As we previously reported, in February 2021, a Texas federal court ruled that RealPage Inc. was not entitled to insurance coverage for funds diverted in an email phishing scheme because RealPage did not “hold” the diverted funds. The Fifth Circuit Court of Appeals has now weighed in, agreeing that RealPage never “held” the diverted funds as required by the policy and affirming the district court’s decision.
In 2018, a RealPage employee clicked on a phishing email purportedly from Stripe Inc., RealPage’s third-party payment processor. The phishers stole the employee’s Stripe login credentials and used them to divert more than $10 million in rent payments from tenants intended for RealPage and its property manager clients. Although some of the payments were reversed, RealPage ultimately lost roughly $6 million reimbursing its property manager clients whose funds were stolen.
RealPage then sought insurance coverage for the lost funds under its commercial crime policy with National Union and its excess fidelity and crime policy with Beazley. National Union reimbursed RealPage for the funds earmarked as RealPage’s transaction fees but denied coverage for the remainder of the funds because RealPage did not own, lease, or hold the funds as required by the policy. Beazley, the excess carrier, denied coverage because the National Union policy was not exhausted by the payment of loss.
After the Northern District of Texas granted summary judgment in favor of the insurers, RealPage appealed to the Fifth Circuit Court of Appeals. The Fifth Circuit noted that while the National Union policy covered certain losses from, among other things, computer fraud and funds transfer fraud, the policy’s conditions limited coverage only to property that RealPage “own[ed] or lease[d]” or that RealPage “h[e]ld for others.” RealPage admitted that it did not own or lease the diverted funds, so the analysis turned on whether it “held” the funds for others.
The Fifth Circuit, applying Texas law, first reasoned that because “hold” was a category distinct but related to “own” and “lease,” its definition must have some relationship to those terms. Turning to Black’s Law Dictionary, the court found the only definitions of “hold” that applied in context were “[t]o keep in custody or under an obligation” and, similarly, “[t]o possess or occupy.” Unfortunately for RealPage, however, the court agreed with National Union that neither definition was satisfied under the facts of the case.
After analyzing the relationship between RealPage, Stripe, and the funds, the Fifth Circuit held that RealPage never possessed the funds distributed by Stripe. Instead, the funds went from a tenant’s account into Stripe’s account, and Stripe thereafter disbursed the funds to the appropriate property manager. RealPage’s role was limited to providing the account numbers of the tenants and property managers. Thus, under the applicable definitions of “hold” requiring “custody” or “possession,” RealPage’s alleged loss was not covered.
Like the district court, the Fifth Circuit also rejected RealPage’s argument that “hold” meant “control” and that RealPage “controlled” the diverted funds. According to the court, RealPage’s attempt to construct an alternate “control” meaning “from an amalgam of selective dictionary definitions” was inconsistent with the policy language and, even if RealPage was right, the record demonstrated that RealPage had no control over the stolen funds.
Thus, because RealPage never “held” the funds at issue, the Fifth Circuit held that National Union was within its rights to deny coverage. And, because National Union’s policy was not exhausted, Beazley’s denial was likewise proper. Accordingly, the Fifth Circuit affirmed the district court’s grant of summary judgment in the insurers’ favor.
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