No Coverage for Missing Property Due to Employee Theft Exclusion – Claims Magazine

Issue:

The insured is a small lawn and garden store. Several large pieces of equipment for sale are parked outside of the store in a well-lit, fenced-in area. Upon inquiry about a particular type of tractor, an employee noticed that the one he thought he had was missing. He found no evidence that it was sold, so he did a physical inventory to ascertain if anything else was missing. By comparing invoices to serial numbers, he learned that a riding mower was also missing. The lock on the gate to the fenced-in area remained intact.

Does the limitation in the BP 00 02 01 97 for "[p]roperty that is missing, where the only evidence of the loss or damage is a shortage disclosed on taking inventory, or other instances where there is no physical evidence to show what happened to the property" apply? What about the exclusion for dishonest or criminal acts by an employee?

Analysis:

Due to their size and weight, the tractor and mower were most likely not misplaced or lost track of at this small business so as to justify application of the missing property limitation.

The fact that such items are missing creates an inference of theft. In Moneta Dev. Corp. v. Generali Ins. Co. of Trieste and Venice, 622 N.Y.S.2d 930 (App. Div. 1995), the court found that the phrase "physical evidence" was ambiguous in an exclusion for "property that is missing, but there is no physical evidence to show what happened to it," and that the phrase included evidence showing a change in circumstances. Thus, the insured's showing that a large amount of heavy equipment was present one day and gone six days later created an inference of theft. Similarly, in Leasing Serv. Corp. v. American Motorists Ins. Co., 496 So. 2d 847 (Fla. App. 1986), theft, not misplacement or loss, was the logical presumption when a 10-foot wheel loader was not found where it was allegedly delivered. Also, in Advance Piece Dye Works, Inc. v. Travelers Indem. Co., 166 A.2d 173 (N.J. Super. 1960), where merchandise stored in the insured's warehouse was discovered missing when a customer requested delivery, circumstantial evidence of theft through showings of customary storage procedures and routine security measures supported the conclusion that missing merchandise was stolen, thus precluding application of an exclusion for "mysterious disappearance or inventory shortages."

The purpose of an exclusion similar to the missing property limitation is protection for the insurer from liability from loss or shortage reflected only in the insured's books where the claim is based on falsified or erroneous inventories. See Betty v. Liverpool & London & Globe Ins. Co., 310 F.2d 308 (4th Cir. 1962) ("unexplained loss or mysterious disappearance of property . . . or loss or shortage of property disclosed on taking inventory"). Evidence of inventory and profit and loss computations was allowed to prove the amount of loss where there was evidence sufficient to prove employee theft apart from these sources in Movie Distributors Liquidating Trust v. Reliance Ins. Co., 595 A.2d 1302 (Pa. Super. 1991). That court observed that allowing inventory computations to be used only to corroborate other independent evidence of both the fact of loss and the amount of loss, would have rendered the insurance valueless in that it would require the thief to be caught red-handed.

It may appear as if the coverage determination turns upon how the loss of the tractor and the mower were discovered, especially in light of court decisions against coverage where property was discovered missing on the taking of inventory. For example, in Maurice Goldman & Sons, Inc. v. Hanover Ins. Co., 607 N.E.2d 792 (N.Y. 1992), an exclusion for "unexplained loss, mysterious disappearance or loss or shortage disclosed on taking inventory" was not limited to loss discovered only upon taking inventory and applied where the insured noticed during a business trip that a bag containing jewelry was missing. Likewise, in Southern Ins. Co. v. Domino of California, Inc., 219 Cal. Rptr. 112 (Cal. App. 1985), an exclusion for loss caused by "mere disappearance of property or loss or shortage of property disclosed on taking inventory" was held to be an unambiguous description of two separate types of loss, and the insurer met its burden to prove "mere disappearance" by showing that four tons of sweaters were apparently received but then disappeared without explanation.

Regardless, the temptation to cite the missing property limitation as a basis for denial whenever an insured cannot "prove" that a theft occurred should be avoided. Once an insured with all-risk coverage has shown that a loss of insured property has occurred, the burden shifts to the insurer to show that the event falls within the scope of an exclusion or limitation on coverage. The insured need not establish that its loss was caused by a specific non-excluded event. Otherwise, the insured would have to establish the negative of each exception to coverage, which would contravene the purpose of all-risk coverage. This was the focus of the court's opinion in Jewelers Mut. Ins. Co. v. Balogh, 272 F.2d 889 (5th Cir. 1959). There, jewelry was placed in a particular spot within a safe at noon on a Saturday, and was discovered missing the following Monday. No one actually saw someone take the jewelry and there were no signs of forcible entry. Evidence implicated an internationally known jewel thief, but the court did not find that the theft in fact took place. Despite this, the insured was still entitled to coverage.

Note that an exclusion drafted in more general terms was given broader application most recently in Star Diamond, Inc. v. Underwriters at Lloyd's, London, 965 F. Supp. 763 (E.D. Va. 1997), where an exclusion for "unexplained or mysterious loss" barred recovery for loss of diamonds from a vehicle because the insured had no evidence of how or when the loss occurred. However, the BP limitation seems more limited in scope.

The more sound basis for denial here is the application of the employee dishonesty exclusion. If an employee admits to the dishonest act in question, then the exclusion of course applies. See RSBI Aerospace, Inc. v. Affiliated FM Ins. Co., 49 F.2d 399 (8th Cir. Mo. 1995). But the absence of such conclusive proof does not prevent application of the exclusion. Rather, the insurer need only prove by a preponderance of the evidence (that it is more likely than not) that an employee stole the items.

The inference of theft by an employee is reasonable. Given the bulk and weight of the tractor and mower, lack of evidence of forcible entry, and presumed accessibility by employees, it is more likely than not that this loss resulted from an inside job.