Unreported / Non-Citable
Background
The Ninth Circuit held that a fraudulent-instructions exclusion barred a California payment processor’s claim under commercial crime policies issued by Berkley Insurance Company and Great American Insurance Company. The unpublished ruling emphasizes that courts read defined terms, quotation marks, and cross-references as part of the policy’s overall structure—not merely by comparing similar phrases in isolation.
Cachet Financial Services sought coverage for a loss under an insuring agreement addressing certain transfers of money. In an earlier appeal, the Ninth Circuit had held that Cachet stated a potentially viable claim under one subsection while affirming dismissal under another. Back in the district court, the insurers argued that the separate Fraudulent Instructions Exclusion eliminated the remaining theory of coverage.
The exclusion applied to loss resulting when an employee or financial institution acted on an instruction to transfer, pay, or deliver money or property, or to debit or delete an account, when the instruction proved fraudulent. The district court dismissed the case, and Cachet appealed again.
The Court’s Holding
The panel affirmed because the exclusion was clear and unambiguous. Cachet relied on the policy’s separately defined term “Fraudulent instruction” and argued that the exclusion’s phrase “instruction proves to be fraudulent” should carry that same specialized definition. The court disagreed. The policy consistently placed defined terms in quotation marks, while the exclusion did not quote the disputed phrase. The definition also expressly applied only to different coverage subsections, not the subsection supporting Cachet’s remaining claim.
Reading the policy as a whole, a reasonable insured would not treat two similar but differently formatted phrases as identical when the contract used a specific convention to identify defined terms. The exclusion’s ordinary language therefore governed and removed coverage for the alleged loss.
The court also rejected Cachet’s argument that enforcing the exclusion made the promised coverage illusory. California’s Supreme Court has not recognized a free-standing illusory-coverage doctrine, and Cachet had not shown that covered losses outside the exclusion were unrealistically rare. Even narrow coverage can be enforceable, and Cachet could evaluate whether the limited protection fit its particular business before buying the policy.
Key Takeaways
- Defined-term conventions matter. Quotation marks, capitalization, and explicit cross-references can determine whether a specialized definition applies.
- Courts interpret an exclusion in the context of the entire policy, so similar wording does not necessarily carry an identical meaning.
- An exclusion does not make coverage illusory merely because it substantially narrows protection for the insured’s own business model.
- Commercial insureds should map common loss scenarios against both the insuring agreement and every related exclusion before purchasing or renewing coverage.
- Policyholders challenging an exclusion should identify a genuine competing reading grounded in the contract’s text and structure, not only a favorable defined term elsewhere.
Why It Matters
California companies handling payroll, electronic payments, or client funds often buy crime and cyber-related coverage for instruction-based fraud. This decision shows why labels such as “fraudulent instructions” can be misleading if reviewed without the precise operative language. Brokers, risk managers, and coverage counsel should test realistic transaction flows against exclusions and confirm which policy definitions actually govern each clause.
For litigators, the ruling is also a reminder that formatting can carry substantive weight in insurance contracts. Although the memorandum is not generally precedential, its policy-wide reading tracks familiar California contract principles and provides a useful checklist for evaluating ambiguity arguments.