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Westlake Chemical Corporation (Westlake) tendered claims to 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’s products. After a dispute arose among the parties regarding coverage for the tendered claims, Westlake sued the insurers for breach of contract, violations of the Texas Insurance Code, and declaratory relief. The trial 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 the trial court erred in granting summary judgment in favor of the insurers. In two issues, Westlake argued the trial court erred by finding that (1) its loss was not covered by the insurance policy’s computer fraud clause, and (2) the insurance policy contained an exclusion that barred coverage for its loss.
BACKGROUND
Westlake manufactures polyethylene and polyvinyl chloride products, which it sells internationally. From 2007 until 2014, Westlake purchased plastic shipping 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 delivered Westlake’s plastic shipping bags to a warehouse owned by Packwell, Inc. (“Packwell”), a plastic bagging 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 until October 2014, the appropriately named Tinkle submitted fraudulent invoices and supporting documentation to Westlake via email for fictitious bags that were never delivered to Packwell. Relying on these false invoices and shipping reports, Westlake 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 in the amount of $15,633,403.98.
INSURANCE CONTRACTS
Westlake purchased a Commercial Crime Insurance Policy from Berkley that provided coverage of $10,000,000 for each occurrence of computer fraud (“Berkley Policy”) and a Crime Insurance Excess Policy from Zurich American Insurance Company that provided Westlake an additional $5,000,000 in coverage (“Zurich Policy”).
Berkley Policy
Berkley promised to “pay for loss of or damage to ‘money’, ‘securities’ and ‘other property’ resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the ‘premises’ or ‘banking premises’: a. To a person (other than a “messenger”) outside those premises; or b. To a place outside those ‘premises’.”
Zurich Policy
The Zurich Policy’s “Insuring Clause” was excess of the Berkley Policy. In no event shall coverage under this policy be broader than coverage under the Berkley Policy. After Westlake discovered Tinkle’s fraud in October 2014, Westlake tendered timely notices of its discovery and Proof of Loss Statements to Berkley and Zurich. On March 25, 2016, Berkley denied coverage for Westlake’s loss under the Berkley Policy because the loss did not result directly from the use of a computer and because it resulted from a dishonest act by 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 take nothing on its claims against the Insurers.
Insurance Policies
An insured has the initial burden of establishing coverage under the terms of the policy.
DISCUSSION
The Insurers carried their burden to prove that coverage is excluded under the Policy. The Insurers argued that Tinkle was Westlake’s “authorized representative” and thus, whether or not the loss originated from “Computer Fraud,” Westlake’s loss is excluded from coverage based on Section D.1.c of the Berkley Policy, which excludes coverage for “Acts Of Employees, Managers, Directors, Trustees Or Representatives.”
Given the dictionary definitions of the phrase “authorized representative” can be commonly understood to mean someone who has permission to speak or act for another, or someone who is empowered to act on another’s behalf. Nothing in the Berkley 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 conclusively established that Tinkle had permission to or was otherwise empowered to act on Westlake’s behalf.
As part of its 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 admit that Tinkle was its ‘authorized representative’ because Westlake admit that it empowered [Tinkle] to act on its behalf.” Anderson’s testimony, Westlake’s interrogatory responses, and its letter to Berkley demonstrate that Westlake authorized Tinkle to manage its shipping supplies, 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 had permission to, or was otherwise empowered to, act on Westlake’s behalf. The court concluded that Anderson’s uncontradicted testimony that Westlake “outsourced” responsibility to Tinkle to “ensure that Westlake was receiving the [necessary] inventory” is enough to satisfy their burden.
ZALMA OPINION
Insurance covers many risks of loss but no insurance policy covers every possible risk of loss. Westlake trusted its supplier, Tinkle to act on its behalf and deliver necessary shipping materials for Westlake to deliver its product to its customers. It was cheated by someone it trusted and who acted on its behalf. The exclusion was clear and unambiguous and no matter how much Tinkle overcharged it did so with authority and was excluded. Westlake’s only hope now is to recover on the restitution order which will be difficult for Mr. Tinkle to pay as he is in prison.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
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