On April 7, 2015, the U.S. District Court for the Western District of Texas released its decision in Tesoro Refining & Marketing Company LLC v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania. The decision analyzes what constitutes “unlawful taking” for the purposes of the Employee Theft coverage, and also provides guidance with respect to the forgery clause now found in some forms of that coverage.
The insured (“Tesoro”) was a refiner and marketer of petroleum products. In 2003, Tesoro began selling fuel to Enmex, a petroleum distributor, on credit. The alleged defaulter, Leavell, was the manager of Tesoro’s Credit Department and managed Enmex’s account. The District Court found that:
- By late 2007, Enmex’s credit balance had grown to $45 million, and Leavell (and Tesoro’s auditors) became concerned about Enmex’s ability to pay down the outstanding debt. In discussions with Tesoro’s auditors in December 2007, Leavell represented that the Enmex account was secured by a $12 million letter of credit (LOC).
- Between December 2007 and March 2008, a series of documents purporting to be LOCs and, in one case, a security agreement, were created in Leavell’s password-protected drive on Tesoro’s server, and were provided to the auditors as evidence of Enmex’s creditworthiness.
- By September 2008, the Enmex balance reached almost $89 million. In October, a document purporting to be a new $24 million LOC was created on Leavell’s drive. A PDF version of this document, with the addition of a Bank of America logo, was created a few days later in the Credit Department’s shared folder.
- In December 2008, Tesoro presented the $24 million LOC to Bank of America, which confirmed that the LOC was not valid.
- Tesoro alleged that Leavell had forged the LOCs and the security agreement.
The Employee Theft Coverage
Tesoro had initially sought to advance a claim under the Forgery coverage of its commercial crime policy with National Union, but loss resulting from forgery by employees was excluded unless the loss resulted from forgery of commercial paper “made or drawn by or drawn upon” the insured. Thus, Tesoro tried to fit the loss within the Employee Theft coverage instead, asserting that Leavell’s alleged conduct represented a “theft” which had caused a loss to Tesoro (i.e., its inability to recover funds on the LOCs). The insuring agreement provided that:
We will pay for loss of or damage to “money”, “securities” and “other property” resulting directly from “theft” committed by an “employee”, whether identified or not, acting alone or in collusion with other persons. For the purposes of this Insuring Agreement, “theft” shall also include forgery.
“Theft” was in turn defined as “the unlawful taking of property to the deprivation of the insured.” Notably, National Union’s insuring agreement includes forgery, unlike some other forms of the theft coverage.
On cross-motions for summary judgment, Tesoro advanced two arguments in support of coverage. First, Leavell’s alleged conduct represented an “unlawful taking” of either Tesoro’s money or its property (fuel sold to Enmex on credit). Second, Leavell’s alleged conduct represented a “forgery” and was, on National Union’s wording, covered employee theft. The Court rejected both arguments.
1. There was no “unlawful taking” by Leavell
Tesoro asserted that Leavell’s alleged misconduct had induced it to continue to sell fuel to Enmex, on the mistaken belief that the account was adequately collateralized. National Union pointed out that no money or fuel had been taken by Leavell, and that the fuel had all gone to Enmex. Tesoro countered that, as “unlawful taking” was not defined in the policy, it was broad enough to encompass Leavell’s alleged misconduct. The Court rejected this contention, holding that, at a minimum, “unlawful taking” requires that an employee seize or otherwise exercise control over an article, such that possession or control of the article is transferred without the owner’s authorization or consent.
While Leavell’s misrepresentations may have led Plaintiff to continue selling the fuel to Enmex on credit despite its outstanding debt, his misrepresentations did not exert control over the fuel such that possession or control of the fuel was transferred by virtue of the misrepresentations themselves. Stated differently, Leavell’s alleged forgeries did not transfer possession or control of the fuel — the fuel was transferred only upon its subsequent sale by Plaintiff to Enmex. …
Interpreting “theft” under the policy to be satisfied by any dishonesty that results in deprivation to the insured would read the language defining “theft” as an “unlawful taking” out of the policy, which the Court may not do. [emphasis in original]
As such, the “unlawful taking” requirement was not made out.
2. The “forgery” clause is not a stand-alone coverage, and a loss must meet the other requirements of the Employee Theft wording
Tesoro also contended that its loss resulted from “forgery” within the scope of the Employee Theft coverage, and that loss resulting from forgery was covered irrespective of whether it met the other requirements of the provision (including, of course, the “unlawful taking” requirement). National Union reasoned that the use of the term “include” meant that the alleged forgery loss had to meet the other requirements of the insuring agreement, i.e., the forgery must constitute an unlawful taking, committed by an employee, to the deprivation of the insured.
The Court accepted National Union’s argument, holding that the provision covers losses resulting from unlawful takings by employees by means of forgery, not simply any loss resulting from an employee’s forgery:
It would be incongruous to interpret the sentence’s use of “include” to place forgery in the same class or category as an unlawful taking, as urged by Plaintiff, such that an act requiring no taking would suffice to show the unlawful taking required for coverage. Plaintiff’s interpretation—that “a forgery always constitutes a theft” under the policy—suggests that language explaining the scope of a covered “unlawful taking” creates a basis for coverage separate and independent from an unlawful taking. The Court finds this interpretation unreasonable.
Tesoro Refining provides valuable guidance as to the scope of “unlawful taking” in Employee Theft wordings, and reinforces fidelity insurers’ intention that the “taking” must be by the employee, rather than any “taking”, by anyone, that is consequent upon an employee’s dishonesty. The Court also endorsed National Union’s position that the inclusion of forgery in the Employee Theft coverage does not create a “stand-alone” forgery coverage, and that the other requirements of the coverage must be established to trigger indemnity.
Tesoro Refining & Marketing Company LLC v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania, 2015 WL 1529247 (W.D.Tex.)