A federal district court recently provided guidance on whether an employee's forgery falls within the scope of commercial-theft coverage. The dispute in Tesoro Refining & Marketing Company LLC v. Nat. Union Fire Ins. Co. of Pittsburgh, Pennsylvania, No. SA:13-CV-931-DAE (W.D. Tex. Apr. 7, 2015) began with an arrangement between Tesoro Refining and Ensmex Corp. (a petroleum distributor) whereby Tesoro sold fuel to Ensmex on credit.  Calvin Leavell was an employee of Tesoro responsible for managing Ensmex's credit account and Ensmex’s letters of credit that secured the account.  After several transactions and audits, Tesoro presented Ensmex's letter of credit to Bank of America, which informed Tesoro that the letter was no longer valid.  A forensic investigation suggested that Leavell had forged the signatures on several of the relevant letters of credit and security agreements.

Tesoro made an insurance claim with National Union Fire for losses related to these forgeries, which National denied.  Tesoro then filed suit against National for breach of contract and breach of the duty of good faith and fair dealing.  At issue in the lawsuit was the policy's Employee Theft provisions, which provided that National would "pay for loss of or damage to 'money,' 'securities' and 'other property' resulting directly from 'theft' committed by an 'employee'...For the purposes of this Insuring Agreement, 'theft' shall also include forgery." Tesoro claimed the “loss” was the loss of fuel that it had sold to Enmex on credit.

National argued that the employee-theft provision did not cover a loss caused by an employee's forgery that does not qualify as a "theft," defined as an "unlawful taking of property to the deprivation of the insured."  Tesoro countered that phrase "'theft' shall also include forgery" meant that forgery could equate to theft, such that there was coverage any time any loss resulted from a forgery.  After engaging in a thorough interpretation of the relevant provisions, the Court concluded that there had to be an employee forgery that was used to effectuate an “unlawful taking” of property from the insured.  Applying this interpretation to the facts of the case, the Court found that Leavell’s forgery did not cause him to exercise any control over the fuel that Tesoro sold to Ensmex.  Accordingly, the Court granted summary judgment in favor of National Union on Tesoro’s claims for breach of contract and breach of the duty of good faith and fair dealing.

[Editor’s Note: although the Court sided with National Union when Tesoro had claimed that the loss was the fuel it sold to Ensmex, the Court cited to another federal court case from New Jersey in which the claimed loss was the money that a bank was required to reimburse customers because of an employee’s forgery.  It is therefore unclear whether the court would have ruled the same way if Tesoro had claimed that the loss was monetary or some other benefit that the employee had derived from the forgery].

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