Hiscox Insurance has been ordered to produce claims and underwriting documents in a $6.8 million coverage dispute related to fraudulent transactions at an electronic payment company.
The dispute centers on two fraudulent dealings that exploited Dwolla Inc.’s payment system, resulting in more than $8.7 million in same-day Automated Clearing House transactions. The United States District Court for the Southern District of Iowa, Central Division, issued the order.
Dwolla was covered by a Hiscox commercial crime policy, which included coverage for losses resulting "directly from computer fraud".
The policy defined computer fraud as the use of a computer to transfer money or other property from an insured’s premises or bank to a person or location outside those premises, with a per-occurrence limit of $5 million.
After the originating banks discovered the fraudulent activity, they reversed the charges and demanded reimbursement from Dwolla. The company complied with the banks’ demands, as required by contract, and incurred a $6.9 million loss.
Hiscox denied the claim, stating the loss did not meet the policy’s definition of "computer fraud," and argued that Dwolla’s loss arose from contractual obligations rather than the fraudulent transactions themselves.
This denial led to litigation, with Dwolla seeking claims and underwriting documents from Hiscox as part of discovery. Hiscox contended that the documents were outside the scope of the case, while Dwolla argued they were relevant to how the insurer interpreted computer fraud in similar claims since 2014.
After months without document production, a United States magistrate judge ordered Hiscox to provide most of the requested documents and interrogatories. Hiscox appealed to the federal district court, arguing the requests exceeded permissible relevance and proportionality in discovery.
The district court upheld the magistrate judge’s ruling, finding that seven of the 10 challenged requests involved coverage disputes with similar policy language and were relevant to the case. The court also determined that the document requests did not impose an undue burden or raise third-party privacy concerns.
Amid this developing legal activity, the insurance industry is seeing a significant rise in fraud involving stolen and synthetic identities. According to the National Insurance Crime Bureau, identity theft-driven insurance fraud is expected to increase by nearly 50% by the end of 2025.
Synthetic identity schemes alone contributed to more than $47 billion in losses last year, and nearly a quarter of questionable insurance claims in recent years have involved fabricated personas.
Insurance fraud remains a costly issue for the industry and consumers alike. The Coalition Against Insurance Fraud estimates that fraudulent claims cost the US approximately $308.6 billion annually, adding about $900 to the average policyholder’s annual insurance costs.
In response to these trends, the NICB and Anti-Fraud Alliance have launched a national campaign to encourage consumers to learn about insurance fraud, share prevention tips, and report suspicious activity. The campaign aims to raise public awareness and reduce the financial impact of fraudulent claims by increasing cooperation between consumers and the industry.
