Colorado town settles insurance battle following $1 million fraud incident

The Town Of Erie will be reimbursed by an insurance company after an employee mistakenly paid more than $1 million to a fraudster four years ago.

That person or organization impersonated the primary contractor which was hired to build the Erie Parkway Bridge, the town stated previously. Fraudulent bank account information was submitted in October 2019. While the actual vendor, SEMA Construction, provided authentic invoices to be paid, an employee electronically sent $1,016,234 to the fraudulent account.  

"Once the payments were in that account, the perpetrators of this fraud sent the money via wire transfer out of the country," Erie Town Administrator Malcom Fleming said after the incident. 

That third party has not been identified.

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The town received $150,000 from CIRSA, its primary insurer, following the loss. That was the correct amount under the terms of the town's policy with CIRSA. 

The town also received $100,000 from its secondary insurer, National Union. But National Union denied the remaining portion of Erie's claim even the town had a policy for $2 million in coverage, according to the town. 

Erie sued National Union in 2020 to obtain what town managers believed to be the proper amount of reimbursement.

In August, a U.S. District Court in Colorado ruled in Erie's favor on the insurance coverage payments and breach of contract claims, but ordered the parties to prepare for a trial on Erie's remaining claim of bad-faith denial of benefits, the town stated. 

Rather than going to trial, the two sides negotiated an agreement. That agreement was unanimously approved by Erie Town Board of Trustees at a meeting on October 27.

According to a press release from Erie, National Union will now pay $1,250,000. That amount covers Erie's losses as well as costs associated with the litigation. 

"We are pleased with the outcome of this years' long process and appreciate the District Court's diligence in investigating the issue and coming to a just decision," Fleming stated in the press release. "The Town has insurance policies in place to protect taxpayer dollars and the outcome of this case should reassure residents we are responsible stewards of their funds, and we fight hard to protect the Town's interests."

The town's administration is also taking steps to mitigate risk to future fraud. 

"There are attempts every day to breach state and local governments' cyber security defenses. In addition to maintaining the latest technical systems, all Town of Erie employees must complete monthly cyber security training to help us recognize and prevent the sophisticated techniques cyber criminals use to try and gain access to our systems," stated Information Technology Director Denise Jakan. 

Fleming told CBS News Colorado that National Union is still used by the town as a cybersecurity insurer. The company has updated its policy with clarifications to the benefit of both parties.