September 1st, 2010

Wachovia Bank wins positive pay lawsuit

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If your firm hasn’t installed positive pay, you should seriously consider doing so. That’s one lesson to be learned from a recent case involving Wachovia Bank and its client’s insurance company.

According to this summary of the case by Greg Litster, president of SAFEChecks, and Frank Abagnale of Abagnale & Associates, Wachovia came out the winner in a lawsuit against its customer’s insurer, after the payee on one of the company’s checks – for more than $150,000 – was altered.

Wachovia’s client, Schultz Foods Company, had demanded that Wachovia cover the loss, saying it had processed the check in violation of the Uniform Commercial Code. Wachovia refused, noting that the company had repeatedly refused to implement positive pay, which would have picked up on the altered name. In fact, the company had been a victim of check fraud several times before the incident that led to the suit. Wachovia had covered those losses.

Schultz Foods also had purchased an insurance contract to protect itself against fraudulent checks. While the company was pursuing Wachovia, it also was filing a claim against its insurer, Cincinnati Insurance Company. Cincinnati did pay the claim, and then went after Wachovia.

However, one section of the contract between Wachovia and Schultz Foods proved critical to Wachovia’s defense. That was this:

“You agree that if you fail to implement any of these products or services, or you fail to follow these and other precautions reasonable for your particular circumstances, you will be precluded from asserting any claims against [Wachovia] for paying any unauthorized, altered, counterfeit or other fraudulent item that such product, service, or precaution was designed to detect or deter, and we will not be required to re-credit your account or otherwise have any liability for paying such items.”

Given the prevalence of check fraud – of the respondents to the 2009 AFP Payments Fraud Survey who had experienced payments fraud, 90 percent were victims of check fraud – companies need to seriously consider services like positive pay. What’s more, in light of the outcome of this court case, it’s likely that more banks will include provisions in their contracts that limit their liability when their customers won’t implement fraud prevention services like positive pay.

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