Performance Autoplex II Ltd. v. Mid-Continent Casualty Co.

REVISED MARCH 19, 2003
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 01-51135

PERFORMANCE AUTOPLEX II LTD; PERFORMANCE FORD LP

Plaintiffs - Appellants

v.

MID-CONTINENT CASUALTY COMPANY

Defendant - Appellee

Appeal from the United States District Court
for the Western District of Texas, San Antonio

February 20, 2003

Before KING, Chief Judge, and JOLLY and HIGGINBOTHAM, Circuit

Judges.

PER CURIAM:

Plaintiffs-Appellants Performance Autoplex II Ltd. and

Performance Ford, L.P. filed suit against Defendant-Appellee Mid-

Continent Casualty Company, alleging that Mid-Continent
improperly refused to pay for employee dishonesty losses covered

by one of its insurance policies. The district court granted

summary judgment in favor of Mid-Continent on all claims and

Performance Autoplex and Performance Ford appeal. We affirm in

part, reverse in part, and remand.

I. FACTUAL AND PROCEDURAL HISTORY

A. Facts

Performance Automotive Group, Inc. (“Performance Group”)
 No. 01-51135
-2-

operates new car dealerships in Texas and other states.

Performance Autoplex II Ltd. (“Performance Autoplex”) and

Performance Ford, L.P. (“Performance Ford”) are two separate

dealerships; both are general partners of Performance Group.

In 1995 or 1996, Michael Avellar, Vice-President of

Performance Group, contacted McKane Morgan & Associates (“McKane

Morgan”) to purchase insurance to cover inventory losses

discovered during annual parts inventories. Abbie Morgan, a

McKane Morgan employee, told Avellar that Performance Group could

obtain coverage from Mid-Continent Casualty Company (“Mid-

Continent”) that would cover inventory losses if there was some

evidence of criminal activity by an employee. Avellar purchased

a Mid-Continent commercial insurance package from McKane Morgan.

The package included a commercial crime coverage policy, which

contained a provision covering losses caused by employee

dishonesty. The policy covers “loss of, and loss from damage to,

Covered Property resulting directly from the Covered Cause of

Loss.” Under the policy, Covered Property is “‘[m]oney’,

‘securities’, and ‘property other than money and securities’” and

the Covered Cause of Loss is “[e]mployee dishonesty.”

Performance Autoplex and Performance Ford were named insureds

under the policy. The policy was renewed in 1997.1

1
When it came time to renew the policy, Avellar asked
E.R. McKane and Morgan if the new policy contained any variances
from prior coverage. McKane and Morgan advised Avellar of
variances from prior coverage, but none of the variances affected
employee dishonesty coverage.
 No. 01-51135
-3-

Pigg Inventory Loss Claim

In 1997, Performance Autoplex, a dealership in Midland,

Texas, undertook an annual physical inventory of its parts

department. During the inventory, Performance Autoplex

discovered that its Parts Manager, Mike Pigg, had stolen parts

and cash from the department. The dealership’s ledger showed a

total inventory discrepancy of approximately $115,000. Pigg

admitted to stealing approximately $4,000 in cash and parts

valued at between $25,000 and $30,000.

Performance Autoplex submitted a claim to Mid-Continent for

the entire amount of the inventory shortage. Mid-Continent had

an outside accounting firm, Campos & Stratis, L.L.P. (“Campos &

Stratis”), investigate the claim and verify the amount of the

loss. Campos & Stratis identified an inventory shortage of

$115,752 and traced $47,222 to parts stolen by Pigg. Campos &

Stratis also identified a cash shortage of $5,643 and traced that

amount to Pigg. After taking shrinkage2 into account, Campos &

Stratis determined that Performance Autoplex’s loss, exclusive of

the cash shortage, totaled between $95,335 and $105,544.3

Mid-Continent paid $52,865, $5,643 for cash stolen by Pigg

2
Shrinkage is an industry term to account for expected
changes in inventory due to factors such as improper data entry,
theft, or breakage. Campos & Stratis assumed a shrinkage value
of 1% to 2% of gross parts sales which amounted to approximately
$10,000 to $20,000 per year.
3
The amount of loss varied based on which rate of
shrinkage was used.
 No. 01-51135
-4-

and $47,222 for parts that could be specifically traced to Pigg.

Mid-Continent denied the remainder of the claim, stating that the

policy’s “inventory computation” exclusion barred payment of the

amount that would be required to reconcile the value of the

physical inventory with the inventory listed in the dealership’s

general ledger.4 Mid-Continent reasoned that because there was

no evidence tracing Pigg to approximately half of the claimed

loss, the amount of the loss could only be substantiated using an

inventory computation, which the policy forbids.

Wall Trade-In Claim

In March 1998, Sheilah Wall, the controller at Performance

Ford, a dealership in Memphis, Tennessee, transferred title in a

new Ford Taurus to her mother. Though this transfer was

purportedly in exchange for a $2,000 down payment and trade-in of

a 1997 Ford Taurus, neither the down payment nor the trade-in was

ever received.

Performance Ford submitted a claim for this loss to Mid-

Continent, requesting payment for the $2,000 down payment and the

value of the trade-in vehicle (approximately $12,700). Mid-

Continent reimbursed Performance for the $2,000 down payment but

4
The inventory computation exclusion states:

1. Additional Exclusions: We will not pay for losses as
specified below:
. . .
b. Inventory Shortages: loss, or that part of any
loss, the proof of which as to its existence or
amount is dependent upon:
(1) An inventory computation; or
(2) A profit and loss computation.
 No. 01-51135
-5-

not for the value of the trade-in vehicle. In explaining why it

denied the claim, Mid-Continent stated that the loss was not one

due to “employee dishonesty” because “[i]t is clear that the

dealership knew [it] did not have the trade in vehicle.” Mid-

Continent later claimed that the loss was barred by the “indirect

loss” policy exclusion.5 Mid-Continent further suggested that

because Performance Ford never claimed that the loss was the

value of the new car, but only that it was the value of the

trade-in vehicle (proven only by the dishonest employee’s

assessment of the vehicle’s value), Performance Ford has not

shown there was a covered loss.

Wall Unauthorized Pay Increase Claim

In December 1997, Sheilah Wall embezzled funds from

Performance Ford by giving herself and another employee

unauthorized pay increases. Though these raises should have been

approved by Performance Ford’s general partner and general

manager, Wall never sought such approval. In total, Wall

obtained $19,724 in extra pay for herself and another employee.

Performance Ford submitted a claim for this loss to Mid-

5
The indirect loss exclusion reads:

A. GENERAL EXCLUSIONS: We will not pay for loss as
specified below:
. . .
3. Indirect Loss: Loss that is an indirect result
of any act or “occurrence” covered by this
insurance including, but not limited to, loss
resulting from:
a. Your inability to realize income that you
would have realized had there been no loss
of, or loss from damage to, Covered Property.
 No. 01-51135
-6-

Continent. Mid-Continent denied the claim, claiming the loss did

not result from “employee dishonesty” because the benefit

received was a salary increase. The employee dishonesty

provision reads as follows:

3. Additional Definitions
a. “Employee Dishonesty” in paragraph A.2 means only
dishonest acts committed by an “employee”, whether
identified or not, acting alone or in collusion with
other persons, except you or a partner, with the
manifest intent to:
(1) Cause you to sustain loss; and also
(2) Obtain financial benefit (other than employee
benefits earned in the normal course of
employment, including: salaries, commissions,
fees, bonuses, promotions, awards, profit sharing
or pensions) for:
(a) The “employee”; or
(b) Any person or organization intended by
the “employee” to receive that benefit.

According to Mid-Continent, there was no “employee dishonesty”

loss because the policy specifically excludes fraudulently

obtained salaries.

B. Procedural History

Performance Autoplex and Performance Ford (collectively

“Performance”) filed suit in Texas state court, seeking breach of

contract damages for Mid-Continent’s denial of their three

claims. Performance also asserts extracontractual claims for

three violations of the Texas Insurance Code, claiming that Mid-

Continent: (1) misrepresented the scope of policy coverage; (2)

denied Performance’s claims in bad faith; and (3) improperly

denied Performance’s claims, even if there was no bad faith, so

that statutory penalties are due. Mid-Continent removed the case

to federal district court.
 No. 01-51135
-7-

Both Performance and Mid-Continent filed motions for summary

judgment.6 The district court referred the matter to a

magistrate judge, who recommended that Performance’s motion be

denied and Mid-Continent’s motion be granted. Performance filed

objections to the magistrate judge’s report and filed a motion to

supplement the record. The district court conducted an

independent review of the record and a de novo review of those

portions of the report to which Performance objected. The

district court then adopted the magistrate judge’s report,

granted Mid-Continent’s motion for summary judgment, and denied

Performance’s motion for summary judgment and motion to

supplement the record.

On the Pigg inventory claim, the district court agreed with

Mid-Continent that the policy’s “inventory computation” exclusion

barred Performance’s claim as a matter of law because the claim

could only be substantiated through an inventory. On the Wall

trade-in claim, the district court found that the “indirect loss”

exclusion barred Performance’s claim as a matter of law. The

district court reasoned that because Performance had not

substantiated the value of the new car or the trade-in vehicle,

it was only claiming a loss of its profit on the trade-in

vehicle.7 On the Wall pay increase claim, the district court

6
The district court initially denied both motions
without prejudice and referred the matter to mediation. After no
settlement came from mediation, both parties re-urged their
motions for summary judgment.
7
The district court also suggested that there was no
covered loss because Performance eventually wrote off the loss.
 No. 01-51135
-8-

determined that the unauthorized salary increase was not covered

“employee dishonesty” as a matter of law under the plain language

of the policy. Finally, the district court ruled for Mid-

Continent on Performance’s Texas Insurance Code claims because

there had not been a misrepresentation and Mid-Continent properly

denied all of the claims.

Performance appeals the grant of Mid-Continent’s motion for

summary judgment, the denial of its motion for partial summary

judgment, and the denial of its motion to supplement the record.

Specifically, Performance raises seven issues for our review: (1)

whether the district court erred in granting Mid-Continent

summary judgment on the Pigg inventory claim; (2) whether the

district court erred in granting Mid-Continent summary judgment

on the Wall trade-in claim; (3) whether the district court erred

in granting Mid-Continent summary judgment on the Wall salary

increase claim; (4) whether the district court erred in granting

Mid-Continent summary judgment on the misrepresentation claim;

(5) whether the district court erred in granting Mid-Continent

summary judgment on the bad-faith coverage denial claim; (6)

whether the district court erred in granting Mid-Continent

summary judgment on the claim for statutory penalties; and (7)

whether the district court erred in denying Performance’s motion

to supplement the record.

II. STANDARD OF REVIEW

This court reviews a grant of summary judgment de novo,

applying the same standards as the district court. Daniels v.
 No. 01-51135
-9-

City of Arlington, 246 F.3d 500, 502 (5th Cir.), cert. denied,

534 U.S. 951 (2001). Summary judgment should be granted if there

is no genuine issue of material fact for trial and the moving

party is entitled to judgment as a matter of law. Fed. R. Civ.

P. 56(c). In determining if there is a genuine issue of material

fact, this court reviews the evidence in the light most favorable

to the non-moving party. Daniels, 246 F.3d at 502. We may

affirm summary judgment on any legal ground raised below, even if

it was not the basis for the district court’s decision. See In

re Williams, 298 F.3d 458, 462 & n.5 (5th Cir. 2002).

An interpretation of an insurance policy provision is an

issue of law reviewed de novo. See Am. States Ins. Co. v.

Bailey, 133 F.3d 363, 369 (5th Cir. 1998). This is a diversity

case and the parties agree that Texas insurance law applies. See

Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-79 (1938). Texas

courts interpret insurance policies using the rules of

interpretation and construction generally applicable to other

contracts. See, e.g., Nat’l Union Fire Ins. Co. of Pittsburgh,

Pa. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995).

Generally, an insured bears the burden of showing that a claim

against an insurer is within the policy’s coverage. See Sentry

Ins. v. R.J. Weber Co., 2 F.3d 554, 556 (5th Cir. 1993)

(interpreting Texas law). An insurer has the burden of

establishing that an exclusion applies. See id.; see also Tex.

Ins. Code Ann. art. 21.58(b) (Vernon 1981 & Supp. 2003). If a

provision in an insurance contract can be given a definite and
 No. 01-51135
-10-

certain meaning, then the provision is not ambiguous. See Nat’l

Union Fire Ins. Co. of Pittsburgh, Pa., 907 S.W.2d at 520. Mere

disagreement over the interpretation of a provision does not make

the provision ambiguous or create a question of fact. See

D.E.W., Inc. v. Local 93, Laborers’ Int’l Union of N. Am., 957

F.2d 196, 199 (5th Cir. 1992) (interpreting Texas law). If an

ambiguity exists, the policy should be interpreted in favor of

the insured. See, e.g., Toops v. Gulf Coast Marine Inc., 72 F.3d

483, 486 (5th Cir. 1996) (interpreting Texas law).

A district court’s denial of a motion to supplement the

record after a magistrate judge recommended granting or denying

summary judgment is reviewed for an abuse of discretion. See

Freeman v. County of Bexar, 142 F.3d 848, 851-53 (5th Cir. 1998).

III. DISCUSSION

A. Pigg Inventory Loss Claim

First, we address whether the district court properly

granted Mid-Continent’s motion for summary judgment and denied

Performance’s motion for partial summary judgment on the Pigg

inventory claim.

Performance argues that it suffered a covered loss and that

the “inventory computation” exclusion does not apply.

Performance first contends that its made out its prima facie case

because the fact that Pigg caused some of the loss raises the

inference that he is responsible for the entire loss. Next,

Performance argues that the inventory performed in this case is

not an inventory computation as a matter of law because it was a
 No. 01-51135
-11-

physical inventory that did not involve estimation or account

comparison.8 Performance also argues that under the policy, an

inventory computation may be used to quantify a loss once there

is independent proof that employee dishonesty caused the loss.

Mid-Continent disputes that it should pay the portion of the

Pigg loss at issue. Mid-Continent initially contends that

Performance did not come forward with sufficient evidence to show

that the Pigg claim was a covered “employee dishonesty” loss.

Alternatively, Mid-Continent argues that, even if Performance

showed the loss was due to employee dishonesty, the loss is

excluded because the method used to quantify the loss is an

“inventory computation.”

The district court granted summary judgment in favor of Mid-

Continent. The district court did not address whether

Performance showed the loss was due to employee dishonesty,

though Mid-Continent made this argument, but instead determined

that the “inventory computation” exclusion barred coverage.9

Because Performance could not trace the disputed portion of its

losses to Pigg but could only estimate these losses using its

annual inventory, the district court denied coverage.

We do not address the “inventory computation” exclusion

because we conclude that Performance has not made out its prima

8
Alternatively, Performance argues that the term
“inventory computation” is ambiguous and that we should thus
adopt a definition that favors coverage.
9
The district court interpreted the exclusion to mean:
“[w]hen the existence or amount of a claim is derived from an
inventory, the exclusion bars recovery of that amount.”
 No. 01-51135
-12-

facie showing that it suffered a covered loss due to “employee

dishonesty.” Put simply, Performance has not provided sufficient

evidence to create a genuine issue of material fact that Pigg

caused the loss at issue. It is Performance’s burden to show

that coverage applies. The policy requires that Performance show

“loss of . . . Covered Property resulting directly from the

Covered Cause of Loss [employee dishonesty].” Campos & Stratis

specifically tied about half of the loss, $5,643 in cash and

$47,222 in parts, to Pigg. The Campos & Stratis report is

fortified by Pigg’s own admission that he took approximately

$4,000 in cash and approximately $25,000 to $30,000 in parts.

Performance offers only two other pieces of evidence to tie Pigg

to the remainder of the loss: (1) the inference that the loss

must have been caused by Pigg because Performance had not

determined any other potential cause and (2) the fact that Pigg,

as Parts Department Manager, could have stolen more than he

admitted and generated false sales invoices that would make the

stolen parts untraceable.10 Performance does not provide

evidence to back up these two suggestions. Pigg admitted, and

Campos & Stratis verified, the details of several transactions he

used to defraud Performance. For example, Pigg explained how he

sold parts to Dugan’s Body Shop for which he was paid in cash,

how he kept the cash rather than turning it in to Performance,

10
Performance bases its second argument on Campus &
Stratis’s conclusory statement that Pigg “was able to remove
inventory without supervision and generate false sales invoices;
thereby rendering the items stolen untraceable.”
 No. 01-51135
-13-

and how he manipulated inventory records to cover the loss. Pigg

provided similar detail for each of his other fraudulent

transactions. When asked about the remaining, un-accounted for

amount, Pigg said, “I can’t tell you where the rest of it went

but I know what I’ve told you is what I know about.” All

Performance relies on to prove its prima facie case is Pigg’s

admission, the Campos & Stratis report, and the inventory

discrepancy. Even if the inventory discrepancy could be used to

substantiate the amount of the loss under the “inventory

computation” exclusion (an issue we do not reach), there is no

evidence, direct or circumstantial, that Pigg caused that portion

of the loss. Without some evidence linking Pigg to the loss,

Performance cannot withstand summary judgment. We affirm the

district court on this issue.

B. Wall Trade-In Claim

We next consider whether the district court erred in

granting Mid-Continent’s motion for summary judgment and denying

Performance’s motion for partial summary judgment on the Wall

trade-in claim.

Performance contends that its loss is a covered loss as a

matter of law and that the indirect loss exclusion does not bar

coverage for the trade-in loss. Mid-Continent first argues that

Performance did not show the trade-in loss was an “employee

dishonesty” loss because the transaction was just a bad business

deal, not a loss due to Wall’s dishonesty. Mid-Continent also

argues that Performance has not shown a loss of “covered
 No. 01-51135
-14-

property” because it has not set forth evidence of the value of

the trade-in vehicle.11 Finally, Mid-Continent argues that the

indirect loss exclusion bars coverage on this claim.

The district court rejected Mid-Continent’s argument that

the trade-in was not within the employee dishonesty coverage, but

then found that the loss was excluded under the “indirect loss”

exclusion.12 The district court agreed with Mid-Continent that

“the figure of $12,700.00 [the value attached to the trade-in

vehicle in the new car purchase contract] represents the benefit

of the bargain, including profit, that [Performance] would have

made on the trade-in deal.”

We need not reach the “indirect loss” exclusion or the issue

of whether there was “employee dishonesty” because we find that

Performance did not make out its prima facie case that there was

a covered loss.13 It is an insured’s burden to put forth

evidence to show that its claim against an insurer is within the

policy’s coverage. See Sentry Ins. v. R.J. Weber Co., 2 F.3d

554, 556 (5th Cir. 1993) (interpreting Texas law). According to

11
Though Mid-Continent’s appellate brief contains
considerably more detail on this argument than its motion for
summary judgment did, we do not find this argument waived because
Mid-Continent has argued all along that Performance has not made
out a case for coverage and that Performance has not set forth
evidence showing the value of the trade-in vehicle.
12
The district court also suggested that there was no
covered loss because Performance was able to write off the loss.
We do not address this finding.
13
While the district court did not rule on the Wall
trade-in claim using this reasoning, the district court’s ruling
reflected that it was troubled, as we are, by Performance’s
failure to prove the value of the trade-in vehicle that was lost.
 No. 01-51135
-15-

the policy, Performance must prove a “loss of . . . Covered

Property resulting directly from the Covered Cause of Loss.”14

The puzzling aspect of this claim is Performance’s

characterization and attempted valuation of the covered property.

Throughout this litigation, Performance has claimed that its loss

due to the fraudulent trade-in was a $2,000 cash down payment and

a $12,700 trade-in vehicle.15 Mid-Continent paid the $2,000 to

account for the down payment that was never received. What is at

issue now is what else, if anything, Mid-Continent owes.

Performance claims it is due $12,700, which is the value that

Wall, the dishonest employee, attributed to the trade-in vehicle.

Part of Performance’s burden in showing coverage is to show the

value of the covered property. See Cotton Belt Ins. Co. v. A.

Campdera & Co., 218 F.2d 76, 79 (5th Cir. 1954) (“Where property

is destroyed or injured, which has a market value, this must be

shown by the owner as the measure of damages.”) (quoting Int’l-

Great-N. R.R. Co. v. Casey, 46 S.W.2d 669, 670 (Tex. Comm’n App.

1932, holding approved)); see also Wallis v. United Servs. Auto.

Ass’n, 2 S.W.3d 300, 302-03 (Tex. App.—San Antonio 1999, pet.

denied) (explaining, in the context of the doctrine of concurrent

14
Covered Property is “‘money’, ‘securities’, and
‘property other than money and securities’.” The policy defines
“property other than money and securities” as “any tangible
property other than ‘money’ and ‘securities’ that has intrinsic
value but does not include any property [specifically exempted].”
15
As Michael Avellar stated: “As a result of this
transaction [Wall transferring title to her mother], Performance
Ford suffered a loss of $2,000.00 in cash and the value of the
1997 Ford Taurus trade-in.” Performance has never claimed that
its covered property was the new Ford Taurus.
 No. 01-51135
-16-

causes, that an insured must prove the value of his loss).

Performance has never attempted to arrive at the value of the

trade-in vehicle by working backward from the value of the new

Ford Taurus. Rather, on this record Performance’s sole basis for

valuing its loss is its dishonest employee’s assessment of her

mother’s trade-in vehicle. Apparently this trade-in vehicle was

never seen by anyone at Performance other than Wall, creating a

question on this record whether the vehicle even existed. Under

the circumstances that obtained here, the dishonest employee’s

assessment of the value of the vehicle does not suffice to

establish the value of the vehicle, and there is no other

evidence of value in the record. Performance has thus not

created a genuine issue of material fact that it suffered a

covered loss. We affirm the district court on this claim.

C. Wall Unauthorized Pay Increase Claim

We next consider whether the district court erred in

granting Mid-Continent’s summary judgment motion on the Wall

unauthorized pay increase claim.

Performance argues that unauthorized pay increases are

covered by the policy as a matter of law because Wall’s salary

increase was not “earned” and was not obtained “in the normal

course of employment.” Mid-Continent argues that summary

judgment in its favor was appropriate because unauthorized pay

increases are excluded under the terms of the policy as a matter

of law.

The district court determined that the policy does not
 No. 01-51135
-17-

provide coverage for unauthorized pay increases due to employee

dishonesty. The district court rejected Performance’s argument

that “in the normal course of employment” is ambiguous and that

the phrase does not cover salary increases obtained through

fraud. The district court instead found that the language means

that “the policy does not reimburse the insured for the salaries

paid to an employee during the time that an employee was

committing acts of dishonesty against the insured, although the

loss incurred by the act of dishonesty may be covered.”16

We agree with the district court. According to the policy,

employee dishonesty includes instances where an employee

dishonestly obtains a financial benefit, but the financial

benefit must be one “other than employee benefits earned in the

normal course of employment, including: salaries . . .” The

plain language of the policy excludes unauthorized salaries

obtained due to employee dishonesty.

Though Performance argues that the Wall salary increases are

covered losses because the benefits were not earned “in the

normal course of employment” because they were due to fraud and

the funds were not “earned” because they were stolen, the one

Texas court to consider this language specifically rejected those

arguments. See Dickson v. State Farm Lloyds, 944 S.W.2d 666, 668

(Tex. App.—Corpus Christi 1997, no writ). In Dickson, an insured

16
The district court also found that Performance did not
make out a prima facie case of coverage because it did not show
the pay increases were unauthorized. We do not address this
holding.
 No. 01-51135
-18-

filed a claim under his employee dishonesty policy to obtain

reimbursement for losses based on two employees manipulating the

time card system to obtain extra compensation. Id. at 668. The

court noted that there were no Texas cases construing the policy

language at issue but that courts of several sister states had

found that the exclusion bars coverage for employee benefits that

were dishonestly obtained. See id. The Dickson court concluded

that “when an employee has dishonestly or fraudulently obtained

for himself only salary or other such employee benefits,” the

policy unambiguously excludes coverage.17 Id. The majority of

courts that have considered this exclusion agree. See Mun. Sec.,

Inc. v. Ins. Co. of N. Am., 829 F.2d 7, 9-10 (6th Cir. 1987)

(interpreting exclusion to exclude an employee’s increased

commissions obtained by fraud); James B. Lansing Sound, Inc. v.

Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 801 F.2d 1560, 1567

(9th Cir. 1986) (finding, under California law, that commissions

on fraudulent sales were clearly excluded); Hartford Accident &

Indem. Ins. Co. v. Wash. Nat’l Ins. Co., 638 F. Supp. 78, 82-84

(N.D. Ill. 1986) (holding that fraudulently obtained commissions

were excluded); Benchmark Crafters, Inc. v. Northwestern Nat’l

17
The language of the policy exclusion in Dickson is
virtually identical to the exclusion in this case. Performance
attempts to distinguish Dickson by saying that the phrase “in the
normal course of employment” in that case modified only the
phrase “other employee benefits,” not “salaries,” while the
phrase “in the normal course of employment” in this case applies
to salaries. This distinction is unpersuasive, especially
because the Dickson court expressly found in that case that the
phrase “in the normal course of employment” did modify
“salaries.” See id. at 667-68.
 No. 01-51135
-19-

Ins. Co. of Milwaukee, 363 N.W.2d 89, 91 (Minn. Ct. App. 1985)

(excluding loss due to an employee submitting false orders to

obtain salary and benefits); Mortell v. Ins. Co. of N. Am., 458

N.E.2d 922, 929 (Ill. Ct. App. 1983) (excluding commissions due

to unauthorized trading).

A few cases in other jurisdictions support Performance’s

construction of the policy language. In Cincinnati Insurance Co.

v. Tuscaloosa County Parking & Transit Authority, for example,

the Alabama Supreme Court, considering nearly identical policy

language, found that unauthorized salary increases obtained due

to employee dishonesty were covered losses because “salaries”

means only “authorized salaries” and the salaries were “stolen,”

not “earned.” 827 So. 2d 765, 767-78 (Ala. 2002). This holding

is supported by two other cases. See FDIC v. St. Paul Fire &

Marine Ins. Co., 738 F. Supp. 1146, 1160 (M.D. Tenn. 1990),

modified on other grounds, 942 F.2d 1032 (6th Cir. 1991); Klyn v.

Travelers Indem. Co., 709 N.Y.S.2d 780, 781 (N.Y. App. Div. 2000)

(finding coverage when an insured’s comptroller paid himself

excessive salary and bonuses).

Though Dickson, as a Corpus Christi Court of Appeals case,

is not binding this court, we believe it likely that the Texas

Supreme Court would adopt its reasoning and interpret the policy

language to exclude coverage, particularly because the Dickson

holding is the majority view. Looking at the plain language of

the policy, the interpretation rejecting coverage makes sense.

If “in the normal course of employment” means “not obtained
 No. 01-51135
-20-

through employee dishonesty,” the policy language excluding

salaries would become mere surplusage. That is, the language

excluding salaries presumes that there are acts of employee

dishonesty that result in increased employee benefits that the

insured and insurer agreed to exclude from coverage. Further, as

one court noted, “unearned salaries and commissions are

nevertheless still salaries and commissions and therefore belong

to the generic category of employee benefits that are normally

earned in the course of employment.” Hartford Accident & Indem.

Ins. Co., 638 F. Supp. at 84.

Turning to the facts of this case, our result is clear.

Wall obtained unauthorized salary increases for herself and

another employee while employed by Performance. This loss is not

covered by the plain language of the policy, which exempts

salaries from the category of employee dishonesty losses. Though

the district court did not rely on Dickson,18 we find it

persuasive here. Thus, we conclude that there is no coverage as

a matter of law and we affirm summary judgment in favor of Mid-

Continent on the Wall salary claim.

D. Texas Insurance Code Misrepresentation Claim

Having resolved the issues of policy coverage, we turn to

Performance’s extracontractual claims and consider, first,

whether the district court properly granted Mid-Continent summary

18
The district court instead reviewed the plain language
of the policy and determined that salary increases due to
employee dishonesty were excluded.
 No. 01-51135
-21-

judgment on the misrepresentation claim.

Performance argues that the district court erred in granting

summary judgment to Mid-Continent because Mid-Continent’s agent

made misrepresentations about the scope of policy coverage. Mid-

Continent responds that Performance has not shown both that

Morgan was an agent and that the statements were false. The

district court determined that Morgan’s statements were too

general to be actionable and that the statements were non-

actionable because they were true.

The Texas Insurance Code makes false statements by an agent

of an insurance company actionable.19 See Tex. Ins. Code Ann.

art. 21.21, § 4(1) (Vernon 1981 & Supp. 2003). To make out a

prima facie case of misrepresentation, an insured must show that

the person making the statement was an agent of the insurance

19
The Texas Insurance Code makes actionable:

[m]aking, issuing, circulating, or causing to be made,
issued or circulated, any estimate, illustration,
circular or statement misrepresenting the terms of any
policy issued or to be issued or the benefits or
advantages promised thereby or the dividends or share
of the surplus to be received thereon, or making any
false or misleading statements as to the dividends or
share of surplus previously paid on similar policies,
or making any misleading representation or any
misrepresentation as to the financial condition of any
insurer, or as to the legal reserve system upon which
any life insurer operates, or using any name or title
of any policy or class of policies misrepresenting the
true nature thereof, or making any misrepresentation to
any policyholder insured in any company for the purpose
of inducing or tending to induce such policyholder to
lapse, forfeit, or surrender his insurance . . .

Tex. Ins. Code Ann. art. 21.21, § 4(1).
 No. 01-51135
-22-

company and that the statement was false. See Celtic Life Ins.

Co. v. Coats, 885 S.W.2d 96, 98-99 (Tex. 1994); Royal Globe Ins.

Co. v. Bar Consultants, Inc., 577 S.W.2d 688, 690-91 (Tex. 1979).

First, Performance set forth sufficient evidence to create

a genuine issue of material fact as to whether Morgan was an

agent of Mid-Continent. A person may be deemed an agent if an

insurance company has authorized that person to sell its

policies. See Tex. Ins. Code Ann. art. 21.02 (Vernon 1981 &

Supp. 2002) (defining an agent as “[a]ny person who solicits

insurance on behalf of any insurance company . . .”). The Texas

Insurance Code does not “require either expressly or by

implication that an agent have actual authority before an

insurance company can be found to have vicariously committed a

deceptive act or practice.” Bar Consultants, 577 S.W.2d at 693.

That is, an insurance company may be liable for the misstatements

of an agent simply because it authorized the agent to sell its

policies, even if it did not authorize the agent to make the

misstatements. See id. Performance put forth the affidavit of

Michael Avellar, which states that he purchased insurance

policies from McKane Morgan and that, in purchasing the policies,

he dealt with McKane and Morgan. Mid-Continent argues that

“[t]he record contains no evidence of the nature or type of

agency relationship” which exists between Mid-Continent and

McKane Morgan. However, it is clear from the Avellar affidavit

that McKane Morgan was authorized to sell Mid-Continent policies,

and Mid-Continent does not dispute this fact. Further, the key
 No. 01-51135
-23-

case Mid-Continent cites supports Performance, for it holds that

a person who sells an insurance policy should be considered an

agent whose misrepresentations are attributable to the insurer.

See Coats, 885 S.W.2d at 98-99. This is enough to create a fact

issue on the question of agency.

Second, Performance has created a genuine issue of material

fact as to whether Morgan’s statements were actually false. The

only evidence in the record documenting what Morgan said is

Avellar’s affidavit. According to Avellar, Morgan stated “that

an inventory shortage, without more, would not be covered by the

employee dishonesty coverage we were purchasing” but “that the

employee dishonesty policy would cover inventory losses when

there was evidence of criminal activity by an employee.” Avellar

continues: “[s]he advised me that when there was independent

evidence of employee theft, the inventory shortage would be

covered in its entirety.” Mid-Continent does not appear to

dispute that Morgan made these statements.20 The statements

could be interpreted one of two ways. First, the statements

20
Mid-Continent instead argues that the statements are
too broad to be actionable, citing Griggs v. State Farm Lloyds,
181 F.3d 694 (5th Cir. 1999). However, the specific statements
Morgan made in this case are not the type of mere puffery deemed
non-actionable in Griggs. See id. at 701 (finding an agent’s
statements that she would handle claims “professionally” and that
she would “monitor the progress of Griggs’ claim” were non-
actionable). Rather, the statements in this case are specific
statements about the scope of policy coverage, which the Texas
courts have found actionable. See, e.g., Lexington Ins. Co. v.
Buckingham Gate, Ltd., 993 S.W.2d 185, 195 (Tex. App.—Corpus
Christi 1999, pet. denied) (finding that an agent’s statement
that a policy “cover[ed] all risks,” when the policy included
several exclusions, was an actionable misrepresentation).
 No. 01-51135
-24-

could convey that the entire amount of an inventory shortage is

covered when there is any evidence of employee dishonesty.

Second, the statements could convey that an inventory shortage is

covered only when the entire shortage is substantiated by proof

of employee dishonesty. Either way, because we conclude that

there is no coverage without some evidence linking the dishonest

employee to the entire amount of the loss, Morgan’s statements

were arguably false. We thus reverse summary judgment in favor

of Mid-Continent on the misrepresentation claim.

E. Texas Insurance Code Claim for Bad-Faith Coverage
Denial

We next consider whether the district court erred in

granting Mid-Continent’s motion for summary judgment on the bad-

faith claim denial issue.

Performance argues that the district court improperly

granted summary judgment because Performance raised a fact issue

as to whether Mid-Continent had a reasonable basis to delay or

deny payment of the claims. Mid-Continent argues that summary

judgment was proper because it correctly denied Performance’s

claims. The district court determined that Mid-Continent was

entitled to summary judgment because Performance did not show

Mid-Continent acted unreasonably and because Mid-Continent

properly denied the claims.

The Texas Insurance Code prohibits bad-faith claim denial

under Article 21.21. The prohibited conduct includes “failing to

attempt in good faith to effectuate a prompt, fair, and equitable
 No. 01-51135
-25-

settlement of a claim with respect to which the insurer’s

liability has become reasonably clear.” Tex. Ins. Code Ann.

art. 21.21, § 4(10)(a)(ii) (Vernon 1981 & Supp. 2003). A cause

of action exists under this statute when an insurer “has no

reasonable basis for denying or delaying payment of a claim or

when the insurer fails to determine or delays in determining

whether there is any reasonable basis for denial.” Higginbotham

v. State Farm Mut. Auto. Ins. Co., 103 F.3d 456, 459 (5th Cir.

1997). “In order to sustain such a claim, the insured must

establish the absence of a reasonable basis for denying or

delaying payment of the claim and that the insurer knew, or

should have known, that there was no reasonable basis for denying

or delaying payment of the claim.” Id. But “[a]s long as the

insurer has a reasonable basis to deny or delay payment of a

claim, even if that basis is eventually determined by the fact

finder to be erroneous, the insurer is not liable for the tort of

bad faith.” Id.

Because we affirm summary judgment in favor of Mid-Continent

on the merits of Performance’s three claims, we affirm summary

judgment in favor of Mid-Continent on this claim as well. Mid-

Continent’s denial of coverage was not only reasonable, it was

ultimately correct. Further, Performance has not set forth any

evidence suggesting bad faith or unreasonable delay.

F. Texas Insurance Code Claim for Statutory Penalties

We now consider whether the district erred in granting Mid-

Continent summary judgment on Performance’s final
 No. 01-51135
-26-

extracontractual claim, its claim for statutory penalties.

Performance argues that the district court erred in granting

summary judgment for Mid-Continent because Mid-Continent

improperly denied coverage. Mid-Continent argues that summary

judgment was proper on each of the three claims, so no statutory

penalties are warranted. The district court rejected

Performance’s statutory claim for damages because it found that

Mid-Continent properly denied coverage on all of the claims.

The Texas Insurance Code provides for statutory damages for

failure to pay an insurance claim within a specified time if an

insurer is found liable under a policy, even if the insurer had a

reasonable basis for denying coverage. See Tex. Ins. Code Ann.

art. 21.55, §§ 3(f), 6 (Vernon 1981 & Supp. 2003); see also St.

Paul Reinsurance Co. v. Greenberg, 134 F.3d 1250, 1255 (5th Cir.

1998) (“[T]he Texas penalty applies automatically if the claim is

not paid within the period allowed.”). Statutory damages apply

if the insurer has delayed payment of a valid claim for more than

sixty days. See Higginbotham, 103 F.3d at 461; Tex. Ins. Code

Ann. art. 21.55, § 3(f).21

The sole basis for finding liability under Article 21.55,

then, is that the requisite time has passed and the insurer was

ultimately found liable for the claim. Because we find that the

district court properly granted summary judgment for Mid-

21
The statutory rate of damages is the amount of the
claim plus 18% of the amount of the claim per annum. See Tex.
Ins. Code Ann. art. 21.55, § 6.
 No. 01-51135
-27-

Continent on each of Performance’s three claims, we affirm the

district court’s grant of summary judgment on this issue as well.

G. Motion to Supplement the Record

Finally, we address whether the district court abused its

discretion in denying Performance’s motion to supplement the

record after the magistrate judge recommended granting summary

judgment in favor of Mid-Continent. Performance argues that the

district court abused its discretion in denying its motion to

supplement the summary judgment record to create a fact question.

Mid-Continent does not directly address this issue on appeal.

The district court effectively denied22 Performance’s motion

without providing reasons for its decision.

We find that the district court did not abuse its discretion

in denying Performance’s motion. As we have previously stated:

[I]t is clear that the district court has wide
discretion to consider and reconsider the magistrate
judge’s recommendation. In the course of performing
its open-ended review, the district court need not
reject newly-proffered evidence simply because it was
not presented to the magistrate judge. Litigants may
not, however, use the magistrate judge as a mere
sounding-board for the sufficiency of the evidence.

Freeman v. County of Bexar, 142 F.3d 848, 852 (5th Cir. 1998).

We further suggested several factors that a court should consider

in deciding whether to accept additional evidence after a

magistrate judge’s recommendation has been issued, including: (1)

the moving party’s reasons for not originally submitting the

22
The district court did not formally rule on this
motion, but the parties appear to consider it as denied, and we
agree that it was effectively denied.
 No. 01-51135
-28-

evidence; (2) the importance of the omitted evidence to the

moving party’s case; (3) whether the evidence was previously

available to the non-moving party when it responded to the

summary judgment motion; and (4) the likelihood of unfair

prejudice to the non-moving party if the evidence is accepted.

See id. at 853.

These factors generally weigh against allowing Performance

to supplement the record. Performance wished to submit the

following evidence: (1) an affidavit from Ned Green, Chief

Financial Officer of Performance, that Performance never received

the trade-in vehicle from Wall’s mother; (2) an affidavit from

Green stating that Wall gave herself and another employee an

unauthorized pay raise; and (3) portions of a deposition of Kirby

Pancoast, Mid-Continent’s corporate representative, in which he

stated that Morgan misrepresented the policy’s terms. The first

two pieces of evidence likely would not have changed the district

court’s decision. Even assuming that Performance could prove the

trade-in vehicle was never received, the district court would

still have denied coverage because the loss was an excluded

“indirect loss.” Similarly, even if Performance submitted

additional evidence that the pay increases were unauthorized, the

district court likely would still have read the unambiguous

policy language to preclude coverage. The third piece of

evidence, though, was likely relevant to the misrepresentation

claim. This evidence was available to Mid-Continent when it

prepared the summary judgment motion, which cuts in favor of
 No. 01-51135
-29-

allowing its admission. But Performance did not explain why it

did not introduce this evidence originally. Instead, Performance

waited to offer this evidence until after it was clear that

summary judgment for Mid-Continent would be granted. With

Performance providing no reason why it failed to introduce the

evidence earlier, the district court clearly did not abuse its

discretion in disallowing this evidence.

IV. CONCLUSION

The judgment of the district court is AFFIRMED in part,

REVERSED in part, and REMANDED for further proceedings. Each

party shall bear its own costs.