Commercial Insurance Blog

Voluntary Parting - When theft isn't covered for small business

 

Today, many small businesses sell their products online. An order comes in; you run the customer's credit card; payment is approved; and you ship the item. At this point everything appears to be in order, but when your bank reverses the deposit and takes the money back out of your account a day, a week, a month or even several months later, you find out that you were paid with a stolen credit card. You may think this is the bank's responsibility to verify the card is good, but from the cases we've seen, it is not. Insurance won't help you either due to an exclusion known as "voluntary parting."

As illustration of this exclusion, we assisted a customer of ours who had a payment denied for a large order shipped six months earlier. Evidently the owner of the card was someone who didn’t pay close attention to her purchases and hadn’t noticed the charge. When she finally did, she contacted her bank and the bank credited her the 5-figure charge as it was indeed a fraudulent purchase.  That's when our customer noticed the same amount withdrawn from their corporate checking account. What was not a particularly noteworthy transaction for the woman whose card was charged was indeed a big number for this business. They called the bank whose representative referred them to the bank agreement.  The agreement was written by the bank, by well qualified attorneys, to protect the bank's interests for any acts of fraud.  How well it protected the bank was remarkable: the bank indeed had the expressly stated right to withdraw, without notice, the full amount of the transaction made on the stolen card.  Naturally, our customer hoped she had insurance for this loss, but the scenario was excluded under "voluntary parting."

Remember back when you were ready to buy a car and the salesman would give you the keys and say, “Take her for a spin?” Those days are long gone. Why? Because some people would take the car for a spin and never return.  Because the salesperson voluntarily gave up the keys, the car was not really "stolen"; no theft means no insurance coverage.  Being duped for sending product to a location far away falls onto this same category:  the product was not stolen therefore no insurance coverage.

A tragic followup to the customer's story described here: several months after having the money taken back out of their bank account they received another order from the same company at the same address in California. They had already contacted the police in California when the scam first happened, and the local and state police said they could not do anything about it as it was probably a fake business or address. But now they had the same company, operating from the same address, trying to take another shot at scamming our customer! They called the local and state police again and were told they had to elevate it to the FBI since this was an interstate commerce fraud.  The FBI told them that they only get involved with scams over $200,000. I also spoke separately with a friend who is an FBI agent and he confirmed that they have resources only for the big fraud cases...the $200,000 limit was right. 

This small business took the hit from the fraudsters and couldn't get help from their financial institution nor law enforcement. PayPal may offer a solution, as they have established a free seller protection program specifically providing insurance when a charge back or reversal occurs due to a fraudulent purchase. We now use our PayPal account for many of our own non-local purchases.

Bottom line:  be skeptical when you take a first order from a big customer who is in a rush. It could well be a scam where there's no insurance to back you up.  

Update: With 'Cyber theft' becoming a greater threat to business every day, Cyber policies are beginning to add specific additional coverage for "Fraudulent Instructions.". This is a close relative of "voluntary parting and is one avenue of protection.   See more about Cyber threats at agordon.com/cyber, or reach out to one of our insurance professionals at Gordon Atlantic Insurance by calling (800) 649-3252.  Have a question?  Click below!

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