An errors and omissions insurance carrier published a notice sharing recent claims received by their offices. The stories were shared to alert title agents to a pattern of fraud occurring in escrow transactions.

A summary of some of these claims follows to show the severity of the resulting loss. The carrier urges their policy holders to review communication protocols and to consider using fax communications to process escrow transactions in lieu of using email – which can be hacked.

Claim Received 09/05/2013

Insured served as buyer's closing agent for a transaction in which Claimant seller sold his vacation home to buyer for $225,000. The seller's closing agent's email account was hacked into by a third party who provided "updated" wire instructions via email to the Insured. On the computer screen the email looked legitimate and the fake address was only apparent if printed (which insured did not do until after the fact).

The Insured sent an email to the other closing agent to verify the new wire instructions. The hacker intercepted that email and created a fake reply from the other closing agent, confirming the wire instructions. The insured sent the wire of approximately $225,000 to the fraudster.

We received a claim from the seller who demanded that the Insured repay $225,000 plus his attorney fees of about $15,000. There was no defense to the claim and we settled it before incurring significant litigation expenses after it was apparent the FBI was not going to be able to recover the funds. The paid loss was $240,000 and paid expenses totaled $24,639.

Claim Received 04/16/2014

This is a fraudulent wire transaction of $7,458, which represents the seller's proceeds for the sale of real estate. Insured was the settlement agent for the sale of property. The seller forwarded closing instructions via email for the proceeds of the real estate sale.

The next day, the Insured received another email requesting a change to a different account. Although Insured did not realize it at this time, the second email instructions were sent from a different but very similar email address. Apparently, an unknown third party hacked into either the Insured's email or the Seller's email account and altered the closing instructions.

Insured wired the funds as per the second email, which turned out to be a fraudulent account. Insured attempted to rescind the wire; however, the funds were withdrawn from the account before the rescission request. The insurance company paid $2,458 but the Insured paid its $5,000 deductible toward the balance of the sustained loss.

Claim Received 06/30/2014

The Insured was the settlement agent for the bank, the seller of the property. The Insured sent the closing funds in the amount of $376,043 to the wrong account after a hacker intercepted emails to and from the Insured, and provided the Insured with fraudulent closing instructions.

The hacker apparently gained access through a breach in seller bank's security and sent the Insured instructions to send the closing proceeds to a different account from which they were subsequently stolen. The Insured later discovered the fraud and attempted to rescind the wire transfer, which appears to have been partially successful; however, the hacker was able to withdraw approximately $38,000 before the rescission took effect.

Claim Received 09/11/2014

The Insured was the settlement agent for the transaction involving the sale of property. Shortly before the closing, the Insured received a request to change the wire instructions for the sale proceeds by email. A paralegal from the seller's attorney allegedly sent the altered instructions via email. The email was then forwarded to the Insured by a paralegal for the buyer's attorney. The Insured then wired the seller's proceeds for the sale through its escrow account at Bank #1 for deposit in a Bank #2 account.

The Insured became aware of a potential problem and immediately contacted Bank #1 to rescind the wire transfer. The Insured also contacted Bank #2, the receiving bank, in an attempt to freeze the account. It appears the breach of security was from a home computer of the paralegal for the seller's attorney. The rescission was successful and the entire proceeds were recovered but this might have resulted in a significant claim.

Claim Received 09/17/2014

The Insured received fake wiring instructions from a hacker posing as the closing agent for the transaction. Insured wired $135,000 to a false account. The Insured contacted the bank that received the funds and notified them it was an erroneous transfer. They had their fraud unit review the matter, and concluded it was a legitimate transaction for that particular account and that they were not required to return the funds. The Insured also notified police and FBI who are attempting to recover the money. So far, the police have not been able to trace the funds.

Protect Against Wire Transfer and Email Fraud

In their notice, the E & O carrier encouraged their policy holders to take all appropriate steps to secure information, and protect against wire transfer and email fraud. In particular, they asked policy holders to maintain a high level of vigilance to avoid computer hacking incidents.