W. L. Petrey Wholesale Co., Inc. v. Great American Insurance Company (CONSENT)
MEMORANDUM OPINION AND ORDER as follows: 1) that the 18 motion to dismiss and for summary judgment filed by Great American be and is hereby GRANTED; 2) that Great American's 9 motion to dismiss and for summary judgment be and is hereby DENIE D as moot; 3) that judgment on all claims in the amended complaint be and is hereby entered in favor of Great American and against Petrey Wholesale and that Petrey Wholesale's claims be and are hereby DISMISSED with prejudice; 4) that all pending deadlines are terminated and all other pending motions are hereby DENIED as moot; and 5) that the costs of this proceeding be and are hereby taxed against the Plf. Signed by Honorable Judge Charles S. Coody on 1/29/2015. (wcl, )
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF ALABAMA
W. L. PETREY WHOLESALE CO., INC., )
GREAT AMERICAN INSURANCE
CIVIL ACT. NO. 2:14-CV-868-CSC
MEMORANDUM OPINION AND ORDER
Before the court are the motions to dismiss, or, alternatively, motions for summary
judgment (Doc. 9 & Doc. 18) filed by the Defendant, Great American Insurance Company.
The claims in this case arise under the laws of the State of Alabama and concern a dispute
over insurance coverage for employee theft. The parties are diverse and the amount in
controversy exceeds $75,000.00; accordingly, the court has jurisdiction over this case
pursuant to 28 U.S.C. § 1332(a). Pursuant to 28 U.S.C. § 636(c)(1) and M.D. Ala. LR 73.1,
the parties have consented to a United States Magistrate Judge conducting all proceedings
in this case and ordering the entry of final judgment. For the reasons stated in this
memorandum opinion, the court concludes that summary judgment is due to be granted and
that the Plaintiff's claims are due to be dismissed with prejudice.
Standard of Review
“Summary judgment is appropriate ‘if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show there is no
genuine [dispute1 ] as to any material fact and that the moving party is entitled to judgment
as a matter of law.’” Greenberg v. BellSouth Telecomm., Inc., 498 F.3d 1258, 1263 (11th
Cir. 2007) (per curiam) (citation omitted); Fed. R. Civ. P. 56(a) (“The court shall grant
summary judgment if the movant shows that there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of law.”). The party moving for
summary judgment “always bears the initial responsibility of informing the district court of
the basis for its motion, and identifying those portions of the [record, including pleadings,
discovery materials and affidavits], which it believes demonstrate the absence of a genuine
[dispute] of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The movant
may meet this burden by presenting evidence which would be admissible at trial indicating
there is no dispute of material fact or by showing that the nonmoving party has failed to
present evidence in support of some element of its case on which it bears the ultimate burden
of proof. Id. at 322–324.
Once the movant meets his evidentiary burden and demonstrates the absence of a
genuine dispute of material fact, the burden shifts to the non-moving party to establish, with
appropriate evidence beyond the pleadings, that a genuine dispute material to his case exists.
Celotex, 477 U.S. at 324; Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991);
see also Fed. R. Civ. P. 56(c) (“A party asserting that a fact cannot be or is genuinely
Effective December 1, 2010, the language of Rule 56(a) was amended. The word “dispute” replaced
the word “issue” to “better reflect [ ] the focus of a summary-judgment determination.” Fed. R. Civ. P. 56(a),
Advisory Committee Notes, 2010 Amendments.
disputed must support the assertion by: (A) citing to particular parts of materials in the
record, including depositions, documents, electronically stored information, affidavits or
declarations, stipulations (including those made for purposes of the motion only), admissions,
interrogatory answers, or other materials; or (B) showing that the materials cited do not
establish the absence or presence of a genuine dispute, or that an adverse party cannot
produce admissible evidence to support the fact.”). A genuine dispute of material fact exists
when the nonmoving party produces evidence that would allow a reasonable fact-finder to
return a verdict in its favor. Greenberg, 498 F.3d at 1263.
To survive the movant’s properly supported motion for summary judgment, a party
is required to produce “sufficient [favorable] evidence” “that a reasonable jury could return
a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–49
(1986). “If the evidence [on which the nonmoving party relies] is merely colorable ... or is
not significantly probative ... summary judgment may be granted.” Id. at 249–250. “A mere
‘scintilla’ of evidence supporting the opposing party's position will not suffice; there must
be enough of a showing that the [trier of fact] could reasonably find for that party.” Walker
v. Darby, 911 F.2d 1573, 1576–1577 (11th Cir. 1990) (quoting Anderson, supra).
Conclusory allegations based on subjective beliefs are likewise insufficient to create a
genuine dispute of material fact and, therefore, do not suffice to oppose a motion for
summary judgment. Waddell v. Valley Forge Dental Assocs., Inc., 276 F.3d 1275, 1279 (11th
Cir. 2001). Hence, when a nonmoving party fails to set forth specific facts supported by
appropriate evidence sufficient to establish the existence of an element essential to its case
and on which the nonmovant will bear the burden of proof at trial, summary judgment is due
to be granted in favor of the moving party. Celotex, 477 U.S. at 322 (“[F]ailure of proof
concerning an essential element of the nonmoving party's case necessarily renders all other
For summary judgment purposes, only disputes involving material facts are relevant.
United States v. 5800 SW 74th Ave., 363 F.3d 1099, 1101 (11th Cir. 2004). What is material
is determined by the substantive law applicable to the case. Anderson, 477 U.S. at 248;
Lofton v. Sec’y of Dep’t of Children & Family Servs., 358 F.3d 804, 809 (11th Cir. 2004)
(“Only factual disputes that are material under the substantive law governing the case will
preclude entry of summary judgment.”). “The mere existence of some factual dispute will
not defeat summary judgment unless that factual dispute is material to an issue affecting the
outcome of the case.” McCormick v. City of Fort Lauderdale, 333 F.3d 1234, 1243 (11th Cir.
2003) (citation omitted). To demonstrate a genuine dispute of material fact, the party
opposing summary judgment “must do more than simply show that there is some
metaphysical doubt as to the material facts.... Where the record taken as a whole could not
lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine [dispute] for
trial.’” Matsushita Elec. Indus. Co, Ltd., v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
In cases where the evidence before the court which is admissible on its face or which can be
reduced to admissible form indicates that there is no genuine dispute of material fact and that
the party moving for summary judgment is entitled to it as a matter of law, summary
judgment is proper. Celotex, 477 U.S. at 323–324 (summary judgment appropriate where
pleadings, evidentiary materials and affidavits before the court show there is no genuine
dispute as to a requisite material fact); Waddell, 276 F.3d at 1279 (to establish a genuine
dispute of material fact, the nonmoving party must produce evidence such that a reasonable
trier of fact could return a verdict in his favor). However, if there is a conflict in the
evidence, “the evidence of the non-movant is to be believed, and all justifiable inferences are
to be drawn in his favor.” Anderson, 477 U.S. at 255; Ruiz de Molina v. Merritt & Furman
Ins. Agency, 207 F.3d 1351, 1356 (11th Cir. 2000).
Petrey Wholesale’s Business Operations
Petrey Wholesale, Inc., is a wholesale distributor of goods and supplies to
convenience stores. (Doc. 21-1 p. 24). One of the products Petrey Wholesale distributes is
a drink called “5-Hour Energy.” “5–hour ENERGY is an ‘energy shot.’ The drink is 1.93
to 2 ounces and is sold in retail stores across the country in a number of fruit flavors, and
regular, extra strength, and decaffeinated varieties.” Podobedov v. Living Essentials, LLC,
2012 WL 2513458 (C.D. Cal. 2012).
Petrey Wholesale hires sales persons for its delivery routes, and each sales person is
provided with a delivery truck. (Doc. 21-1 p. 24). The sales person leases a storage unit in
which to store goods from Petrey Wholesale prior to delivery. Id. Each sales person orders
goods from Petrey Wholesale according to each customer’s need, Petrey Wholesale delivers
the goods to the storage unit, and the sales person delivers the goods to the customers and
accounts for the deliveries by entering the relevant data in a computer system. Id. Excess
stock or return merchandise is shipped back to the warehouse when necessary. (Doc. 21-1
p. 25). At least twice per year, a physical inventory is conducted for each route salesman’s
truck and storage facility. Id.
Petrey Wholesale’s Employee Dishonesty Insurance Policy
From July 1, 2010 to July 11, 2011, Petrey Wholesale held a business insurance and
crime protection policy from Great American Insurance Company (“Great American”).
(Doc. 21-1 p. 138). That policy was subsequently renewed and was in force through July 1
2013. (Doc. 21-1 p. 142; Doc. 21-1 p. 42). The insurance policy provided:
We will pay for loss of, and loss from damage to, money, securities, and other
property resulting directly from dishonest acts committed by an employee,
whether identified or not, acting alone or in collusion with other persons, with
the manifest intent to:
cause you to sustain loss; and also
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:
(1) the employee; or
(2) any person or organization intended by the employee to receive that
. . . .We will not pay for loss as specified below:
. . . Inventory Shortages:
Loss, or that part of any loss, the proof of which as to its existence or amount
is dependent upon:
a.) an inventory computation; or
b.) a profit and loss computation.
(Doc. 21-1 pp. 46, 51, 116, 121).
From March 15, 2010, to June 6, 2011, Jason McKean was a route delivery driver for
Petrey Wholesale in Shreveport, Louisianna. (Doc. 21-1 p. 71). On June 6, 2011, McKean’s
supervisor, Bill Ashworth, could not reach him by telephone, so he drove to Shreveport and
found that McKean had abandoned the job. Id. Ashworth immediately noticed that there
appeared to be a shortage of remaining merchandise in McKean’s truck and storage unit, so
he began to take a physical inventory of the items. Id. After the physical inventory was
taken of the remaining items from McKean’s truck and storage facility, the number of
missing items were subtracted from the computer’s records of the number of items that
should have been in McKean’s possession. (Doc. 21-1 p. 72). This price comparison
revealed a shortage of items totaling $122,899 in value based on inventory cost. Id. The vast
majority of the missing inventory consisted of 5-Hour Energy drinks. Id.
In addition, a complete reconstruction of all transactions for McKean’s route was
performed, beginning with a physical inventory performed on December 15, 2010. Id. All
shipments and transfers of product to McKean were added to that figure, and returned
merchandise was subtracted from the figure to determine the amount of inventory that should
have been in McKean’s possession on June 9, 2011. Id. Petrey Wholesale filed a police
report about the theft. (Doc. 21-1 p. 110). In response to a letter from Petrey Wholesale,
Jason McKean telephoned Petrey Wholesale and denied stealing inventory. (Doc. 21-1 p.
Petrey Wholesale submitted a claim for loss of the missing inventory to Great
American. (Doc. 21-1 p. 171). Petrey Wholesale’s proof of loss was primarily based on its
calculations comparing sales and inventory records with the results of the physical inventory
of the remaining merchandise from McKean’s route. Id. After confirming that McKean was
the only person who had access to the missing inventory, Great American paid the claim.
(Doc. 21-1 pp. 109-110, 171).
Justin Bree was a route delivery driver for Petrey Wholesale from August 16, 2007
to May 24, 2013. (Doc. 21-1 p. 32). On May 24, 2013, his employment was terminated after
one of Petrey Wholesale’s customers requested that Bree no longer service its store. (Doc.
21-1 p. 33). At the time of his termination, Petrey Wholesale took from Bree his truck, its
contents, and the computer equipment used on his route. (Doc. 21-1 p. 25). Bree’s truck was
turned over to a relief driver to finish the route, and Bree’s supervisors went to Bree’s storage
unit and changed the locks on it. (Doc. 21-1 pp. 25-26).
On June 26, 2013, Steve Carter, a general manager at Petrey Wholesale, was
reviewing route inventory reports when he noticed that the inventory numbers for 5-Hour
Energy products on Bree’s route were exceptionally high.
(Doc. 21-1 p. 26).
immediately ordered an audit of the records and a physical inventory of Bree’s remaining
route inventory. Id. A physical inventory was performed on June 28, 2013. Id. Scott
Rayburn, who is responsible for inventory accounting at Petrey Wholesale, compared Petrey
Wholesale’s computer-generated inventory records with the results of the physical inventory,
and the results of this calculation indicated an inventory shortage of 82,510 bottles of 5-Hour
Energy drinks valued at $111,415.35. (Doc. 21-1 pp. 25-26). Rayburn also compared the
results of the June 28, 2013, physical inventory with a physical inventory conducted on
January 15, 2013, which, after accounting for Bree’s sales and all interim shipments of
merchandise to and from Bree, confirmed that 82,510 bottles of 5-Hour Energy drinks were
missing from Bree’s final inventory. (Doc. 21-1 p. 26).
Petrey Wholesale filed a police report and attempted unsuccessfully to locate Bree and
inquire about the inventory shortage. (Doc. 21-1 pp. 26, 38, 40).
Petrey Wholesale submitted an insurance claim to Great American showing, based on
Rayburn’s calculations, that 82,510 bottles of 5-Hour Energy drinks were missing from
Bree’s inventory. (Doc. 21-1 pp. 35-36). Great American denied the claim, relying in part
on the inventory shortage exclusion in the policy. (Doc. 21-1 pp. 46, 51, 172, 186-87).
On August 14, 2014, based on Great American’s refusal to pay the insurance claim
stemming from theft of Bree’s route inventory, Petrey Wholesale filed a complaint against
Great American for breach of contract. (Doc. 1). On September 11, 2014, Great American
filed a motion to dismiss, or, in the alternative, motion for summary judgment, arguing that,
under the inventory shortage exclusion, it was not obligated to pay the claim. (Doc. 9).
On September 24, 2014, prior to responding to the motion for summary judgment,
Petrey Wholesale filed an amended complaint against Great American alleging breach of
contract and bad faith failure to pay a claim. (Doc. 16). On October 8, 2014, Great
American filed a motion to dismiss the amended complaint and motion for summary
judgment, again arguing that it was not obligated to pay the loss under the inventory shortage
exclusion. (Doc. 18). The motions to dismiss and motions for summary judgment are now
Applicability of the Inventory Shortage Exclusion
This is a diversity case involving an Alabama insurance contract; therefore, Alabama
law governs the claims in this case. See Hartford Fire Ins. Co. v. Mitchell Co., Inc., 440
Fed. Appx. 759, 760 (11th Cir. 2011); Dempsey v. Auto Owners Ins. Co., 717 F.2d 556, 559
(11th Cir. 1983).
Under Alabama law, Great American cannot be liable for Petrey
Wholesale’s bad faith or breach of contract claims unless the loss at issue is covered under
the crime protection policy. See State Farm Fire & Cas. Co. v. Brechbill, 144 So. 3d 248,
258 (Ala. 2013) (holding that breach of an insurance contract is one of the elements of a bad
faith claim for failure to pay a claim).
Under Alabama law, when analyzing an insurance policy to determine whether
coverage exists, “a court gives words used in the policy their common, everyday meaning and
interprets them as a reasonable person in the insured’s position would have understood
them.’” State Farm Mut. Auto. Ins. Co. v. Brown, 26 So. 3d 1167, 1170 (Ala. 2009) (quoting
Crossett v. St. Louis Fire & Marine Ins. Co., 289 Ala. 598, 603 (1972)). “‘If, under this
standard, they are reasonably certain in their meaning, they are not ambiguous as a matter of
law and the rule of construction in favor of the insured does not apply.’” Id. (quoting
Crosset, 289 Ala. at 603).
In this case, the employee dishonesty policy covers loss of property “resulting directly
from dishonest acts committed by an employee, whether identified or not, acting alone or in
collusion with other persons, with the manifest intent” to cause the employer to sustain loss,
and also to obtain financial benefit for the employee or some other person that the employee
intends to receive financial benefit. (Doc. 21-1 p. 46). However, as Great American points
out, the employee dishonesty policy contains an exclusion which provides that Great
will not pay for . . . [l]oss, or that part of any loss, the proof of which as to its
existence or amount is dependent upon: a.) an inventory computation; or b.)
a profit and loss computation.
(Doc. 21-1 pp. 46, 51).
Here, as proof of the existence and amount of the loss of 82,510 bottles of 5-Hour
Energy Drinks, Petrey Wholesale offers a calculation based on comparing the results of the
January 15, 2013 and June 28, 2013 physical inventories of items in Bree’s truck and storage
unit after accounting for all interim shipments, recorded sales, and return merchandise
shipments. (Doc. 21-1 p. 36). Petrey Wholesale also “ran a complete item comparison of
the June 28th physical inventory count with the computer generated perpetual count, then
extend[ed] the differences at unit inventory cost,” which “revealed [a] shortage of 82,510
bottles of 5-Hour Energy product with a cost of $11,415.35. Id. Neither party has cited (and
the court has not found) an Alabama case defining the term “inventory computation” as used
in the inventory shortage exclusion at issue. However, Petrey Wholesale appears to concede
that these calculations are “inventory computations” within the meaning of the exclusion, and
the court concludes that they are. Cf. Fid. & Deposit Co. of Md. v. So. Utils., Inc., 726 F.2d
692, 695 (11th Cir. 1984) (“An inventory computation is ‘“an inventory arrived at by taking
a beginning inventory, adding purchases and deducting the cost of merchandise sold.”’”
(quoting Chenoweth-Chapman Corp. v. Amer. Ins. Co., 553 S.W.2d 872, 876 (Mo. App.
1977, quoting in turn Fort Smith Tobacco & Candy Co. v. Amer. Guar. & Liab. Ins. Co., 208
F. Supp. 244, 254 (W.D. Ark. 1962)); Russell G. Donaldson, J.D., Construction and Effect
of Clause in Fidelity Bond or Insurance Policy Excluding from Coverage Losses Proved by
“Inventory Computation” or “Profit and Loss Computation,” 45 A.L.R.4th 1049 § 3[a]
(Westlaw 2011) (collecting cases holding that “an ‘inventory computation’ [is] a figure
arrived at by taking a beginning inventory, adding purchases, and deducting the cost of
merchandise sold, so that a computed inventory loss would therefor be the difference arrived
at by deducting an actual inventory from the inventory computation”); 11 Steven Plitt, et al.,
Couch on Ins. 3d § 161.12 (Westlaw 2014) (“The exclusion does not bar an inventory made
upon a unit basis, but does bar inventory which requires computation to reduce them to some
other basis, or where, when one inventory is compared with a later one, it is necessary to
compute and allow for sales and purchases made in the interim.”).
Although Petrey Wholesale concedes that its proof of loss is dependent upon
inventory calculations, it argues that the phrase “dependent upon,” as used in the inventory
shortage exclusion, applies only when proof of loss is wholly dependent upon, but not
partially dependent upon, inventory calculations. In support of this contention, Petrey
Wholesale cites American Fire & Casualty Co. v. Burchfield, 232 So. 2d 606 (Ala. 1970).
In Burchfield, the Alabama Supreme Court concluded that a similar inventory exclusion did
not preclude “use of inventory calculations to show the amount of the loss” after the insured
offered other “evidence without conflict that it has suffered loss by reason of theft by . . . its
employees, and has offered further evidence that no other basis exists to explain the loss.”
232 So. 2d at 609. Thus, in Burchfield, the court permitted the use of inventory calculations
to show the amount of a loss where the insured offered evidence that it had discovered its
employees stealing from its warehouse and the employees admitted to the theft.
Petrey Wholesale argues that, in addition to inventory calculations, it has provided
other evidence of the existence of a loss due to employee dishonesty in the form of an
affidavit of its chief financial officer, Norman Parks. (Doc. 21-1 p. 19). In his affidavit,
Parks states that “the proof of the existence of the loss is the missing items themselves,” but
Parks relies on nothing other than inventory calculations as the basis of his knowledge that
items were missing. (Doc. 21-1 pp. 26, 28). Thus, Parks’s affidavit does not provide any
independent corroboration of the existence of a loss apart from inventory calculations.
The court notes that Parks’s affidavit indicates that, according to company policy,
inventory in Bree’s care was supposed to be kept locked in an offsite storage unit and in his
truck, and that Petrey Wholesale’s employees changed the locks on Bree’s storage unit on
the day he was fired. (Doc. 21-1 pp. 24-26). However, evidence suggesting that only Great
American’s employees could have been responsible for the disappearance of inventory in
Bree’s care is not independent evidence of a loss due to dishonesty or theft. The existence
of the loss is presupposed on the basis of inventory records alone, and the manner of the loss,
if one existed, is a matter of speculation. Even if Great American’s employees were the only
ones who could have stolen Bree’s inventory, there is no evidence, apart from inventory
calculations, that any inventory was in fact stolen by anybody. Moreover, there is no
independent evidence that employee dishonesty was responsible for any loss of inventory,
rather than, for example (among a number of possibilities), employee negligence in following
company policies for securing the goods. See Doc. 21-1 p. 46 (employee dishonesty
provision in the Great American policy providing coverage for loss due to “dishonest acts
committed by an employee . . . acting alone or in collusion with other persons, with the
manifest intent” to cause the employer to sustain loss, and also to with the employee’s intent
to obtain financial benefit for himself or some other person); see also Burchfield, 232 So. 2d
at 609 (recognizing that the purpose of an inventory shortage exclusion is to limit the
coverage of employee dishonesty policies to claims that are in fact due to employee
dishonesty rather than to negligence, bookkeeping errors, waste, inexactness, pilferage by
nonemployees, or dishonesty inherent in a claim “‘built upon self-created inventory
records.’” (quoting Hoboken Camera Center v. Hartford Accident & Indem. Co., 93 N.J.
Super. 484, 499 (1967)). Cf. Dunlop Tire & Rubber Corp. v. Fid. & Deposit Co. of Md., 479
F.2d 1243, 1247 (2d Cir. 1973) (holding that, where inventory calculations indicated a
shortage of goods stored in a locked wire cage accessible only to employees, the insured had
provided “circumstantial evidence that, if a loss in fact was sustained, [the insured’s]
employees were the perpetrators. But this so-called evidence of employee dishonesty
presupposes the factual existence of the loss. The evidence merely tends to foreclose the
possibility of theft by persons other than employees. It does not prove the existence of any
loss. There are no confessions, actual or implied, from employees who had been stealing
goods. Dunlop has not shown suspicious circumstances indicating that employees were
pilfering goods. The only evidence that a loss occurred at all is the inventory computations.
Such computations alone are insufficient to prove the existence of the loss in light of the
prohibition of the inventory exclusion clause.”).
Thus, Petrey Wholesale’s reliance on Burchfield is misplaced because inventory
calculations are the only evidence Petrey Wholesale has offered as proof of the existence of
a loss due to employee dishonesty as defined by the policy. Accordingly, the court concludes
that Petrey Wholesale’s loss is not insured under terms of the policy.
The Inventory Shortage Exclusion Does Not Render Coverage Illusory
Citing Burchfield, Petrey Wholesale argues that the inventory coverage exclusion
renders coverage for employee dishonesty illusory because, according to Petrey Wholesale,
inventory calculations are the only available means to prove the existence of a loss of
inventory due to employee dishonesty. In Burchfield, the Alabama Supreme Court noted
with approval that a New Jersey court had indicated that the exclusion would “nullify to a
considerable extent” the benefits of an employee dishonesty policy if the exclusion was
interpreted according to its literal meaning without allowing use of inventory calculations
alongside some other wholly separate evidence proving the existence of a loss due to
employee dishonesty. Burchfield, 232 So. 2d at 609 (citing Hoboken Camera Center v.
Hartford Accident & Indem. Co., 93 N.J. Super. 484, 496 (1967)).
Contrary to Petrey Wholesale’s interpretation of Burchfield, however, this is far from
a holding that the exclusion renders coverage illusory if it excludes coverage in cases where,
as here, inventory calculations are the sole proof of loss due to employee dishonesty. The
purpose of any exclusion in an insurance policy is to “nullify” the availability of coverage
to some extent, and insurers “have the same right as individuals. . . to impose whatever
conditions they please upon their obligations not inconsistent with public policy.” Ala. Farm
Bureau Mut. Cas. Ins. Co. v. Goodman, 279 Ala. 538, 541 (Ala. 1966). Under Alabama law,
an exclusion renders coverage illusory, and is unenforceable as against public policy, only
when it “‘completely contradict[s] the insuring provision.’” Shrader v. Emp’rs Mut. Cas.
Co., 907 So. 2d 1026, 1033 (Ala. 2005) (quoting Indus. Chem. & Fiberglass Corp. v.
Hartford Accident & Indem. Co., 475 So.2d 472, 479 (Ala. 1985) (emphasis added)).
Nullifying coverage “to a considerable extent,” Burchfield, 232 So. 2d at 609, is not the same
thing as “completely contradicting” an insuring provision and thus rendering it illusory,
Shrader, 907 So. 2d at 1033.
The inventory shortage exclusion is “a standard clause that appears in virtually every
employee dishonesty policy” and “has been construed by a number of courts,” including in
numerous cases where coverage was found to exist. Burchfield, 232 So. 2d at 609; see also
Coleman Cable, Inc. v. Travelers Indem. Co., 790 F. Supp. 2d 742, 755-56 (N.D. Ill. 2011)
(“The type of exclusion upon which Federal relies, known as an inventory shortage
exclusion, is hardly new to the insurance industry.”). As noted in part IV. A. of this opinion,
the purpose of the inventory shortage exclusion is widely recognized not (as Petrey
Wholesale contends) to serve as a surreptitious and complete contradiction of the coverage
provided in employee dishonesty policies, but to protect insurers from the dangers of
negligence, bookkeeping errors, waste, inexactness, pilferage by nonemployees, or
dishonesty inherent in a claim “built upon self-created inventory records.” Burchfield, 232
So. 2d at 609; see also, e.g. Coleman Cable, Inc. v. Travelers Indem. Co., 790 F. Supp. 2d
742, 755-56 (N.D. Ill. 2011) (“[I]nventory shortage exclusions have long been used to curb
abuses by employers insured against employee dishonesty where covered losses were claimed
on the basis of mere estimates, but where the losses might actually be the result of
bookkeeping errors, waste, or negligence.” (citations and internal quotation marks omitted));
Donaldson, 45 A.L.R.4th 1049 § 2[a] (discussing the purpose of inventory shortage
exclusions); Carleton Burch, et al., 15 Fidelity L.J. 309 (Oct. 2009) (“Over time, the most
commonly used fidelity forms have developed exclusions to limit or prohibit the introduction
of proof of loss through inventory computations. These forms have recognized that inventory
shrinkage, as shown in such calculations, can arise from any number of sources, some or all
of which may or may not bear any direct relation [to dishonesty] by an employee.”).
Contrary to Petrey Wholesale’s contention, inventory calculations are not the only
means available for proving the existence of a loss of inventory due to employee dishonesty.
Other calculations based on regularly kept business records are permissible as proof so long
as they are not inventory calculations. E.g., Atlanta Coca-Cola Bottling Co. v. Transamerica
Ins. Co., 61 F.R.D. 120 (N.D. Ga. 1973) (holding that the exclusion did not preclude an
insured from relying on the daily records of allegedly dishonest routemen who serviced soft
drink machines). For example, it has been held that an “inventory calculation” does not
occur when items in a store or warehouse are individually marked and accounted for when
sold so that the insured could show from its records that individually-identifiable items are
missing. See, e.g., Hoboken Camera, 93 N.J. Super. at 491 n.2 (one of two cases that the
Alabama Supreme Court expressly followed in Burchfield); see also, e.g., Sun Ins. Co. v.
Cullum’s Men Shop, 331 F.2d 988, 991 (5th Cir. 1964) (“[P]roof of the amount of the loss
did not depend upon an inventory computation . . . but on the contrary consisted of an
enumeration of each missing item . . . based upon a check of the stock record . . . against the
stock actually on hand”); Ace Wire & Cable Co., Inc. v. Aetna Cas. & Sur. Co., 60 N.Y.2d
390, 659 (N.Y. 1983) (holding that it was not an “inventory computation” to prove “the fact
or amount of loss through inventory records (whether perpetual or periodically made)
detailing the actual physical count of individually identifiable units,” such as stock records
of the reels of wire in which “each reel is separately listed with a notation of the exact
footage on the reel[,] and on many items a specific control number is assigned to the reel”).
Further, as Petrey Wholesale itself recognizes, evidence other than business records
can be used to prove a loss due to employee dishonesty, such as security camera footage,
evidence that an employee destroyed records and abandoned his job when he became aware
that a theft was about to be discovered, eyewitness statements that an employee removed
items from a warehouse, confessions of dishonest employees, evidence that a dishonest
employee sold the items for personal gain, and records of deliveries of items that were in fact
never delivered. Cf., e.g., So. Utils., Inc., 726 F.2d at 695-97; Burchfield, 232 So. 2d at 607.
Moreover, in light of the plain language of the policy, the fact that inventory shortage
exclusions have long been the industry standard in employee dishonesty policies, Burchfield,
232 So. 2d at 609, and Petrey Wholesale’s statement that it obtained the employee dishonesty
policy precisely because of the potential for inventory theft by route salesmen (Doc. 21-1
pp. 13, 27), the court is particularly unconvinced by Petrey Wholesale’s argument that
coverage is illusory because it could not reasonably have foreseen the need to implement
security measures or record-keeping procedures that would allow for proof of loss
independent of an inventory calculation in accordance with the requirements of the exclusion.
In short, the inventory shortage exclusion by no means “completely contradicts” the
coverage provided by the employee dishonesty policy. Because the inventory shortage
exclusion does not “completely contradict” the insurance coverage provided by the employee
dishonesty policy, the exclusion does not render the coverage illusory. Shrader, 907 So. 2d
at 1033 (defining “illusory coverage”).
Petrey Wholesale points out that, under similar2 circumstances, Great American paid
a claim for theft by Jason McKean in 2011 after Petrey Wholesale provided a proof of loss
that involved inventory computations. Petrey Wholesale argues that, by paying the claim for
theft by McKean, Great American waived its right to rely on the inventory shortage exclusion
to deny coverage for the claim for theft by Justin Bree. However, Petrey Wholesale cites no
The circumstances of the two claims were similar in that inventory calculations were submitted as
proof of loss. However, McKean abandoned his job and his truck shortly before the time that a physical
inventory would have been expected to take place, and Petrey Wholesale discovered the disappearance of
inventory at the same time it discovered McKean’s disappearance, prior to conducting an inventory
calculation. (Doc. 21-1 p. 71). Bree did not leave his employment under suspicious circumstances; his
employment was terminated for reasons unrelated to theft, and he was not suspected of theft until inventory
calculations conducted a month after his termination indicated an inventory shortage. See So. Utils., Inc.,
726 F.2d at 695-97 (holding that an inventory exclusion did not preclude coverage where, in addition to
inventory calculations, the insured provided evidence of loss due to theft by providing evidence of the
suspected employee’s “actions that were consistent with dishonesty, such as . . . clearing out his desk and
leaving his job several hours after being told by his superior to explain discrepancies in the construction
legal authority in support of this contention.
Moreover, under Alabama law, “the doctrine [of waiver] is not available to bring
within the coverage of a policy risks not covered by its terms or risks expressly excluded
therefrom.” Home Indem. Co. v. Reed Equip. Co., 381 So. 2d 45, 50-51 (Ala. 1980); see
also Woodall v. Alfa Mut. Ins. Co., 658 So. 2d 369, 372 (Ala. 1995) (“If a coverage provision
or an exclusion is unambiguous, it is not subject to waiver or estoppel.”). Therefore, Great
American’s payment of the claim for theft by Jason McKean does not operate as a waiver of
the inventory shortage exclusion in this case. Cf. Payne v. Mutual Sav. Life Ins. Co., 58 So.
3d 108 (Ala. 2010) (holding that, “regardless of the reason” the insurer paid claims in excess
of $8,000 for the insured’s chemotherapy drugs in 2007 and 2008, the doctrine of waiver did
not preclude the insurer from denying coverage in 2009 based on an unambiguous policy
provision that placed an $8,000 maximum yearly limit on prescription drug coverage).
Accordingly, it is
ORDERED as follows:
that the motion to dismiss and for summary judgment (Doc. 18) filed by Great
American be and is hereby GRANTED;
that Great American’s motion to dismiss and for summary judgment (Doc. 9) be and
is hereby DENIED as moot;
that judgment on all claims in the amended complaint be and is hereby entered in
favor of Great American and against Petrey Wholesale and that Petrey Wholesale’s
claims be and are hereby DISMISSED with prejudice;
that all pending deadlines are terminated and all other pending motions are hereby
DENIED as moot; and
that the costs of this proceeding be and are hereby taxed against the Plaintiff.
A separate final judgment will be entered.
Done this 29th day of January, 2015.
/s/Charles S. Coody
CHARLES S. COODY
UNITED STATES MAGISTRATE JUDGE
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?