Tesoro, a US-based oil refining company is not entitled to coverage under its crime policy issued by its insurer, an AIG company, because there is no evidence that forged letters of credit (L/Cs) involve "unlawful taking," an appeals court has ruled.

The ruling affirms a lower court ruling that was subsequently challenged by the oil refiner.

L/C forgeries

The refiner sold fuel on credit to petroleum distributor Enmex Corporation under the supervision of Tesoro's credit director, Calvin Leavell. Enmex's account was unsecured, with a US$25 million credit limit.

In 2007, after a query by an auditor, Leavell presented a document purporting to be a US$12 million L/C for Enmex and subsequently a US$24 million L/C for the petroleum distributor.

Forgery discovered

In 2008, after he produced another US$24 million L/C for Enmex, supposedly from Bank of America, Tesoro's risk management officer asked to see further documentation. It was shown to Bank of America, who said it was not valid.

Tesoro stopped selling fuel to Enmex and sued it for breach of contract and fraud. The lawsuit was settled.

Insurance claim

The refiner then submitted a claim to AIG subsidiary, National Union, which denied Tesoro's claim.

Tesoro filed a suit against National Union, but the US District Court in San Antonio granted the insurer summary judgment dismissing the case, a judgment the appeal court has now upheld.

Not covered

National Union's policy covers "employee theft," which it defines as "the unlawful taking of property to the deprivation of the insured," said the appeals court ruling.

"To trigger coverage under the policy, Tesoro must show that an 'unlawful taking' occurred," said the ruling. The company has not done so, the appeals court concluded.

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