The United States Court of Appeals for the Fifth Circuit in New Orleans affirmed Feb. 16 the Texas Supreme Court’s decision on policy language finding that underwriters at Lloyd’s are not obligated to compensate a gold coin and precious metal dealer for the theft of more than $1 million of gold coins obtained with fraudulent checks.

Having accepted a forged check as payment for gold coins and insuring the shipment of the coins only to have the shipment intercepted by the forger, Dillon Gage Inc. of Dallas filed an insurance claim, which the underwriters at Lloyd’s denied pursuant to a coverage exclusion for losses incurred “consequent upon” handing over insured property to any third party against payment by fraudulent check, according to court documents.

The case was on appeal from the United States District Court for the Northern District of Texas, but because the language in the policy had yet to be interpreted in Texas, the federal appeals court handed the issue to the Texas Supreme Court, which concluded that the exclusion applied and Dillon Gage was not entitled to coverage.

According to the facts of the case presented in the Fifth Circuit’s decision, in 2018, Dillon Gage Inc. received an order for $549,000 worth of gold coins. Dillon Gage thought the order was from Kenneth Bramlett, an orthopedic surgeon from Alabama. But unbeknownst to Dillon Gage, a criminal posing as Bramlett placed the order and provided Bramlett’s correct home address, correct social security number, and a scan of an Alabama driver’s license of a person purporting to be Bramlett. The thief stole Bramlett’s identity and intercepted a box of his personal checks from the mail.

As described by court documents, after Dillon Gage received the order, and the check (purportedly signed by Bramlett’s wife) cleared, Dillon Gage shipped the order via UPS and emailed the tracking information to the email address the thief provided. Shortly after the package arrived at UPS’s facility for shipping, the thief sent UPS an instruction to hold the package at a UPS facility instead of delivering it to Bramlett’s address. However, UPS was not authorized to reroute the package without Dillon Gage’s consent. An unknown person retrieved the package, without signing for it, only three minutes after it arrived at the facility.

Having successfully stolen the coins, according to court documents, the thief did the same thing with another order for $655,000 worth of coins. Once Dillon Gage discovered the fraud, Dillon Gage had neither the $1,204,000 worth of gold coins it had shipped nor the $1,204,000 it had received from Bramlett.

Dillon Gage filed an insurance claim, which underwriters denied, so Dillon Gage then sued the underwriters for breach of contract and violations of the Texas Insurance Code. The district court concluded the losses were excluded because they were consequent upon Dillon Gage accepting fraudulent checks and shipping the insured coins.

The first question before the Texas Supreme Court was whether Dillon Gage’s losses were sustained consequent upon handing over insured property to UPS against a fraudulent check, causing the policy exclusion to apply. If yes, then whether UPS’s alleged errors are considered an independent cause of the losses under Texas law.

The Texas Supreme Court concluded “yes” to the first question and “no” to the second by concluding that UPS’s alleged negligence was a concurrent cause of loss depending on Dillon Gage’s handing over the gold coins against fraudulent checks.

Dillon Gage had argued that the proximate cause of the loss was the theft of the packages, not the fraudulent checks, but the Texas Supreme Court ruled Gage’s interpretation is unreasonable.