Reg E protects the consumer, first and foremost. I completely agree with John.
If she claims someone didn't have the authority to use her card, that is fine. But as John noted, tell her you'll do what is necessary to avoid a loss here. It shouldn't be too difficult to know that someone in her family did this. And that it is a serious offense. I would tell her (if it is true) that if she doesn't want to file a report with the police, as you step into her shoes, you will. Also, she will (likely) have some liability here, at least $50. So she doesn't get a free ride. You also can decide if you want to reissue her a card or not. It is a privilege, not a right.
You might consider signing up for my webinar as we'll discuss these issues exactly.
http://calendar.bollearningconnect.com/main.php?view=event&eventid=1187791406963