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Westlake Chemical Corporation (Westlake) filed claims with Berkley Regional Insurance Company (Berkley) and Zurich American Insurance Company (Zurich) seeking coverage for $16,000,000 in losses resulting from the payment of fraudulent invoices for shipping bags used to export Westlake products . After a dispute arose between the parties regarding coverage for the stated claims, Westlake sued the insurers for breach of contract, violation of the Texas Insurance Code, and declaratory relief. The District Court granted summary judgment in favor of the insurers and the decision was appealed.
IN Westlake Chemical Corporation v. Berkley Regional Insurance Company and Zurich American Insurance Company, No. 01-21-00225-CV, Court of Appeals of Texas, First District (May 25, 2023) Westlake argued that the trial court erred in granting summary judgment in favor of the insurers. On two issues, Westlake argued that the trial court erred in finding that (1) its loss was not covered by the policy’s data fraud clause and (2) the policy contained an exclusion barring coverage for its loss.
Westlake manufactures polyethylene and polyvinyl chloride products, which they sell internationally. From 2007 to 2014, Westlake purchased plastic bags and other supplies to export its products from John Tinkle (“Tinkle”) through his company Tinkle Management Inc. (“TMI”), a supplier of shipping bags to chemical companies. TMI supplied Westlake’s plastic bags to a warehouse owned by Packwell, Inc. (“Packwell”), a plastic bag and logistics company, and Packwell used the supplies to package and ship Westlake’s chemical products overseas. After the shipping supplies were delivered by TMI, Tinkle would submit an invoice to Westlake for payment of the supplies.
From March 2010 to October 2014, the aptly named Tinkle submitted fraudulent invoices and supporting documentation to Westlake via email for fictitious bags that were never delivered to Packwell. Westlake relied on these false invoices and shipping reports and paid Tinkle $16,423,941.78 for shipping bags that Tinkle never provided. Westlake did not discover Tinkle’s fraud until October 23, 2014.
In April 2017, Tinkle pleaded guilty and was sentenced to 48 months in prison and ordered to pay restitution to Westlake of $15,633,403.98.
Westlake purchased a Commercial Crime Insurance Policy from Berkley providing $10,000,000 coverage for each occurrence of computer fraud (“Berkley Policy”) and a Crime Insurance Excess Policy from Zurich American Insurance Company providing Westlake with an additional $5,000,000 in coverage (“Zurich Policy”).
Berkley promised to “pay for loss of or damage to ‘money’, ‘securities’ and ‘other property’ directly resulting from the use of any computer to fraudulently cause a transfer of that property from within the ‘premises’ or ” the banking premises” : a. To a person (other than a “messenger”) outside these premises; or b. To a place outside these “premises”.
The Zurich policy’s “insurance clause” overrode the Berkley policy. In no event shall the coverage under this policy be broader than the coverage under the Berkley policy. After Westlake discovered Tinkle’s fraud in October 2014, Westlake sent Berkley and Zurich timely about its discovery and proof of loss. On March 25, 2016, Berkley denied coverage for Westlake’s loss under the Berkley policy because the loss was not directly attributable to the use of a computer and because it was due to the dishonest act of an authorized representative of Westlake. The parties do not dispute that Westlake’s loss is not covered by the Zurich policy unless the Berkley policy also covers the loss.
The trial court ordered that Westlake be barred from its claims against the insurance companies.
An insured has the initial burden of establishing coverage under the terms of the policy.
The insurers bore their burden of proving that coverage is excluded under the policy. The insurers argued that Tinkle was Westlake’s “authorized representative” and thus, whether or not the loss resulted from “computer fraud,” Westlake’s loss is excluded from coverage based on section D.1.ci of the Berkley policy, which excludes coverage for “acts of employees , managers, board members, trustees or representatives.”
Given the dictionary definitions, the term “authorized representative” can generally be understood as someone authorized to speak or act for another, or someone empowered to act on another’s behalf. Nothing in Berkley’s policy indicates that the phrase “authorized representative” was intended to have a technical or legal definition.
Tinkle was Westlake’s authorized representative
Based on the plain meaning of “authorized representative,” the insurers were entitled to summary judgment if they ultimately determined that Tinkle was authorized or otherwise authorized to act on Westlake’s behalf.
As part of their summary judgment evidence, the insurers submitted deposition testimony from Westlake’s corporate representative Christopher Anderson (“Anderson”), Westlake’s interrogatory responses, and a letter from Westlake responding to Berkley’s questions about Westlake’s loss prepared as part of the claims process. Relying on these exhibits, the insurers argue that “Westlake admits that Tinkle was its “authorized representative” as Westlake admits that it authorized [Tinkle] to act on its behalf.” Anderson’s testimony, Westlake’s interrogatories, and its letter to Berkley show that Westlake authorized Tinkle to handle its shipping needs, to order additional shipping bags for Westlake, and to ensure that Westlake received the ordered inventory.
Based on the plain meaning of “authorized representative,” the insurers had to conclusively establish that Tinkle was authorized to, or otherwise had the authority to, act on Westlake’s behalf. The court concluded that Anderson’s uncontradicted testimony that Westlake “outsourced” responsibility to Tinkle to “make sure Westlake got [necessary] stock” is sufficient to satisfy their burden.
Insurance covers many risks of loss but no insurance covers all possible risks of loss. Westlake relied on its supplier, Tinkle, to act on its behalf and supply necessary shipping material for Westlake to deliver its product to its customers. It was deceived by someone it trusted and who acted on its behalf. The exclusion was clear and unambiguous and regardless of how much Tinkle overcharged, it did so with authority and was excluded. Westlake’s only hope now is to recover from the repayment order which will be difficult for Mr Tinkle to pay as he is in prison.
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