In this week's Alabama Law Weekly Update, we present for your consideration a decision released by the United States Court of Appeals for the 11th Circuit. The court addressed what evidence is required to demonstrate a loss purportedly covered by an insurance policy.

W.L. Petrey Wholesale Co. v. Great Am. Ins. Co., No. 15-10629, 2015 WL 4646599 (11th Cir. Aug. 6, 2015) (inventory stolen by employee was not a covered loss under the insurance policy)

W.L. Petrey Wholesale Company (“Petrey”) sells wholesale goods and supplies to convenience stores through a network of sales people on specific routes. Route salespersons are required to drive a Petrey company truck and to rent a storage facility to store Petrey inventory. After an employee was terminated, Petrey discovered that the inventory in the storage unit used by the employee was short by 82,510 bottles of 5–Hour Energy products, worth $111,415.35. Petrey audited the employee’s route inventory records and took a physical count of the route inventory in the storage unit and compared the physical inventory count with a computer generated perpetual inventory count, revealing a shortage of physical inventory. Petrey also compared the physical inventory count with the records of all route transactions involving 5–Hour Energy products, which confirmed the exact shortage amount of 82,510 bottles. Petrey also compared the terminated employee's orders for those products with his sales, which revealed a pattern of ordering more 5–Hour Energy products than the sales should have required.

Petrey filed a claim with its insurance company, Great American Insurance Company (“Great American”), under its Crime Protection Policy, which insured against “loss of, and loss from damage to, money, securities and other property resulting directly from dishonest acts committed by an employee.” Great American denied the claim based on a specific exclusion in the policy, which read: “We will not pay for … 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.” Petrey filed suit claiming breach of the insurance contract, and Great American filed a motion to dismiss or, in the alternative, for summary judgment based solely on the inventory shortage exclusion. The district court granted the motion for summary judgment, ruling that the inventory shortage exclusion applied and barred Petrey’s claim. Petrey then appealed.

To prevail on a breach of insurance contract claim under Alabama law, an insured must show that the loss suffered was covered by the insurance policy. Although the appeals court stated it was clear that the policy in this case covered loss of property caused by employee theft, the insurance policy expressly excluded employee theft claims that are dependent upon proof of loss by an (i) inventory calculation or (ii) profit and loss calculation. In affirming the district court's decision, the appeal court stated the exclusions applied to Petrey because Petrey failed to offer independent proof of the loss (such as in a previous case where the insured presented sworn affidavits of three employees that they stole company property). Rather, Petrey unsuccessfully argued that its physical inventory count provided independent evidence by showing that the terminated employee ordered the goods in question, received them from Petrey, did not deliver them to his customers, and did not have them on hand in his storage locker. But the Court was not swayed, calling the argument “circular” because Petrey supported its arguments only with order and sales records, which are the same as inventory comparison computations.

Petrey also argued that Great American’s own prior coverage determinations showed that the inventory shortage exclusion should not apply. In 2011, Petrey filed a claim for theft of merchandise worth $102,897.05 by an employee when the exact same Crime Prevention Policy was in place, and Great American paid the claim to Petrey in full without contest. Petrey argued that because the claim in this case was essentially identical, it too should be covered by the policy. Yet again the Court was not moved, stating that Alabama law forbids courts from using extrinsic evidence (such as the parties’ course of dealing) to interpret an unambiguous contractual provision such as the exclusion in this policy. The appellate court affirmed the dismissal of the breach of contract claim.