The Fifth Circuit recently ruled, in Tesoro Refining and Marketing Company, L.L.C. v. National Union Fire Company of Pittsburgh, Pennsylvania, No. 15-50405, 2016 U.S. App. LEXIS 13838 (5th Cir. July 29, 2016), that National Union was not obligated to cover losses caused by the alleged act of forgery committed by a Tesoro employee when no “unlawful taking” occurred as a result of the forgeries.

In 2003, Tesoro, an independent refiner and marketer of petroleum products, began selling fuel to Enmex Corporation on unsecured credit with a $25 million credit limit. By December 2007, the balance had grown to approximately $45 million and Deloitte and Touche, Tesoro’s auditors, spoke to Calvin Leavell, Tesoro’s credit director, about the $45 million balance and he indicated that Enmex’s account was secured by a $12 million letter of credit and soon thereafter, the auditor requested documentation of the letter of credit. Leavell was apparently confused about the accessibility of password-protected documents on a company server as forensic evidence later showed that a document purporting to be a $12 million letter of credit was created that day on a password-protected part of Tesoro’s server which stored Leavell’s documents, although he denied creating the false document. In January 2008, a Tesoro consultant asked Leavell about the Enmex account and a day later Leavell produced a document purporting to modify the $12 million letter of credit into a $24 million letter of credit that was also created on a password-protected part of the company server storing Leavell’s documents.

By March 2008 Enmex’s balance had increased to $59 million and Ernst and Young, Tesoro’s new auditors, discussed the account with Leavell and other employees and in May, a document purporting to be a security agreement signed in January 2008 was created — wait for it — on a password-protected part of the company server storing Leavell’s documents. Ernst and Young’s reports referenced both the $24 million letter of credit and the security agreement.

In September 2008, as the Enmex balance continued to grow, a new $24 million letter of credit was created on the same password-protected part of the company server as the other documents, although the PDF version of that document that was added to the credit department’s file share folder also contained a Bank of America logo and the forged signature of a BOA representative. At around the same time, Leavell also emailed Tesoro’s risk management vice president to let him know that Tesoro held the $24 million letter of credit. By December 2008, Enmex’s balance had risen to $90 million and Tesoro presented the letter of credit to BOA, which rejected it as invalid and Tesoro then stopped selling fuel to Enmex and sued the company for breach of contract and fraud, a case which eventually settled.

Tesoro then submitted a proof of loss to National Union under its commercial crime policy, a standard industry policy that consisted of several “insuring agreements,” including agreements covering “forgery or alteration,” which Tesoro claimed covered the loss and National Union denied coverage. Tesoro then filed an amended proof of loss under an “employee theft” provision, which National Union also denied. Tesoro then sued in federal court in California seeking a declaratory judgment under claims for breach of contract and bad faith but the case was transferred to the Western District of Texas, which eventually granted summary judgment to National Union because it determined that the “employee theft” provision did not cover losses due to forgeries that did not also include an unlawful taking, notwithstanding Tesoro’s argument that in order to trigger coverage it only needed to prove that a forgery took place.

On appeal, the Fifth Circuit noted that the insuring agreement stated that it covered “loss of . . . ‘other property’ resulting directly from ‘theft’ committed by an ‘employee’. . .” but that it also stated “[f]or purposes of this Insuring Agreement, ‘theft’ shall also include forgery.” The policy defined “theft” to mean “the unlawful taking of property to the deprivation of the insured.” Tesoro first argued that in order to have a covered claim, it only had to establish a “forgery,” and did not have to establish a “theft” through forgery. The appeals court rejected this argument, holding that when read in context, the employee theft provision unambiguously required a forgery leading to theft to trigger coverage.

Tesoro also alternatively argued that Leavell’s alleged forgeries constituted theft by deception, and thus was a covered “unlawful taking.” The court noted that under Texas law, theft by deception required 1) that a deceptive representation be a substantial or material factor in inducing the property owner to transfer the property, and 2) that if he’d been aware of the truth, he would have acted differently. As to the first prong, the court held that Tesoro did not produce any evidence that Leavell’s actions “affected its decision to continue selling fuel to Enmex.” As to the second prong, the court held that Tesoro failed to offer any evidence that it would have acted differently had it known that the Enmex account was actually not secured since it continued to sell fuel to Enmex when it knew the account was unsecured. As such, the court affirmed the trial court’s determination that no coverage was available.