Policy for Employee Theft Including Forgery Doesn’t Cover Employee Forgery

A seller extends $90 million in credit to a customer, secured by letters of credit.  When the debtor can’t pay, the seller discovers the instruments are fakes, forged by its own employee.  Can the seller recover under a policy that covers employee theft, including forgery?

Tesoro refinery sold fuel on credit to Enmex.  When Tesoro’s auditors asked the credit director about the mounting debt, he said it was secured by letters of credit, which he showed the auditors.  This happened more than once.  When the debt reached $90 million, Tesoro’s risk manager took one of the instruments to the bank.  The bank said, correctly, that it was a forgery.

Tesoro sued Enmax, and they settled the case.  Tesoro then tried to collect under the “forgery and alteration” coverage in its commercial crime policy but was stymied by an exclusion for “acts of employees.”  When that claim was denied, Tesoro resubmitted the claim under the “employee theft” coverage of the same policy.  That was denied, too.

Tesoro sued for declaratory judgment that its claim was covered by the employee theft policy and moved for summary judgment.  (For purposes of the litigation, the courts and parties assumed that Tesoro’s credit director was the forger, although he denied it.)  The court denied Tesoro’s motion and granted the insurer’s motion for summary judgment.

On appeal to the Fifth Circuit, Tesoro based its argument on a provision covering losses resulting directly from “theft” by an employee and defining “theft” to include “forgery.”  The insurer argued that “theft” requires an “unlawful taking” and that no such taking had occurred.  The court sided with the insurer.

Analyzing the facts surrounding the sales under Texas law, the court ruled that there had been no unlawful taking. There was no evidence that Tesoro had relied on—or even cared about–the instruments in deciding to sell to Enmex on credit.  In fact, at one point when two of the instruments had expired, Tesoro kept on selling and extending credit to Enmex.

In short, in deciding to extend the credit, Tesoro hadn’t been deceived, therefore hadn’t suffered a taking by deception, and therefore hadn’t suffered a theft.  Summary judgment for the insurer affirmed.

The case is Tesoro Refining v. National Union Fire Insurance, No. 15-50405 (5^th Cir., July 29, 2016).