This was an appeal by the Plaintiff Credit Union from a summary trial judgment dismissing the claim. The trial judge held that the credit union’s loss from credit card fraud was not covered by its indemnity for “securities” as defined in the master bond policy issued by the Respondent insurers. The Court of Appeal allowed the appeal, holding that credit card receipts fell within the definition of securities as “drafts”.

North Shore Credit Union v. Cumis General Insurance Co., [2003] B.C.J. No. 2923, British Columbia Court of Appeal

The Plaintiff credit union was the issuer of a MasterCard account to a retail business. Under the agreement, only the business owner’s signature was required to withdraw funds from its commercial account. The business owner participated in a scheme whereby forged MasterCard payments were deposited in the account. Because the fraudulent slips were in the names of genuine cardholders, the fraud went undiscovered for some time. Credit unions are part of the MasterCard system using a clearing agency to route authentic slips between the issuing financial institution and the credit union submitting the slip, and where fraud is discovered, the credit union has a right of reimbursement from the merchant who accepted the fraudulent transaction. In this case, that right was hollow because the business owner was not good for the loss.

The trial judge decided that the Defendant Insurer’s bond insured only “securities” against fraud, with a definition that included mortgages and specific instruments. Absent an instrument insured against fraud, the insurer argued that the only obligation imposed was the contractual obligation of the credit card holder to pay the issuer. The remainder of the transaction sequence through the clearing agency to the credit union and the merchant reflected authorization by the card holder but not obligation on the issuer.

The Court of Appeal held that a credit card slip was, in fact, a “draft” as it was defined in law, because it called for payment on presentation, first by the credit union to the merchant, and then by the credit card issuer to the credit union. “Drafts” were contained within the definition of “securities” in the bond, and therefore falsified credit card slips were held to be forgeries of securities, a loss for which the credit union had a right of recovery within the terms of the bond.

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