Cyber criminals have been exploiting the ‘privacy’ features of crypto-assets to target businesses and individual accounts to steal and unlawfully demand the transfer of crypto-currencies through ransomware attacks. In addition to the distinctive features of cryptocurrencies which gives cyber criminals a false sense of anonymity, the rapid rise in cryptocurrency fraud and ransomwares are also the product of very lax or non-existent international regulation. In 2020, 57.9% of the organizations in the UK and 78.5% in the USA were affected by a ransomware. The targets of major ransomware attacks in 2021 included Colonial Pipeline and JBS meat processing in the US, Health Services Executive in Ireland and Hackney Borough Council in England. The business types targeted is an indication of the threat to critical national infrastructure. Some ransom demands are made in fiat currency while others are in cryptocurrencies. The average ransom paid by medium sized organizations was US$170,404 and the average costs to rectify and respond to a ransomware was US$1.85 million.
International and Government Response
Prior to the creation of the Ransomware Task Force in December 2020, there was no coordinated effort among states and the private and public sector to tackle the serious and growing threat from ransomware attacks.
Equally problematic is the lack of clarity on the legality of paying ransom / ransomware demands.
England and Wales
The payment of a ransom is not illegal in England and Wales provided they are not paid to or have any association with terrorist groups (s. 15 (3) Terrorism Act 2000), persons subject to economic sanctions or used to finance a criminal act and there is nothing illegal about the contracts between the parties. The National Cyber Security Centre in their guidance on mitigating malware and ransomware attacks emphasised that law enforcement does not encourage, endorse or condone the payment of ransom demands.
United States of America
The US has not outlawed the payment of ransoms but have issued an advisory on potential sanctions risks for facilitating ransomware payments. The advisory warned that companies including insurance firms, financial institutions and those specialising in digital forensics and incident response that facilitates the payment of ransom may risk breaching OFAC Regulations. These companies are encouraged to contact the relevant government agencies if they reasonably believe that the person making the ransom demand may be sanctioned or in connection with sanctioned individual or entity.
France has unofficially declared their refusal to pay ransomware demands. Consequently, AXA insurers in France announced they would temporarily halt writing cyber insurance with a clause to indemnify customers for ransom paid.
Efforts to recover cryptocurrency?
Seizure / Recovery of cryptocurrency
Bitfinex: The authorities in the US have been able to successfully trace and recover crypto-assets stolen or paid for ransom. The most recent is US$5bn worth of stolen bitcoin seized by the US Department of Justice reported on Tuesday (08/02/2022). The bitcoin was stolen in 2016 after hackers breached the Bitfinex cryptocurrency exchange. The money was then transferred to digital wallets said to be operated by a couple in New York. At the time, the bitcoin valued about US$71 million but its current value is upwards US$5 billion. Various methods were employed by the couple to launder about US$25, 000 of the bitcoins. The couple will be charged for federal crimes of conspiracy to defraud the US and conspiracy to commit money laundering.
The length of the probe (5yrs) and the coordinated efforts of investigators from across the U.S and Germany highlights the resources governments and private investigators are willing to invest to ensure cyber criminals are not allowed to steal and launder cryptocurrencies gained unlawfully.
Colonial Pipeline: The authorities were also able to recover some of the cryptocurrencies paid as ransom by Colonial Pipeline Company following a ransomware attack in 2021. Colonial paid the cyber-criminals US$4.4 million in cryptocurrency to release the system, which they made a claim to recover from their cyber insurers. The U.S authorities recover US$2.3 million of the ransom.
AA v Unknown and others :The claimants were UK insurers whose customer, a Canadian insurance company computer system was hacked and encrypted. A ransom demands of US$950,000 in bitcoins to a specific address was made by the hackers. The Claimants agreed to pay the ransom. Some of the money was transferred into fiat currency while 96 bitcoin was sent to an address linked to an exchange operated by the 3rd and 4th defendants. The first Defendant was the persons unknown who made the demand. The second Defendant was the owner / controller of the 96 Bitcoins. The insurers retained the services of an incident response company that specialises in the negotiation of crypto currency ransom payments to negotiate with the hackers to regain access to the customer’s data and systems. The ransom was paid but further investigations were carried out by the insurers with the assistance of Chainalysis Inc, a blockchain investigations company who also provides software to track the payment of cryptocurrency. The investigations successfully revealed the location of the Bitcoins, 96 of which was found at an address operated by the 3rd and 4th Defendants while some was transferred to a fiat currency account. The insurers successfully made an application to the High Court for a proprietary injunction over the cryptocurrency. It was held by the court that cryptocurrencies are ‘property’ and could be the subject of a proprietary injunction as they met the four criteria of property; ‘being definable, being identifiable by third parties, capable in their nature of assumption by third parties and having some degree of permanence’. The decision was an adoption of points presented in the Legal statement on cryptoassets and smart contracts by the UK Jurisdiction Taskforce.
ION Science Ltd v Persons Unknown and others: The case concerned the fraudulent inducement of the claimants to make an investment equivalent to 64.35 bitcoin and pay for commission to receive profits from the said investment. The company referred by the Respondent was operating without Swiss authorisation. The bitcoins were transferred to two cryptocurrency exchanges each located in the US and Cayman Islands. The court granted orders against the first Respondent (Persons Unknown) in the form of a proprietary injunction, a worldwide freezing order and an ancillary disclosure against persons unknown. There was also a Bankers Trust order which could be served on two cryptocurrency exchanges outside of the Jurisdiction.
Remarks: These cases are examples of the instances where cyber-criminal are held responsible for the theft of or laundering of cryptocurrencies. Cyber criminals are subject to the application of money laundering and Terrorism. Crypto-assets illegally acquired can be the subject of an injunction, a worldwide freezing order and seized even if the investigation takes years to complete. Cyber insurance and incident response companies do have an obligation to ensure they are not facilitating the payment of ransoms to terrorists, sanctioned person or governments and their affiliates. The abovementioned orders are methods victims of a cryptocurrency fraud or ransomware attack can use in their effort to recover their crypto-assets. However while these methods have been successful for traceable currencies (Bitcoins and Ethereum), the same may not be very effective to recover non-traceable cryptocurrencies (Monero).
The 2Cs, COVID-19 and cyber risks, 2 plagues of our generation, both of which command global interest and competes in both print and online media for daily headlines. They also have one thing in common, they are highly misunderstood and mutates ever so often. For these and other reasons, governments and business stakeholders have invested heavily in developing safety guidelines to mitigate the loss and damages arising directly or indirectly from cyber risks and COVID19. While governments have made some progress in the fight against COVID-19 through the vaccine administration, cyber risks on the other hand is mutating at such a rate where it almost impossible to keep up and the shipping and insurance industries are just as vulnerable to cyber risks as any other industry. Here we will briefly discuss phishing, often described as the most widespread and pernicious cyber-attack technique, but the discussion will be centered around the decision of the U.S. District Court for the Northern District of Texas in RealPage v National Union Fire Insurance Company of Pittsburgh and Beazley Insurance Company.
BIMCO in its guidelines on cybersecurity risks onboard ships describes phishing as encompassing the sending of emails to many potential targets asking for pieces of sensitive or confidential information. The email may also contain a malicious attachment or request that a person visits a fake website using a hyperlink included in the mail. A distinguishing feature of phishing is that attackers pretend to be a real and trusted person or company that the victim usually or have had business relations. It is reported in the Cyber Security Breaches Survey 2020, that phishing attacks are the most common attack vector used by cyber criminals and that between 2017 and 2020 there has been a rise in the number of businesses experiencing a phishing attacks from 72% to 86% whereas there has been a fall in viruses and other malware from 33% to 16%. Since phishing is such a constant threat to businesses, it is understandable why insurers see the need to cater for this risk in their cyber insurance policies and or other commercial crime policies.
Facts of RealPage case:
RealPage provides several services for their clients who are property owners and managers of real estate. The clients entered contracts with RealPage authorizing it to act as agents on their behalf, and to manage and collect monies debited from their customers’ accounts, and to credit the client’s identified bank account. The tenants authorized the transactions processed by RealPage and this was communicated to RealPage by their clients. RealPage then contracted with Stripe to provide software services that enable payment processing and related functions.
The payment process involved the following:
A tenant would log in to an interface called “Resident Passport” to make a payment to one of RealPage’s clients.
Upon initiation of a payment by a tenant, RealPage would send application programming interface (API) calls to Stripe’s server either through Stripe Dashboard or the On-Site application.
Upon receipt of an API call, for an automated clearing house (ACH) transaction, Stripe would send instructions to its bank, Wells Fargo to process the ACH transfer that would pull money from the tenant’s bank account and place these funds in Stripe’s Wells Fargo bank account.
Thereafter, Stripe would direct Wells Fargo to complete another ACH transfer to pay these funds to the clients in accordance with RealPage’s instructions.
The funds held in Stripe’s accounts were for the benefit of its users and merchants such as RealPage. If there was a balance owed to a client of RealPage, the funds for that client in Stripes account would be for the benefit of the said client. RealPage had no rights to the funds held in Stripes account. RealPage was not entitled to draw funds and did not receive interest from funds maintained in the account. RealPage contracts describes the relationship with Stripes as independent contractors. One exception where Stripe operates as an agent is holding funds that are owed to RealPage
The hackers used targeted phishing to obtain and alter the account credential of a RealPage employee. They then used those credentials to access the Stripe Dashboard and alter RealPage’s fund disbursement instructions to Stripe. The hackers diverted over $10 million that was not yet disbursed to clients. RealPage discovered the fraud, contacted Stripe and directed them to reverse the payments and freeze outgoing payments. RealPage was unable to recover over $6 million of the funds. RealPage refunded clients for lost funds.
Insurance Policies with National Union and Beazley
At the time of the attack, RealPage had a commercial crime policy with National Union and an Excess Fidelity and Crime Policy from Beazley. The Excess Policy provides a $5,000,000 limit of liability “for any loss which triggers coverage under the Commercial Crime Policy. Therefore, any recovery under the Excess policy was dependent on RealPage successfully making a claim under the Commercial Crime Policy. The following provisions of the Commercial Crime Policy are the most relevant
Ownership of Property; Interests Covered:
The property covered under this policy is limited to property:
(1) That you own or lease; or
(2) That you hold for others whether or not you are legally liable for the
loss of such property.
We will pay for loss of or 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”.
Funds Transfer Fraud:
We will pay for loss of “funds” resulting directly from a “fraudulent instruction” directing a financial institution to transfer, pay or deliver “funds” from your “transfer account”.
Insurance Claims and Responses
RealPage claim for the funds lost under the policy but National Union was only willing to reimburse the transactional fees owed to Real Page. With respect to the diverted funds that were owed to RealPage clients, National Union concluded that based on their preliminary analysis, RealPage did not own or hold the funds and thus was not entitled to coverage. As a result of National Union’s denial of coverage, RealPage filed a claim seeking a declaration of judgment for the funds fraudulently diverted and lost as a result of the phishing attack.
The main issue for the court was ‘whether RealPage is entitled to coverage under commercial crime insurance policies for the loss of its clients’ funds which were diverted through a phishing scheme’? In answering this question, the central issue is whether RealPage held these funds despite its use of a third-party processor, Stripe Inc? After an extensive discussion of the meaning given to the word ‘hold’, it was accepted that there must be possession and not necessarily ownership of an item. Accordingly, the court held that RealPage did not suffer a direct loss as required under the policy as they did not hold the funds at the time of the phishing attack and in so doing the court decided in National Union and Beazley’s favour granting them summary judgment.
RealPage argued that the policy was expansive enough to cover property they held. They also reasoned that since they had the authority to direct Stripe as to where the funds should go, they ‘held’ the funds. The court rejected this line of reasoning by stating ‘hold’ cannot be reduced to simply the ability to direct but required some sort of possession of property. By applying the ordinary meaning of ‘hold’, Real page was not in possession of the funds. The funds were in Stripes account at Well Fargo and not RealPage up to the time it was diverted to the hackers account. RealPage ability to direct the transfer of the funds does not amount to holding the funds. Furthermore, RealPage had no rights to the funds in the account, could not withdraw the funds and held in the same account as those of other Stripe users.
RealPage had to also establish that they had suffered loss resulting directly from computer fraud or funds transfer fraud. Since RealPage did not hold the funds, its loss resulted from its decision to reimburse its clients. Accordingly, RealPage did not suffer a direct loss as required under the Policy.
While we acknowledge that this decision is not binding on the courts in the UK, it cannot be denied that many of the practices within the UK cyber insurance market are influenced by what happens in the more mature US market. Furthermore, many of the insurance companies including Beazley who are leading the way in the UK as cyber insurance providers also have parent companies, branch offices or subsidiaries operating in the USA. So, while the decision is not binding, it will certainly be persuasive or at the very least leave an indelible lesson for both assureds and insurers to seek clarity and modify policy clauses relating to loss or damage from phishing or other social engineering attacks.
If a higher court was to approve this judgement and a similar practice is adopted in the UK by insurers, it will be very difficult for assureds who use third party providers to assist them with payment transfers and other transactions to successfully claim an indemnity from their insurers relying on similar policy wording. This would mean even though the assured’s system was breached when the employee inadvertently shared their confidential account details and though the phishing diverted funds belonging to clients of the assured, a policy bearing similar clauses as those provided above, would not respond since the outcome of the claim would be totally dependent on the definition of ‘hold’ and what was considered to be in the possession of the assured as per the requirement of the policy at the time the funds were fraudulently diverted.
To prevent such a harsh outcome for assureds, it is recommended that assures negotiate with their brokers for their cyber insurance policies or commercial crime policies to include words which would cover situations where funds are being held in the account of an agent or third-party contractor. In so doing, the policy wording could be modified to include not just funds the assured ‘hold or owns’ but to also cover ‘loss of funds for which they have authority to direct’.
We will indemnify you in respect of the following for loss by theft committed on or after the Retroactive Date stated in the schedule which is first discovered during the period of insurance and notified to us in accordance with Claims conditions applicable to Section B:
i) assets due to any fraudulent or dishonest misuse or manipulation by a third party of the computer system operated by you
ii) your funds or those for which you are responsible at law from an account maintained by you at a financial institution following fraudulent electronic, telegraphic, cable, telephone or email instructions todebit such account and to transfer, pay or deliver funds from such account and which instructions purportto have come from you but which are fraudulently altered, transmitted or issued by a third party or are
In the event that any party other than an insured person enters into an agreement with a third party entity pretending to be you we will pay reasonable fees and costs to establish that such fraud has occurred should the third party seek to enforce such agreements against you provided that such loss is first discovered and is notified to us during the period of insurance.
The words provided in clause 1a (ii) will cause a different outcome when compared to how property was defined and what was decided by the court in RealPage. In RealPage the National Union insurance policy defined ‘property’ as that i) owned or leased by the assured or ii) that you hold for others whether or not you are legally liable for the loss of such property’. Whereas, under Section B- Crime, clause 1a (ii) of Zurich Cyber Policy, the assured will be indemnified for ‘your funds or those for which you are responsible at law from account maintained by you at a financial institution following fraudulent electronic … or email instructions to debit such account and to transfer…’. The difference with the Zurich policy is that unlike the National Union policy in RealPage, there is no requirement for the assured to ‘hold’ the funds in the literal sense of the word. Furthermore, under the Zurich policy the insurer will only indemnify the assured if funds are either his or those for which he is responsible at law. This is different in RealPage as the National Union policy will cover property that the assured hold for others whether or not he is legally liable for the loss. Another distinguishing feature between the two policies is that in the Zurich policy the insurer will cover funds from an account maintained by the assured at a financial institution.
This latter feature has similar meaning to ‘hold’ as interpreted by the court in RealPage. If we consider for example, maintenance of a bank account, this includes holding and transferring funds within the account and the execution of other control mechanisms to ensure that the account remains active and in good financial standing. However, others may argue that ‘an account maintained by the assured at a financial institution’ should be given a wider meaning in that even accounts owned or held by a third party at a financial institution may be maintained by the assured. In other words, maintenance of an account does not necessarily mean that the funds must be held or are being held by the assured as was decided in RealPage. If this interpretation should be applied to the facts in RealPage, it is reasonable to conclude that the insurers would have been held liable to indemnify the assured since the monies in the account held by Stripe Inc was the legal responsibility of RealPage. Moreover, if the account was used solely to hold funds related to RealPage business there should be no logical explanation as to why it cannot be accepted that RealPage is maintaining the account in accordance with Zurich policy wording. Either way, the ambiguity and possibility of a trial will be removed if the parties clearly defined and explained what it meant by ‘maintenance of account’.
For those businesses without a cyber insurance policy, coverage may be acquired under their commercial crime policy. Below is an example of a clause covering this type of loss that can be found in most crime policies:
1. loss of or damage to Money, Securities or Property resulting directly from
Computer Fraud committed solely by a Third Party; or
2. loss of Money or Securities contained in a Transfer Account at a Financial Institution resulting directly from Funds Transfer Fraud committed solely by a
“Funds Transfer Fraud” means fraudulent written, electronic, telegraphic, cable, teletype
or telephone instructions by a Third Party issued to a Financial Institution directing such
institution to transfer, pay or deliver Money or Securities from any account maintained by
an Insured at such institution, without the Insured’s knowledge or consent.
Some crime policies in their definition section provide that a “Transfer Account” means an account maintained by the Insured at a Financial Institution from which the Insured can initiate the transfer, payment or delivery of Money or Securities.” Like the Zurich policy, the implications of the clause will turn on the meaning assigned to ‘maintenance of an account’ as discussed above.
Funds transfer fraud is also covered in Beazley Commercial Crime Insurance Module:
Fund transfer fraud means the transfer of money, securities or other property due to electronic data, computer programs or electronic or telephonic transfer communications within a computer system operated by the insured having been dishonestly, fraudulently, maliciously or criminally modified, replicated, corrupted, altered, deleted, input, created, or prepared.
Fund transfer fraud does not include loss due to social engineering fraud.
Based on this definition and the exclusion of social engineering from Fund transfer fraud, an assured in RealPage’s position could not rely on the Funds transfer clause under their commercial crime policy. Instead, the assured would need to rely on the social engineering fraud clause (where not excluded), variations of which are found in most cyber insurance policies.
Social Engineering Fraudmeans the insured having authorised, directed or acknowledged the transfer, payment, delivery or receipt of funds or property based on:
an electronic or telephonic transfer communication which dishonestly, fraudulently, maliciously or criminally purports to be, but is not, from a customer of the insured, another office or department of the insured, a financial organisation or vendor; or
a written or printed payment instruction obtained by fraudulent impersonation.
In some policies for example Zurich Cyber Policy, an obligation is placed on the assured to confirm the validity of the transfer instructions before actions are taken to send the funds to the account mentioned in the purported instructions. The confirmation must include ‘either verification of the authenticity or accuracy of the transfer instruction by means of a call back to a predetermined number or the use of some other verification procedure and the assured must keep a written record of the verifications along with all elements of the fraudulent transfer instruction’. It is imperative for assureds to check their cyber insurance and or commercial crime policies to ensure they have adequate protection against phishing and other types of social engineering attacks as cyber criminals will continue to use these attack vectors to steal from companies.
 Civil Action No. 3:19-cv-1350-b (ND Tex Feb 24, 2021)
It has just been announced that Professor Soyer’s recent book “Marine Insurance Fraud” has won the 2015 BILA Book Prize. This prize, for the best book on insurance law, is awarded annually by the British Insurance Law Association Charitable Trust, a body existing to promote research on the interrelationship between law and insurance.
BILA 2015 Prize for Professor Barış Soyer’s book “Marine Insurance Fraud”
The announcement was made at BILA’s Annual General Meeting on 16 October 2015. Alison Green, Chair of the BILA Charitable Trustees, congratulated Professor Soyer, not only for having written a highly relevant, interesting and accessible book, but also for being the only author to win the Prize twice (having first won the Prize in 2002 for his first monograph on warranties in marine insurance).
His most recent prizewinning monograph, published last year, gives a comprehensive and coherent legal analysis of the impact of fraud on the position of various parties to a marine insurance contract. At the time of publication it was seen as a winner. In the foreword, Sir Bernard Rix (formerly a Lord Justice of Appeal) stated: “Professor Soyer has written a book on an important and fascinating theme which not only states the law in a clear and concise way, but also analyses it critically, insightfully and helpfully. I am confident that it will be used profitably by a wide range of readers.”
Professor Barış Soyer is the Director of the Institute of International Shipping and Trade Law, a research institute based in the College of Law at Swansea University. He has taught marine insurance and other aspects of commercial law at Swansea for some 15 years.
Hard on the heels of legislation in the Insurance Act 2015 about fraudulent claims by the insured, readers may like to know that insurers can now take comfort from s.57 of the Criminal Justice and Courts Act 2015 concerning third party dishonesty. Essentially where there is substantial dishonesty in or about an injury claim the entire claim falls to be dismissed, subject to a “substantial injustice” exception.