By Chris McKibbin and Devra Charney
On May 25, 2023, the Texas Court of Appeals released its decision in Westlake Chemical Corporation v. Berkley Regional Insurance Company. The Court affirmed the District Court’s summary judgment in favour of the insurers on the basis that the Authorized Representative Exclusion applied. The Court’s decision is notable in finding that the exclusion does not require an agency relationship and applies to a broader range of circumstances where the representative has permission to, or is otherwise empowered to, act on an insured’s behalf.
Westlake Chemical Corporation (“Westlake”) manufactures polyethylene and polyvinyl chloride products. From 2007 to 2014, Westlake purchased plastic shipping bags and other supplies 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. Packwell used the supplies to package and ship Westlake’s chemical products overseas. After the shipping supplies were delivered by TMI, Tinkle submitted invoices to Westlake.
From March 2010 to October 2014, 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 maintained a primary Commercial Crime Policy with Berkley and follow-form excess coverage with Zurich. Westlake contended that its losses were covered by Insuring Agreement A.6.a (Computer Fraud) of the Berkley policy. Berkley concluded that Westlake’s loss did not fall within the coverage grant (as no computer hacking had occurred) and that, in any event, the loss was excluded by the Authorized Representative Exclusion found in section D.1.c of the policy. Berkley and Zurich (collectively, the “Insurers”) successfully moved for summary judgment on both issues. Westlake appealed.
The Authorized Representative Exclusion
The Texas Court of Appeals decided the case solely based on the Authorized Representative Exclusion, and expressly found it unnecessary to consider the District Court’s conclusion that the requirements of the Computer Fraud Insuring Agreement had not been met. Section D.1.c of the Berkley policy excluded:
Loss resulting from “theft” or any other dishonest act committed by any of your “employees,” “managers,” directors, trustees or authorized representatives:
(1) Whether acting alone or in collusion with other persons; or
(2) While performing services for you or otherwise;
except when covered under Insuring Agreement A.1.
The Insurers were of the view that the term “authorized representative” refers to someone who has permission to act on behalf of another; as Westlake authorized Tinkle to act on its behalf in placing orders for shipping supplies and managing Westlake’s inventory, Tinkle was Westlake’s authorized representative.
Westlake asserted that that the term “authorized representative” “ha[d] a meaning similar (if not identical) to ‘agent,’” and thus, to prevail on summary judgment, the Insurers had to establish that, as a matter of law, “Tinkle was entitled to act essentially as Westlake’s agent.” According to Westlake, “an agent is one who is empowered to act on the principal’s behalf.” Westlake contended that Tinkle was simply Westlake’s vendor, not its agent or authorized representative.
The Court rejected Westlake’s restrictive interpretation, holding that the exclusion did not require an agency relationship:
… 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. To the extent Westlake attempts to augment the definition of “authorized representative” to encompass a legal or technical definition of agent, such an interpretation is inconsistent with the commonly understood meaning of the term and is thus unreasonable.
The Court then reviewed the evidence relating to the Westlake-Tinkle relationship:
- Westlake’s representative testified that Westlake gave Tinkle the responsibility to manage how many supplies it needed at a given time.
- When asked why Westlake trusted Tinkle to order bags on Westlake’s behalf, Westlake’s representative explained that Westlake believed it to be his forte and that Tinkle had also served in a similar role for other companies.
- According to Westlake’s representative, Westlake did not have an independent system in place to ensure that Westlake was receiving the inventory that Tinkle ordered. Rather, Westlake outsourced that to Tinkle and relied on him to ensure that it had enough supplies in place when it needed them.
- In response to the Insurers’ interrogatories, Westlake advised that Tinkle ordered the bags and shipping supplies for each packaging warehouse as he determined to be necessary.
- Westlake also stated that TMI had authority for calculating how many bags Westlake needed at any given time and that TMI ordered additional bags and shipping supplies when it believed the bags and shipping supplies on hand at the packaging warehouses needed to be replenished.
- Westlake stated that, because TMI maintained bag and shipping supply levels at Westlake’s facilities, no approval process existed for those orders after March 2010.
This was sufficient for the Court to conclude that the exclusion applied:
[Westlake’s representative]’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. … Westlake does not dispute that Tinkle was authorized to act on its behalf in a limited capacity. … at a minimum, Westlake does not dispute that it authorized Tinkle to “monitor” Westlake’s “inventory and suggest purchases.” Rather, Westlake argues that the evidence is insufficient to establish that Tinkle was its “authorized representative” because an “authorized representative” is akin to an agent and therefore the term requires more than managing supplies and suggesting purchases, such as the ability to make payments for the shipping supplies using Westlake’s funds. But the plain language of the Berkley Policy does not support this technical or legal definition. The plain terms of Section D.1.c. only require evidence that Tinkle had permission to or was otherwise empowered to act on Westlake’s behalf, because that is the plain and ordinary meaning of the phrase “authorized representative.” […]
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. We conclude that [Westlake’s representative]’s uncontradicted testimony that Westlake “outsourced” responsibility to Tinkle to “ensure that Westlake was receiving the [necessary] inventory” is enough to satisfy their burden.
The Court affirmed summary judgment in favour of the Insurers.
Westlake Chemical is instructive for fidelity claims professionals insofar as it rejects the contention that the Authorized Representative Exclusion applies only in circumstances akin to an agency relationship. The Texas Court of Appeals found that the exclusion will apply where the representative has permission to, or is otherwise empowered to, act on an insured’s behalf in some capacity.
The Court’s decision accords with the intention underlying the Authorized Representative Exclusion, which is to encompass relationships outside of the traditional employer-employee relationship where the insured has nevertheless afforded the representative some permission or authorization to act on its behalf. It is essentially impossible for insurers to anticipate or underwrite the myriad circumstances in which insureds can delegate permission or authority to non-employee third parties.
Westlake Chemical is also noteworthy for what it portends for future claims involving freelancers and independent contractors as the “Gig Economy” continues to grow. One might speculate that the Authorized Representative Exclusion will take on greater significance as more individuals work in freelance and independent contractor roles.
Westlake Chemical Corporation v. Berkley Regional Insurance Company, 2023 WL 3634322 (Tex. App.)