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Note: Tesoro Refining & Marketing Co. (Oil Refiner) sold oil to Enmex (Distributor) on credit. When Distributor’s credit account balance reached USD 45,000,000, Oil Refiner became concerned whether the account was properly collateralized. When Oil Refiner’s auditor, Deloitte & Touche, sought additional information about the account, Calvin Learall (Employee), the manager of Oil Refiner’s credit dependent account “represented that the [Distributor’s] account was secured by a [USD 12,000,000] letter of credit,” and on a request for documentation, submitted a document appearing to be such a LC which was later increased to USD 24,000,000, although Employee testified “that he neither created the documents nor forged their signatures.” The Bank of America logo and a signature block with forged signatures were also added. Oil Refiner continued to sell oil to Distributor on belief that the credit account was properly collateralized.

When Distributor’s account reached USD 88,900,000, Distributor defaulted on payment and Oil Refiner demanded payment on the letter of credit from Bank of America. The bank informed Oil Refiner that the letter of credit was not valid. Oil Refiner sued Distributor in a separate action and simultaneously claimed on its commercial crime insurance policy with National Union Fire Insurance Co. (Insurer). Oil Refiner/Insured claimed that it had experienced deprivation of value through a taking by the employee who had forged the letter of credit. Insurer denied the claim stating that it was not covered under the policy. Oil Refiner/Insured then sued Insurer for breach of contract and failure to act in good faith and fair dealings. Both parties moved for summary judgment. The U.S. District Court for the Western District of Texas, David Alan Ezra, J., denied Oil Refiner/Insured’s motion for summary judgment but granted Insurer’s motion for summary judgment.

The Oil Refiner/Insured’s policy covered “theft,” which the policy defined as “unlawful taking of property to the deprivation of the insured.” The Judge ruled that the Insurer was right in its assertion that the loss suffered by Oil Refiner/Insured was not covered by the policy. The Judge stated that forging letters of credit did not constitute a “taking” under Texas law because the money was never under the control of the employee, in addition, loss from forging of commercial paper was explicitly excluded from the policy. The Judge also ruled that Insurer did not act in bad faith by denying Oil Refiner’s claim.

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