..And we feel she was negligent in protecting her card from risk of theft...we understand the card was stolen...So is it really a stolen card?
I'd say so. I think you said so, too.
IMO, it is a valid claim. I'd consider it stolen since he returned it after the previous authorized use, but subsequently took it again without permission.
Had he retained possession all the while, I'd say he exceeded authority and deny the claim based on 1005.2(m).