Fifth Circuit Rules That Unlawful Taking Coverage in a Crime Policy Only Extends To Forgeries that in Fact Lead To Such a Taking
Tesoro Ref. and Mktg. v. Nat’l Union Fire Ins. Co. of Pittsburgh, No. 15-50405, 2016 WL 4166173 (5th Cir. July 29, 2016). The Fifth Circuit held that National Union Fire Insurance Company did not have to cover $15 million of a $90 million loss that Tesoro Refining and Marketing sustained after continuing to sell fuel on an unsecured basis to Enmex Corporation. From 2003 to 2008 Tesoro sold fuel on credit to petroleum distributor Enmex. The account was unsecured with a credit limit of $25 million. Over the next five years Calvin Leavell, Tesoro’s Credit Director, forged letters of credit in an effort to mollify Tesoro’s risk management offices so the company would continue to sell fuel to Enmex. In 2008, with Enmex’s balance fast approaching $90 million, Tesoro asked for the first time to see the forged $24 million letter of credit. Tesoro then presented the letter to Bank of America for authentication and the bank informed Tesoro that the letter was invalid. Tesoro sued Enmex for breach of contract and fraud, and the case settled. Tesoro then submitted proof of loss to National under its commercial crime policy. The insurer denied coverage. Tesoro sued National and moved for partial summary judgment, arguing that the “Employee Theft” insuring agreement covered losses resulting from employee forgery even if that forgery did not result in theft. National cross moved for partial summary judgment and the district court agreed with the insurer that “Employee Theft” agreement required that, to trigger coverage, the act of forgery had to have resulted in theft.
On appeal, the Fifth Circuit first addressed whether the “Employee Theft” agreement always required a showing of theft to triggering coverage. The agreement stated “We will pay for loss of or damage to ‘money,’ ‘securities’ and ‘other property’ resulting directly from ‘theft’ committed by an ‘employee.’” Under the agreement “theft” also included “forgery.” The policy defined “theft” as “the unlawful taking of property to the deprivation of the Insured.” Tesoro argued that forgery was a type of theft covered under the policy. The Fifth Circuit disagreed, finding that the inclusion of “unlawful taking” as the definition of theft made clear that only forgery that leads to such a taking is covered. The Court then considered the meaning of “unlawful taking.” Tesoro argued that an unlawful taking is any theft as defined under Texas law, specifically theft by deception. The court looked to the Texas Penal Code and relevant case law for guidance, and determined that theft by deception requires that the owner of the stolen property relied on the thief’s inducement/deception in misappropriating the property. The court reasoned that to survive summary judgment Tesoro had to allege a genuine dispute of material fact existed regarding whether the documents that Leavell forged substantially affected the company’s decision to continue selling fuel to Enmex. Tesoro, however, never explained how the decision-making process to continue selling fuel to Enmex worked, or whether the forged letters of credit affected that process. In fact, the evidence suggestd the opposite, that the forged letters had no effect on Tesoro’s decision to continue selling fuel to Enmex. Although Enmex consistently failed to pay for the fuel, the record indicated that it was considered a valuable customer – Tesoro had already authorized Enmex to run up a balance of at least $15 million its $25 million limit. Furthermore, Tesoro continued to sell fuel to Enmex even after the forged letters of credit, which officials at the time believed to be legitimate, had expired. Thus, the Court upheld the lower court’s decision granting National’s motion for partial summary judgment.