An electronic payments company's insurer must turn over claim files and underwriting materials as they continue to litigate whether the company's roughly $6.8 million loss from two fraud schemes falls within its policy's coverage for "computer fraud," an Iowa federal court ruled Tuesday.

Rejecting Hiscox Insurance Co. Inc.'s appeal of Magistrate Judge William Kelly's August discovery order, U.S. District Judge Stephanie Rose said to prevail, Hiscox must show his findings were "clearly erroneous or contrary to law," which is a "demanding standard that gives magistrate judges broad discretion in managing discovery."

"Hiscox identifies no legal principle that Judge Kelly misunderstood or misapplied. Rather, the company largely reiterates the same arguments he already considered and rejected," Judge Rose found Tuesday. "Disagreement with a magistrate judge's conclusions, however vigorous, cannot establish clear error."

According to court filings, Hiscox filed its action against policyholder Dwolla Inc. in October 2024, seeking a declaration that it owes no coverage under its commercial crime policy that provided up to $5 million per occurrence for losses "resulting directly from computer fraud."

As a company that helps facilitate automated clearinghouse, or ACH, transfers between customers and financial institutions, Dwolla had authorized two customers to initiate same-day ACH debits and credits.

However, fraudsters "posing" as those two authorized customers initiated fraudulent same-day ACH transfers totalling more than $8.7 million, the declaratory action states. Dwolla then reimbursed originating banks per its agreements with participating financial institutions, suffering a total loss of roughly $6.8 million for which it sought coverage.

Dwolla's policy with Hiscox specifically defined "computer fraud" in part as the "use or manipulation of any computer system to make a fraudulent transfer of money … from inside the premises or financial institution premises to a person (other than a messenger) or place outside" such premises. The policy further stated that "computer fraud" does not include any fraudulent transfer of money that required Dwolla, its employees or others acting on Dwolla's behalf to initiate or authorize, aside from a "financial institution," which was separately defined.

In the ensuing discovery dispute, Dwolla sought documents concerning how Hiscox previously interpreted such insuring language and handled similar claims in the past. Judge Kelly broadly sided with Dwolla in his August order, which compelled Hiscox to turn over documents relating in part to policy wording, Hiscox's policy interpretation, particular employees involved in developing Hiscox's commercial crime policy and Hiscox's handling of other similar claims.

On Tuesday, Judge Rose first agreed that "[e]vidence of an insurer's interpretation of disputed provisions in other contexts may reveal inconsistent positions or shed light on ambiguous terms."

She then rejected Hiscox's argument that providing the requested documents would impose an undue burden since the insurer said it maintains roughly a thousand claim files in a system requiring manual review.

"Judge Kelly correctly characterized this as an 'outmoded record keeping system,'" Judge Rose said, adding that "[a] party cannot avoid its discovery obligations by choosing inefficient methods of information management."

And Hiscox's privacy concerns don't hold water in light of an existing protective order, she said.

Judge Rose then further slammed Hiscox's challenge to Dwolla's four separate discovery requests relating to policy wording, interpretation and the insurer's document retention policy, noting the insurer "never presented its current arguments to Judge Kelly."

"When opposing requests for production 16, 19, and 20, Hiscox commingled these requests together with its broader objections to prior claims materials, offering only vague objections about 'underwriting and development' materials without explaining what compliance would entail or why it would prove burdensome," she said.

As for Dwolla's interrogatory relating to Hiscox's document retention policy, Judge Kelly already found that Hiscox did not make any particular arguments with respect to that interrogatory but instead "lump[ed] interrogatory 25 with arguments concerning requests seeking prior claims material," she highlighted.

Though Judge Rose said Hiscox has now provided "detailed arguments about canvassing employees across multiple departments," it should have made such arguments before Judge Kelly.

"The court will not permit Hiscox to wait and see 'which way the wind was blowing' before developing its positions," Judge Rose said, quoting the First Circuit's 1988 decision in Paterson-Leitch Co. v. Massachusetts Municipal Wholesale Electric Co. "Such gamesmanship undermines the allocation of responsibilities between magistrate and district judges."

"Because Hiscox failed to preserve these arguments, the court need not address them," Tuesday's decision concluded.

A representative of Dwolla declined to comment.

Representatives of Hiscox did not immediately respond to a request for comment.

Hiscox is represented by Michael Keeley of Clark Hill PLC and Kent Gummert of Lederer Weston Craig PLC.

Dwolla is represented by Peter Deegan, Todd Rowden, Adam Hollander and Michael Mayerck of Taft Stettinius & Hollister LLP.

Hiscox Insurance Co. Inc. v. Dwolla Inc., case number 4:24-cv-00372, in the U.S. District Court for the Southern District of Iowa.