Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-almd-2_14-cv-00868/USCOURTS-almd-2_14-cv-00868-0/pdf.json

Parties Involved:
Great American Insurance Company
Defendant
W. L. Petrey Wholesale Co., Inc.
Plaintiff

Document Text:

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF ALABAMA

NORTHERN DIVISION

W. L. PETREY WHOLESALE CO., INC., )

)

Plaintiff, )

)

v. ) CIVIL ACT. NO. 2:14-CV-868-CSC

) (WO)

GREAT AMERICAN INSURANCE )

COMPANY, )

)

Defendant. )

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.

I. 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

Case 2:14-cv-00868-CSC Document 22 Filed 01/29/15 Page 1 of 22
genuine [dispute ] as to any material fact and that the moving party is entitled to judgment

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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 1

the word “issue” to “better reflect [ ] the focus of a summary-judgment determination.” Fed. R. Civ. P. 56(a),

Advisory Committee Notes, 2010 Amendments.

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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

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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

facts immaterial.”).

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

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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).

II. Facts

A. 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

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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.

B. 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:

Employee Dishonesty

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:

a. cause you to sustain loss; and also

b. 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

benefit.

EXCLUSIONS:

. . . .We will not pay for loss as specified below:

. . . Inventory Shortages:

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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).

C. Jason McKean

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 thatshould

have been in McKean’s possession on June 9, 2011. Id. Petrey Wholesale filed a police

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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.

73).

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).

D. Justin Bree

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). He

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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).

III. Procedural History

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

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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

under submission.

IV. Discussion

A. 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

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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

American

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

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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.,

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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

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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

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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

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that Petrey Wholesale’s loss is not insured under terms of the policy.

B. 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

conditionsthey 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

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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 employersinsured against employee dishonesty where covered losses were claimed

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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 lossthrough 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

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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

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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”).

C. Waiver

Petrey Wholesale points out that, under similar circumstances, Great American paid

2

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 itsright 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 2

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

records”).

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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).

V. Conclusion

Accordingly, it is

ORDERED as follows:

1. that the motion to dismiss and for summary judgment (Doc. 18) filed by Great

American be and is hereby GRANTED;

2. that Great American’s motion to dismiss and for summary judgment (Doc. 9) be and

is hereby DENIED as moot;

3. that judgment on all claims in the amended complaint be and is hereby entered in

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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 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

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