challenges to those of us who practice in the insurance industry. Fortunately, Rainforest will get another bite at convincing the trial court there’s coverage, this time however, without the confusing “false pretense” exclusion to contend with.
1 Rainforest Chocolate, LLC v. Sentinel Ins. Co., No. 2018-095, 2018 VT 140 (Vt. Dec. 28, 2018).
2 It is a well-settled principle in most jurisdictions that if a policy contains ambiguous language, its interpretation will favor the insured, as it is up to the insurer—the drafter of the contract—to put together an unambiguous policy.
3 Ad Advert. Design, Inc. v. Sentinel Ins. Co., No. 17-140, 2018 WL 4621744 (D. Mont. Sept. 26, 2018).