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US Appeals Court Says Bank Liable For Losses From Poor Online Security
An anonymous reader writes with this extract: "Threatpost reports that a judge on the United States Court of Appeals this week ruled that People's United Bank's processes and systems for protecting customer accounts from fraud were not "commercially reasonable." The ruling in People's United Bank (formerly Ocean Bank of Maine) versus Patco Construction Company reverses a lower court's ruling in a case that stems from six allegedly fraudulent transactions that occurred over the period of a week in May, 2009 and drained close to $589,000 dollars from Patco's accounts. Patco alleged that People's United Bank did an inadequate job of protecting them against fraud, ignoring repeated 'high risk' warnings from the bank's fraud detection system. Now the Appeals Court appears to agree. The ruling could have broad implications in the U.S., where businesses that are the victim of account takeovers and fraudulent transactions are suing banks to recover lost funds."
Basic tort theory states that responsibility for a loss should be placed on the individuals or entities that are most capable of preventing the loss. In this case, banks are responsible for security controls on their own accounts. Banks are most capable of preventing most losses due to fraudulent transactions. It's absurd that they have not already been held responsible for all the fraud out there.
RTFA.
Apparently the issue is that although individuals are protected against fraud by legal statutes, businesses are not. Specifically at issue is the authorization of commerical ACH (automated clearing house) transactions to the account (when you use your debit card it's authorized under the EFTA or electronic funds transfers act).
In this case the bank so egregiously ignored it's own security measures (authorized transactions even though it's internal fraud alert systems was warning against the transaction) that it was clear the bank was in the wrong...
Yep. Though actually this isn't governed by tort law, it's governed by Art. 4A Sec. 202 of the Uniform Commercial Code. (http://www.law.cornell.edu/ucc/4A/4A-202.html) (But you're right; the UCC seems just to be codifying the principle you identified.) So, the good news may be that the law has always been pretty sensible about this sort of issue (at least in theory). Though perhaps individual judges and juries have lagged in their understandings of "commercially reasonable."