Strings & Things in Memphis, Inc. v. State Auto Insurance Companies

Citations: 920 S.W.2d 652; 1995 Tenn. App. LEXIS 732; 1995 WL 666221Docket: 02A01-9408-CH-00195

Court: Court of Appeals of Tennessee; November 8, 1995; Tennessee; State Appellate Court

Original Court Document: View Document

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The appeal involves Strings. Things in Memphis, Inc. (plaintiff-appellant) challenging a chancery court ruling that dismissed its claim against State Auto Insurance Companies (defendant-appellee) for coverage of employee dishonesty under an insurance policy. The key issue on appeal is whether the evidence contradicts the chancellor's findings. The plaintiff's complaint states that it held a valid insurance policy from April 1, 1990, to April 1, 1991, which covered property loss due to employee dishonesty.

The plaintiff alleges that on July 1, 1990, merchandise valued over $31,000 was discovered missing from a secured area, believed to have been stolen by an employee. The plaintiff asserts compliance with all policy terms, thus claiming entitlement to recovery. The defendant admits validity of the policy but argues the loss is excluded under Section 2(b) of the policy, which denies coverage for losses dependent on inventory or profit and loss computations.

The plaintiff's evidence included testimony from Christopher John Lovell, the company principal, and various exhibits. The plaintiff, a retailer of musical instruments, noted that missing items were identifiable by serial numbers, with no sales recorded for them. Access to the secured area was limited to the business owners and two employees, with no signs of forced entry. The plaintiff suspected the two employees of theft and reassigned them. Lovell notified the defendant's agent about the potential theft on April 30, 1990, and maintained communication regarding the investigation, ultimately providing written notice of the claim and an itemized list of missing items in November 1990. The court's decision to vacate, render, and remand the case suggests further consideration is warranted.

A proof of loss form was completed by the plaintiff and returned to the defendant's agent. In January 1991, the defendant sent an investigator to interview the plaintiff, Lovell, and requested documentation, which was provided despite the claim being denied beforehand. The plaintiff presented invoices, packing lists, and receipts at trial to demonstrate purchases and financing of the missing items, asserting they were not sold in the ordinary course of business. The sole witness for the defendant was Lee Boyer Herrington from Equifax Services, who testified about the challenges of auditing the plaintiff's disorganized inventory. An audit on July 30, 1990, revealed a decrease in inventory. The plaintiff paid for eleven missing items but contested the loss of four, claiming theft. The defendant formally denied the claim in a May 20, 1991 letter, citing the policy's exclusion relating to loss verification based on inventory discrepancies. On October 23, 1991, Lovell reiterated his claim, detailing an employee theft incident involving missing parts of a Roland keyboard discovered in a secured area, with no sales record for the missing items, highlighting ongoing issues with inventory management and theft.

The corporation owns the building at 1492 Union Avenue and leases the ground floor of the adjacent building at 1500 Union Avenue, which are separated by a small alley. Both buildings contain a secured warehouse area for inventory storage, with access limited to the Warehouse Manager, Craig Walker, who was employed from May 21, 1990, to November 16, 1990. Following the discovery of a theft, floorplan auditors from Textron conducted a monthly audit within 48 hours, verifying received Roland products but lacking sales evidence. An in-depth investigation revealed that the missing Roland inventory, valued at $31,812.30, was taken from secured warehouse areas rather than display inventory. Walker, who requested a transfer to sales staff upon learning of the investigation, had a prior arrest history related to theft. The claim for the theft is substantiated by documentation rather than inventory calculations. The chancellor found that the plaintiff failed to prove the loss was due to employee theft, citing a lack of confrontation with suspects and failure to notify police. Testimony indicated disorganization within the business and issues with the security of the vault. While the court agreed on the plaintiff's lack of appropriate action, it disagreed with the chancellor's claim regarding vault security, noting that it was kept locked after the first year of audits.

Plaintiff received various merchandise intended for resale, stored in a locked area accessed by two employees. There is no record of these items being sold, and they were not found in the designated locked area. The defendant argues that the plaintiff's claim is excluded under policy provisions since establishing the loss and its amount requires "inventory computation." No relevant Tennessee case law has been cited, but similar provisions have been interpreted in other jurisdictions. In Ace Wire, Cable Co. Inc. v. Aetna Casualty, Surety Co., the New York Court of Appeals ruled that "inventory computation" does not permit generalized estimates based on sales records or average markup. Instead, proof of loss can be substantiated through detailed inventory records of identifiable units. Similar rulings in other cases reinforce that inventories based on unit counts are permissible, while those requiring calculations to adjust for sales or purchases are excluded. The policy in question specifically references "inventory computation," indicating a requirement for mathematical calculation rather than a straightforward enumeration of missing items. The evidence presented in this case—documenting purchases and the absence of items without evidence of sale—does not constitute an "inventory computation" as per the policy. The defendant's policy guarantees coverage for losses due to fraudulent or dishonest acts by an employee.

The exclusion in Section 2(b) does not apply since the proof of loss does not rely on inventory calculations. Under Section 4 of the policy, if a loss is attributed to the fraud or dishonesty of covered employees, the insured can still benefit from the insurance provided they can reasonably demonstrate that the loss resulted from such actions. The insured's evidence indicates that the items were received but not sold, stored securely, and accessible only by two specific employees. Despite the business being somewhat disorganized, the evidence supports that the loss stemmed from the dishonesty of the employees with access to the locked area. Although the insured seeks reimbursement for interest on financing for the items, the policy does not cover this type of loss. The total loss exceeds the $25,000 contractual limit, leading to the trial court judgment being vacated. A judgment of $25,000 is entered for the plaintiff, and the case is remanded for further proceedings, with appeal costs assigned to the appellee.