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AIG unit wins coverage dispute over crime policy

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An oil refining company is not entitled to coverage under its crime policy issued by an American International Group Inc. unit because there is no evidence that forged letters of credit also involved “unlawful taking,” says an appeals court in affirming a lower court ruling.

San Antonio-based Tesoro sold fuel on credit to Los Angeles-based petroleum distributor Enmex Corp. under the supervision of Calvin Leavell, Tesoro's credit director, according to Friday's ruling by the 5th U.S. Circuit Court of Appeals in New Orleans in Tesoro Refining and Marketing Company, L.L.C. v. National Union Fire Insurance Company of Pittsburgh, Pa. Enmex's account was unsecured, with a $25 million credit limit.

In December 2007, after a query by an auditor, Mr. Leavell presented a document purporting to be a $12 million letter of credit for Enmex, then later a $24 million letter of credit.

After the purported letters of credit expired, he produced a new $24 million letter of credit for Enmex, supposedly from Bank of America. When Tesoro's risk management officer asked to see it for the first time in December 2008, Bank of America said it was not valid.

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

Tesoro submitted a claim to National Union, a unit of New York-based AIG, under its $15 million commercial crime insurance policy for its losses on the account, which National Union denied.

Tesoro filed suit against National Union, and the U.S. District Court in San Antonio granted the insurer summary judgment dismissing the case, which a three-judge panel of the 5th Circuit unanimously affirmed.

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 panel concluded.

“Tesoro failed to offer any evidence that it would have acted differently had it known the Enmex account was actually not secured,” said the panel in affirming the lower court's ruling dismissing the case.