How Real Estate Attorneys Can Protect Themselves From Social Engineering Scams

Real estate transactions regularly involve the transfer of substantial sums of money. With increased financial stakes, scenarios involving wire transfers have become prime targets for cybercriminals. A recent scenario highlights the complexities around liability, both professional and cyber, involving compromised communication and financial loss.

Social Engineering Scams in Action 

A buyer’s real estate attorney received standard instructions via email from the seller’s legal representative, directing the buyer to wire closing funds to a designated bank account. Shortly thereafter, the buyer’s lawyer received another email, appearing to originate from the seller’s lawyer, providing revised banking instructions.

The buyer’s lawyer advised their client to follow the updated instructions, and the buyer subsequently wired funds to the newly provided account. Unfortunately, this account turned out to be fraudulent, resulting in the loss of the transferred funds. It remains unclear whether the fraudulent communication resulted from a compromised email account or a spoofed email address.

As a result, the buyer has filed lawsuits against both law firms involved.

Wire Fraud and Professional Responsibility

Professional liability insurance covers professionals against claims of negligence or failure to perform duties to a professional standard. In this scenario, the question is whether the buyer’s lawyer failed to adequately verify the legitimacy of the revised banking details.

Evaluating Professional Conduct

Key considerations include:

• Did the attorney adhere to established verification protocols?
• Were there reasonable steps available that the lawyer did not take to authenticate the request?
• Did the attorney’s actions align with industry best practices for preventing wire fraud?
• Were internal office procedures followed consistently and accurately?

A failure to meet expected professional standards, such as independently verifying altered wire instructions through direct phone communication, could constitute negligence. Courts often assess whether an attorney’s actions were consistent with what a prudent professional would have done under similar circumstances.

Legal Precedents and Regulatory Context

Several jurisdictions have issued advisory opinions and disciplinary actions related to similar fact patterns. These often reinforce the duty of attorneys to maintain reasonable safeguards for protecting client funds. Regulatory bodies emphasize the importance of verification, encryption, and clear communication protocols.

When a professional does not maintain these standards, it strengthens the argument for liability under a professional liability policy.

Cyber Liability Considerations

Cyber liability coverage addresses incidents involving data breaches, hacking, and fraudulent cyber activities. If the fraudulent banking instructions arose from a compromised email account, this would constitute a cyber incident rather than merely social engineering.

Identifying a Cyber Event

Cyber insurance considerations in this scenario:

• Did either law firm experience a breach of their email system?
• Was appropriate cyber protection and monitoring in place?
• Were internal policies addressing cyber threats followed correctly?
• Were external vendors or IT providers involved in system monitoring?

In many cyber policies, the definition of a “security event” includes unauthorized access, malware deployment, and data exfiltration. If an investigation reveals that an email system was compromised and used to send fraudulent instructions, a cyber liability policy might respond.

Potential Cyber Coverage Triggers

• Incident response and forensic investigation
• Legal defense costs
• Notification to affected parties
• Regulatory fines or penalties
• Loss of funds depending on policy endorsements

It is essential for law firms in Westchester, Fairfield, and the tri-state area to understand the specific language and sublimits within their cyber policy, especially those relating to social engineering fraud.

Social Engineering and Its Role

Social engineering involves deceptive tactics to trick individuals into sharing sensitive information or performing actions, such as wiring money to fraudulent accounts. Spoofed emails, appearing legitimate but originating from external parties, constitute classic social engineering schemes.

Distinguishing Social Engineering from Cyber Breach

If no system breach occurred, and the fraudulent email simply appeared credible enough to deceive recipients, professional liability rather than cyber liability is likely to be the dominant coverage.

However, many cyber policies offer optional endorsements for social engineering coverage. These sublimits are often low, and coverage may depend on the presence of specific verification steps before a loss is covered.

Common Social Engineering Tactics in Real Estate

• Email spoofing of trusted professionals
• Fake domain names resembling legitimate firms
• Time-sensitive language to induce urgency
• Requests for secrecy or deviation from standard protocols

The effectiveness of these tactics underscores the need for multi-layered defenses and robust internal controls.

Best Practices for Mitigating Wire Fraud Risk

Professionals involved in wire transfers should adopt stringent verification practices:

• Always confirm wire transfer instructions by telephone using independently verified contact information.
• Require dual approval for any change to wiring instructions.
• Implement multi-factor authentication (MFA) and secure email gateways.
• Train staff regularly to recognize phishing and social engineering attempts.
• Establish clearly defined protocols for handling wire transfers and changes to banking instructions.
• Use encryption for all client communications involving financial data.
• Document every verification step taken in a client file.

Role of Firm Leadership and Culture

Establishing a security-first culture requires leadership buy-in. Partners and managing attorneys must model risk-aware behaviors and support training and investments in secure infrastructure. A clear chain of command for incident response should be communicated firm-wide.

Insurance Coverage Gaps and the Need for Coordinated Policies

Even firms with both professional and cyber liability coverage may face gaps. Social engineering coverage may be subject to:

• Low sublimits
• Strict proof-of-loss conditions
• Requirements for specific verification procedures

Coordinating with an insurance advisor to align cyber, crime, and professional liability policies can help close these gaps. Policies should be reviewed annually to ensure evolving threats are adequately addressed.

Key Takeaways for Real Estate Professionals

• Understand the distinctions between cyber incidents and social engineering.
• Review professional liability coverage to confirm that failure to verify scenarios are included.
• Assess whether cyber liability coverage includes social engineering fraud and under what conditions.
• Implement formal, documented processes for verifying wire instructions.
• Regularly train attorneys and staff on emerging fraud tactics and defensive measures.

By clearly understanding the distinctions and overlaps between professional liability, cyber liability, and social engineering risks, real estate professionals in Tuckahoe, Westchester County, Fairfield County, and the broader tri-state area can better protect their practices and clients.

Need Assistance Evaluating Your Risk Profile?

RefinedRisk, based in Tuckahoe, New York, provides tailored risk management solutions to safeguard your professional practice. Our team of advisors serves Westchester County, Fairfield County, New York City, and the broader tri-state area with deep expertise in legal and real estate risks.

We can review your current coverage, identify potential exposures, and recommend policy enhancements to mitigate future losses.

Connect with us to explore how to align your insurance with today’s evolving legal and cyber risk landscape.