In a significant financial institution bond decision, the Seventh Circuit affirmed that a fake collateral document — no matter how close in likeness it may be to a genuine original — is not a Counterfeit for purposes of Counterfeit coverage under a standard financial institution bond (Form 24). The appellate court’s ruling now settles what arguably was an open question in this circuit.
In North Shore Bank, FSB v. Progressive Casualty Insurance Company, the insured bank had accepted a fake certificate or origin to secure a $400,000 loan for the purchase of a supposed new recreational motor home. After the bank’s customer defaulted, an investigation revealed the certificate — while appearing to be authentic — did not correspond to a real motor home. Instead, the bank’s customer — the owner of an auto dealership — created the fake certificate and, during an on-site inspection, passed off an older motor home as the “new” motor home he claimed to be purchasing.
On appeal from summary judgment in favor of Progressive (the Firm’s client), the bank argued that the fake certificate matched the likeness and contained the same vehicle identification number of the motor home it inspected. According to the bank, this was sufficient to qualify as a Counterfeit and trigger the bond’s coverage. The Seventh Circuit disagreed.
Adopting the Firm’s coverage arguments, the Seventh Circuit affirmed that a Counterfeit must imitate an original document and therefore, where no such original document exists, a document is not Counterfeit, but simply fake. That is precisely what the bank accepted: a fake certificate that did not imitate a real certificate for a real motor home. And in that circumstance, the Seventh Circuit held that the fake certificate at issue was not a Counterfeit under the terms of Progressive’s standard financial institution bond.
Because the appellate court ruled that the fake certificate was not a Counterfeit, the court did not reach a secondary argument: that the bank also failed to act in good faith as further required for Counterfeit coverage. Significantly, however, the appellate court — following arguments made by Progressive — recited various ways in which the insured bank could have detected the fraud. This arguably puts banks on notice that the Seventh Circuit is mindful of a bank’s ability to prevent fraud of this nature, which is a factor that may bear upon a bank’s ability to satisfy the good faith requirement for Counterfeit coverage.
Michael Galibois, a member of the Firm, argued and briefed the matter on behalf of Progressive in the appellate and district courts, with support from Jennifer Stegmaier, a senior associate.
A copy of the Seventh Circuit’s opinion can be found at North Shore Bank, FSB v. Progressive Casualty Insurance Company, — F.3d — (7th Cir. 2012). It is also attached below.
Related Documents
Seventh Circuit Opinion
