Chapter 77: Insurance and Professional Liability: Who Pays for the Damages

The following scenario is an educational example based on common fraud patterns. The characters and events are for illustration purposes only.

It was two in the morning when the phone of Rami, the CEO of an infrastructure company, vibrated on his nightstand. Normally, Rami would ignore calls at such an hour, but the number appearing on the display was that of his CFO. When he picked up the receiver, he did not hear her calm, authoritative voice, but rather short, choked breaths.

"Rami," she whispered, "the money didn't reach the Italian supplier. And the bank says... the bank says the account to which we transferred the 800,000 euros yesterday doesn't belong to them at all. It belongs to an entity in Singapore that closed down this morning."

At that moment, Rami felt the ground fall out from under him. But amidst the panic, one calming thought arose: "We have insurance." He was always meticulous about the company being insured. Professional liability, directors' and officers' liability, third-party insurance – he paid significant premiums every year exactly for this moment. He did not know then, on that fateful night, that the real struggle was just beginning, and that the insurance policy he relied on might turn out to be a broken reed.

In previous chapters, we dealt with the techniques of scammers and methods of prevention. But what happens when prevention fails? When the money has already left the account and disappeared into the depths of the global network? This is where the most painful legal and economic question arises: Who bears the damage? Is it the bank that did not stop the suspicious transfer? Is it the insurance company signed on the professional liability policy? Or perhaps the accountant and the bookkeepers who failed to identify the fraud?

The Infrastructure Company's Story: When the Insurance Says "No"

The company was in the midst of a complex bridge construction project. Their primary supplier, an Italian firm, sent an email containing an update on a change in bank account details due to an "internal accounting audit." The CFO saw the familiar logo, the polite writing style of the sales manager, and approved the transfer of funds to the new account.

Three days later, when the supplier sent a non-payment notice, the scale of the disaster became clear. Hackers had breached the supplier's email (or the infrastructure company's—that may be determined during an investigation), monitored correspondence for a period, and at the critical moment, "inserted" the fake invoice with their bank details.

In a meeting with the insurance broker, the CEO was told that there was a professional liability policy and basic cyber insurance, and therefore, there was coverage. However, shortly thereafter, the letter arrived from the insurance company. The response was a denial of the claim.

"According to the policy terms," the denial letter stated, "the insurance does not cover damages caused as a result of 'Social Engineering' or the voluntary transfer of funds by the insured, unless a specific extension for this was purchased. Furthermore, it is claimed that the insured failed to perform a telephone verification as required by the protection terms, which may be considered negligence."

At that moment, it became clear that the battle was not only against the scammers but also within the legal and insurance framework. A legal "Bermuda Triangle" was created: the insurance company alleges negligence on the part of the business; the bank claims it followed the client's instructions; and the supplier demands its money and threatens to halt the project.

This is where law and reality meet. In this chapter, we will analyze the possible liability of each of the players in the field and understand why the word "insurance" is sometimes just the beginning of a complex legal journey.

The Black Hole in Insurance Policies: Professional Liability vs. Cyber Insurance

One of the main failures encountered during years of professional practice representing companies that have fallen victim to a scam is the lack of understanding of the differences between types of insurance coverage. Many business owners believe that "professional liability insurance" is some kind of safety net for every human error. The legal reality is more complex.

A professional liability policy is intended to cover damages caused to a third party due to a professional mistake by the insured. But when it comes to digital fraud where the business itself has lost its own money, insurance companies may argue that this is a pure financial loss to the business itself, and not a liability toward a third party covered under "professional liability."

This is where "cyber insurance" comes into the picture. In recent years, this insurance has become a common product. But here lies the trap: many standard cyber policies cover damages to computer systems, data recovery costs, and perhaps loss of profits due to downtime. They do not necessarily and automatically include funds transfers carried out following a fraud.

The professional term that is important to know is Social Engineering Fraud. Insurance companies may consider such a transfer a "voluntary transfer." From their perspective, the employee is the one who performed the technical actions to approve the transfer. Without a specific extension for social engineering fraud, the possibility of receiving compensation from the insurance company may be extremely complex.

Furthermore, insurance companies set threshold conditions. They may require the business to show that it operated internal controls—for example, telephone verification of any change in bank account details with an authorized party at the supplier. If this action was not performed, the insurance company may argue for increased risk or negligence by the insured, a matter affecting the right to compensation according to the Insurance Contract Law, 5741-1981.

Bank Liability: Did the Watchman Sleep on the Job?

When difficulty arises with the insurance company, attention is sometimes turned to the bank. The question arises of how the bank allowed a transfer of such a significant amount to an unusual destination without performing further inquiry.

The legal question is what is the "duty of care" of the bank toward its client. On one hand, the bank is obligated to carry out the client's instructions. Delaying a money transfer could cause business damages. On the other hand, the bank has monitoring systems that are supposed to identify abnormal activity.

The legal analysis on this subject is in a process of development. In the past, the prevailing approach was that the liability lay with the client who gave the instruction. But today, one can see a trend of examining an increased duty of care for banks. Under certain circumstances, when the transfer is clearly abnormal—for example, a destination in a high-risk country, an amount that does not match the account history, or beneficiary details that do not match the account holder's name—it is possible that the bank's liability would be examined if it did not perform a sufficient check.

However, it is important to understand the limitation: in international transfer systems, banks usually operate according to account numbers and do not always check for full correspondence with the beneficiary's name. An analysis of legal options suggests that a sweeping obligation to check every such correspondence is not always imposed on the bank, and the responsibility for entering correct details usually remains with the client.

Cases where it is possible to examine the imposition of liability on banks are those where there were clear "red flags" that were ignored, or cases where the bank did not stand by its promises for increased inspection.

Liability of the Accountant and Bookkeeping

The third party in the discussion is the professional echelon that manages the funds. In a scenario of fraud, a question may arise regarding the liability of the accounting firm or the bookkeepers.

Is an accountant in an annual audit supposed to identify such fraud? Usually the answer is no, as their role is to examine financial statements. However, when it comes to ongoing bookkeeping, the liability may increase. If the professional was exposed to a suspicious email and did not raise a question, or if basic work procedures of "dual authorization" were not established, a claim of professional negligence may arise.

In such a case, the professional's liability policy is examined. If negligence is proven, it may be possible to explore the option of collecting from their insurance company, although insurance companies may argue for exclusions due to the nature of the act or contributory negligence by the business owner.

The Legal Aspect: Laws and Rules in the Allocation of Liability

In the legal analysis of such cases, several sources are examined:

1. Insurance Contract Law, 5741-1981: The insurance company's compliance with the duty of disclosure is examined. Was it clarified to the insured what the cyber insurance includes? Were exclusions highlighted as required by Section 3 of the Law? Restrictions that were not highlighted may sometimes be voided under legal examination.
2. Torts Ordinance [New Version]: Examination of the tort of negligence. Was the duty of care violated by the bank or the insurance company? Could the damage have been foreseen and prevented?
3. Payment Services Law, 5769-2019: This law regulates liability in cases of misuse of payment methods. Its principles also permeate into the world of bank transfers, especially regarding the definition of negligence by the client.
4. "Contributory Negligence" Doctrine: Banks and insurance companies tend to argue that the primary fault lies with the business that acted according to a forged email. In an analysis of legal options, it is possible that the court will divide the liability between the parties according to the circumstances of the case.

Warning Signs Before Difficulties in Coverage

• Offer for cyber insurance at an especially low cost: May not include coverage for financial fraud (Funds Transfer Fraud).
• Lack of a "Social Engineering" addendum: Without such explicit coverage, the business might not be protected in the event of impersonation.
• Lack of security requirements from the bank: If increased authorization mechanisms were not defined, this could constitute a loophole.
• Over-reliance on insurance: The thought that insurance will cover everything without taking precautionary measures is a significant risk.

Recommended Actions Upon Identifying an Incident (Insurance and Liability Aspect)

1. Immediate notification to the insurer: Timely notification is critical for the purpose of reviewing the claim. Every interaction must be documented.
2. Documentation of work procedures: Collecting evidence of compliance with accepted procedures may assist in dealing with claims of negligence.
3. Urgent contact with the bank: A demand in writing and in a recorded conversation to freeze funds (Recall). The speed of the bank's response may affect its liability.
4. Examination by a cyber expert: An independent expert can assist in determining the source of the breach, which is an important pillar in clarifying liability.
5. Examination of supplier liability: If the source of the fraud is in the supplier's email inbox, it is possible to examine their liability for the damage.

Legal Aspect: Summary of the Educational Scenario

In a possible scenario, after examining the evidence and conducting a legal proceeding, the parties may reach a settlement. The bank might bear a certain portion of the damage if it is proven that its systems identified suspicious signs that were not handled properly. The insurance company might agree to pay partial compensation if it turns out that exclusions in the policy were not clear enough to the insured.

The message emerging from the various cases over the years is that courts may expand the liability of financial entities, but the chance depends on the circumstances and the degree of caution exercised by the business owner. The law is intended to protect those who act with reasonable caution and fell victim to exceptional sophistication.

In the next chapter, we will review the construction of a "business protection plan" – including legal and insurance aspects – with the goal of minimizing the risk of reaching a legal proceeding in the first place. As seen in many cases, professional prevention is the most effective tool.