The Texas Supreme Court has taken a pass on a Houston [1st] Court of Appeals decision affirming a summary judgment order in favor of commercial and excess insurers in a multi-million dollar dispute with a chemical manufacturer.
Westlake Chemical Corporation v. Berkley Regional Insurance Company and Zurich American Insurance Company (No. 23-0789; pet. denied June 21, 2024) arose from a coverage dispute. From 2007 to 2014, Westlake, a manufacturer of polyethylene and polyvinyl chloride products, contracted with John Tinkle and his company TMI to supply plastic shipping bags to a warehouse owned by Packwell, a plastic bagging and shipping company. Packwell used the bags to package and ship Westlake’s products overseas. Beginning in March 2010, Tinkle submitted fraudulent invoices and supporting documentation to Westlake via email for shipping bags that were never supplied to Packwell. By the time Westlake discovered the fraud in late 2014, it had paid nearly $16.5 million for bags Tinkle never provided. In July 2015 a federal grand jury indicted Tinkle for fraud and money laundering. He pleaded guilty and was sentenced to four years in prison, as well as ordered to pay restitution to Westlake.
Westlake filed a claim with Berkley under a commercial crime insurance policy that provided $10 million in coverage for each occurrence of computer fraud. Westlake filed an additional claim for $5 million under a crime insurance excess policy with Zurich. The Berkley policy excluded coverage for “[l]oss resulting from ‘theft’ or any other dishonest act committed by any of your ‘employees,’ ‘managers,’ directors, trustees or authorized representatives.” Berkley denied Westlake’s claim on two grounds: (1) the policy covered only computer hacking and not run-of-the-mill fraud (though Tinkle did submit the fraudulent invoices by email, i.e. “using” a computer “to fraudulently cause a transfer of [] property from inside the ‘premises’ or ‘banking premises’” to an outside person or premises); and (2) even if the policy did cover the loss, the fraudulent conduct was committed by Westlake’s “authorized representative,” excluding the loss. Westlake sued Berkley and Zurich alleging breach of contract and extracontractual claims. Both parties moved for summary judgment. The trial court denied Westlake’s motion and granted Berkley’s on the policy exclusion ground. Westlake appealed.
In an opinion by Justice Rivas-Molloy, the court of appeals affirmed. The issue was whether Tinkle was an “authorized representative” of Westlake. Because the policy did not define the term, Berkley argued that its plain, common meaning unambiguously included Tinkle. The court agreed, concluding that “[g]iven these [various] dictionary definitions, 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.” The insurers “conclusively established that Tinkle had permission to or was otherwise empowered to act on Westlake’s behalf,” pointing to the deposition evidence of Westlake’s corporate representative and other evidence showing that Westlake “outsourced [procurement of the shipping bags] to Mr. Tinkle. . . [a]nd [Westlake] relief on him to ensure [it] had enough supplies in place when [it] needed them.” Moreover, once Westlake discovered Tinkle’s fraud, it took management of its “inventory supplies” into its own hands. This was enough for the court, which rejected Westlake’s argument that Tinkle was not its “legal agent,” but just a “vendor.”
The court left the issue of whether the policy’s coverage of “computer fraud” encompassed Tinkle’s submission of fraudulent invoices via email. Westlake contended that since Tinkle used a computer to defraud the company and the company used a computer to process the invoices and pay them, the computer became indispensable to the fraud. Berkley countered that the provision covers a third-party hacking into the company’s computer system and stealing something. The trial court denied Berkley’s summary judgment motion as to that argument, but it didn’t matter because the policy exclusion applied to Tinkle. In any event, if for nothing else this case is instructive for insurers and policyholders who may think that their coverage for computer fraud means different things. We would also imagine that insurers will want to review the policy language to make sure it more specifically identifies what they intend to cover. Here it seems that the use of the computer was incidental to what is really garden-variety fraud. It would have been the same thing if Tinkle had submitted the invoices by mail or courier or carrier pigeon. Still, the decision left that issue on the table.
