Eleventh Circuit Upholds Inventory Shortage Exclusion in Insurance Policy

In W.L. Petrey Wholesale Co. v. Great American Ins. Co., No. 15-10629 (11th Cir. Aug. 6, 2015), an unpublished case, the Eleventh Circuit held, under Alabama contract law, that an exclusion clause in a Crime Protection Policy provision of an insurance policy, excluding coverage for losses based on inventory comparisons, is valid, absent independent proof of employee theft or dishonesty.

W.L. Petrey Wholesale Company (“Petrey”) is a supplier of wholesale goods to convenience stores. After a route salesman was fired, Petrey took possession of his storage unit and its inventory, which was company property. Petrey then determined that 82,510 bottles of 5-Hour Energy ($110,415.35) were missing. A month passed before Petrey noticed a shortage in the storage unit’s inventory; specifically, the absence of 82,510 bottles of 5-Hour Energy bottles worth a total of $111,415.35. Petrey calculated the missing property by employing three checks: First, the company compared a physical inventory count with a computer generated perpetual inventory count; Second, it compared a physical inventory count with the records of all route transactions involving 5-Hour Energy products and; Finally, Petrey compared the salesman’s orders for 5-Hour Energy products with his sales of those products, which revealed a pattern of over ordering.

Petrey then filed a claim with Great American Insurance Company (“Great American”), its insurer, under a Crime Protection Policy provision, which covers “loss of, and loss from damage to, money, securities and other property resulting directly from dishonest acts committed by an employee.” However, the claim was denied by Great American, citing an “inventory shortages exclusion” in the policy: “We 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.” Petrey filed an action for bad faith and breach of the insurance contract, but the district court granted summary judgment for Great American, finding that the exclusion clause in the policy barred Petrey’s claim.

On appeal, the Eleventh Circuit looked to American Fire & Casualty Co. v. Burchfield, 232 So. 2d 606 (Ala. 1970), where the Alabama Supreme Court reviewed a similar insurance provision. That court held that such a prohibition did not apply to a grocer, to whom a lower court had provided an award based on an inventory computation, because the grocer had offered independent proof—three sworn affidavits—in addition to an inventory computation in order to demonstrate loss resulting from the malfeasance of his employees. Inventory calculations were deemed admissible to demonstrate damages only after the condition precedent of independent proof had been supplied. Relying on Burchfield, the Eleventh Circuit thus determined that since Petrey could not point to any evidence of loss by the salesman’s alleged theft outside of its own inventory comparison computations, its claimed losses must be excluded from coverage by the policy provision in this instance.

Petrey attempted to argue that its physical inventory count sufficed for independent evidence pointing to theft, but the Eleventh Circuit found this argument circular given that the physical count relied solely on order and sales records, which are essentially inventory comparison computations. The court likewise foreclosed another of Petrey’s arguments—that Great American had previously paid, in full and without contest, a similar claim to Petrey under its Crime Prevention Policy provision—by noting that Alabama law forbids the use of extrinsic evidence to demonstrate a course of dealing when interpreting an unambiguous contract provision.

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