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Coverage for Loss Due to Credit Card Fraud

Author: VU Faculty

Your insured accepted an order via the internet for products that he sells. He verified that the credit card was valid through a service that he uses. It was not until several days later that the service that he uses advised him that the credit card had been stolen. He shipped the product that he sold and is now without the product and lost the income. Is there any insurance product out there to cover this exposure?


Question"I recently had an insured that accepted an order via internet for products that he sells. He verified that the credit card was valid through a service that he uses. It was not until several days later that the service that he uses advised him that the credit card had been stolen. He shipped the product that he sold and is now without the product and lost the income. Is there any insurance product out there to cover this exposure?"

Question"We have a claim on a BOP policy where the insured accepted payment by credit card for the purchase of appliances and the credit card was stolen. We submitted the claim to our company and they have denied coverage based on:

"Exclusions 2. We will not pay for loss or damage caused by or resulting from any of the following:

"G. False Pretense - Voluntary parting with any property by you or anyone else to whom you have entrusted the property if induced to do so by any fraudulent scheme, trick, device or false pretense.

"Our position is that we disagree with the application of this exclusion and interpertation of coverage. We feel the coverage should apply under the coverage"

"J. Money Orders and Counterfeit Paper Currency.

"Our reasoning is that the coverage states:

"We will pay for loss due to the good faith acceptance of:

"1. Any U.S. or Canadian post office, express company, or national or state chartered bank money order that is no paid upon presentation to the issuer;

"Our insured got an authorization from the credit card company, they deposited into his business account the funds to cover the purchase, a washer and dryer, and then shipped the items once payment was received. After this the credit card company told our insured that the card was stolen and they were taking the money out of his account they had previously deposited.

"The BOP coverage for money, etc. is limited to $1,000 so we are not talking about a large loss, but this is a small business who feels he is not being treated fairly."

Question"Our insured sold a printing job to a customer over the phone for $2,083.54, charging it to a credit card. They shipped the order and then, a few weeks later, the credit card purchase was returned by the bank as the card had been stolen. They attempted to contact the customer whose number had been disconnected. Obviously they were the victim of credit card fraud. Is there coverage for this under money and securities? As I read the coverage it does not appear to be covered, so I hesitate to turn in a claim just to find out. If this is not covered is there a way to obtain such a coverage?"

Question"I have a client – a large hotel in Miami. On a holiday weekend, a person representing himself to be a music industry executive reserved 9 rooms by presenting a credit card by fax. It was later determined that the credit card information provided was a forgery. This was not discovered until after the weekend when the insured presented the bills and authorizations to American Express.

"As it turned out, the credit card information was a forgery. The loss includes the cost of the hotel rooms, food, room service, etc., all to the tune of almost $29,000. The insurer has denied the claim.

"I have looked at this several ways. I don’t believe it’s a covered forgery loss because the account that was forged belonged to someone else, not the insured. As I read the crime form, forgery only covers loss that occurs on accounts in the insured’s name.

"I also looked at the money and securities coverage but I believe that, again, no coverage exists. It was not money or securities that were taken. Food and loss of use of the hotel rooms are what I see to be the actual loss. Even if this could be considered a money and securities loss, I believe the “voluntary parting” exclusion would apply.

"I also looked at it from the angle of filing the claim under the property policy since the Special Causes of Loss Form includes theft. There again, if this was considered tangible property and if there was coverage for Business Income, I still believe the 'voluntary parting' exclusion would apply.

"Can you or any of the other gurus see anything that I have missed or anything else I can use to explain to the insured that there is no coverage? Or, can anyone give me an argument that coverage exists?"

Question"I have a travel agent client who is looking to provide web-based ticketing. The concern is that someone may be able to purchase tickets with a stolen credit card, use the tickets and then leave the travel agency with a loss. The money can be credited back to the affected credit card account, but the airline will hold the travel agency liable if the tickets are used or refunded. Is there a crime policy that would cover this situation?"

Question"We have an insured that is looking for coverage if he accepts a credit card payment for merchandise and it turns out the credit card was a case of stolen identity and the person whose name the credit card is in wasn't the person making the purchase. Basically their identity was stolen. Now our insured is out the merchandise and can't charge the credit card. Is there an ISO form that would cover this?"

Question"During the past 2 years we have had a claim situation arise that has been submitted to the carrier for review and has been denied since it was deemed that no coverage applied. The situation involves credit card fraud where products or services are sold by the insured and charged to a credit card. The credit card in most cases was stolen and the owner of the credit card has the charges reversed, therefore, leaving the insured without the product or service sold and the money. This type of coverage, similar to False Pretense or Trick or Device Coverage which is common in the Auto Dealership industry does not appear to be available for the Retail/Service market. Obviously this is a large exposure for any retailer and a coverage that should be addressed and recommended. With the large amount of business done through credit cards today, i.e., e-commerce, catalog orders, and situations where the customer is not required to sign a charge slip, is this an exposure that can be covered? If so, how? Thanks for your help."

Question"We have had a prospect call in with the following scenario. Can you help us with a coverage for the a book publisher selling books over the internet and via phone, there is the potential for claims or property loss due to orders being made to the publisher using stolen credit card info. The order is shipped and in 30 days the true owner of the credit card disputes the charge and the money is taken from the publisher. He has sustained a property loss. Do you all have any ideas of how we might cover this type of situation?"

Question"We have a client who recently filled an order that they had received via telephone (a normal procedure for them). The products were paid for by credit card. They called the bank to verify the credit card number. It was verified and the order was filled and shipped. The bank later refused to pay for the order as the card used had been stolen prior to the transaction, and our insured did not actually physically see or have possession of the card. The Property carries Special Causes of Loss including Theft. The only Crime coverage is Fidelity - Form A Blanket, and incidental Money and Securities provided by an insurance company proprietary Property Coverage Extension Endorsement.

"Predictably the claim was denied citing the exclusion in the property coverage about voluntary parting with property...if induced to do so by any fraudulent scheme, trick, device, or false pretense. The obvious question is if you (or Ace Insura) were arguing with the adjuster, what would your argument be? The next obvious question for you (and perhaps your esteemed faculty) seems a bit elementary - what is your suggestion as to the best way to cover this exposure?"

Question" If a web billing company has stolen credit card numbers used on its websites and the credit card company rejects the payment based upon fraudulant charges, is there anything that can be done (coverage wise)? My client already sent out the product and now has to contend with a charge back."

Answer?This is one of the most common questions we get here. With the dramatic increase in internet and catalog sales, credit card fraud has become one of the primary sources of risk and loss for retailers. The question is, can this and should this be insured? Or is this simply a business risk that must be borne by the retailer or managed in some way other than insurance?

Faculty Response
I'm not aware of any "standard," readily available insurance product that will cover the loss of merchandise due to accepting a stolen credit card. With the probably billions lost to this annually, my guess is most insurers would consider it uninsurable. Most property and crime policies exclude loss due to trick, scam, scheme, etc. I don’t think anyone can profitably sell insurance coverage at an affordable price to protect against this rapidly increasing risk of loss. The best solution is to risk management the exposure.

Faculty Response
Seven or eight years ago, there was a product called WiSP - Merchant Credit Card Fraud Insurance. I Googled it and couldn't find anything current. Their old web site URL doesn't appear to exist anymore. I also Googled "credit card fraud merchant insurance" and came up empty. So, I'm not sure there is a readily available product out there. There are procedures for merchants to follow to avoid adverse losses arising from fraudulent credit cards. An Internet seller can delay shipment to new customers until the payment clears...that's one reason web sites and catalog services usually tell you that delivery may take 10-14 days or whatever. This is a situation where loss control procedures are more important than insurance.

Faculty Response
Before the internet took off, Merchant Fraud Insurance was/is a policy that covered the supplier (merchant) from financial loss caused by a fraudulent transaction on the Internet, either through loss of goods or charge back. The insurance was only available to Internet businesses that used a processing system accepble to the insurer. It reimbursed you for sums that you were legally obligated to pay because of loss, to which this insurance applies. It also insured you for a loss of money or electronic funds due to fraudulent electronic purchases, either entailed through loss of goods or by bank charge back. I haven't come across this form in a while. It could be that it wasn't profitable or became unaffordable given the amount of fraud today.

Faculty Response
My first question would be, if he's using a credit card verification service, why didn't they catch this? I would look at what kind of guarantee they have. If they can't tell you if a credit card is valid, then what good are they. So, my first inclination would be to seek recovery from the credit card service. The next step would be to implement loss control stategies to prevent or mitigate losses. Increasingly, many retailers will not ship to an address that differs from the credit card billing address. Exceptions may be made for established customers. That will undoubtedly affect sales, particularly gift giving related sales, but if the risk of loss is great enough, it might be necessary.

Faculty Response
For most businesses, I don't think the risk is insurable, at least not at an affordable price. That leaves alternative risk management approaches. Here are some links to various informational and private web sites that give you an idea of what procedures and loss control measures can be implemented to reduce, if not eliminate, this type of fraud:


Faculty Response
Are you aware of an insurance product that will protect merchants against credit card fraud? If so, please email the information to and we'll post it here.

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