Spirits Spirited Away Covered by Insurance Despite Policy Exclusions

Travelers insured Warehouse Wine & Spirits, Inc. against risks of direct physical loss, including theft, with certain exceptions. One James Ceseretti stole more than $1 million worth of wine and liquor while he ran a warehouse for Warehouse Wines, where it stored excess inventory for its retail store in Manhattan. On cross motions for summary judgment regarding coverage, U.S. District Judge Katherine B. Forrest, United States District Judge for the Southern District of New York, reversing her own earlier ruling, granted the policyholder’s motion for summary judgment and denied that of Travelers. The decision, Warehouse Wines & Spirits, Inc. v. Travelers Property & Casualty Company of America, is reported at 2015 U.S. Dist. LEXIS 141722 and was filed October 16, 2015.

The insurance policy, under which Travelers denied the entire theft claim, consisted of two coverage parts, $4 million of “Property Floater Coverage” and $60,000 of “Transportation Coverage”. Both coverage parts insured against direct physical loss to covered property, including theft, subject to certain exclusions. The floater coverage excluded insurance for losses caused by or resulting from shortage found upon taking inventory, or caused by dishonest acts of the insured, its employees, authorized representatives, or those entrusted with covered property. The dishonest acts exclusion, however, specified that it did not apply to property in the custody of a carrier for hire. The transportation coverage contained a nearly identical dishonest acts exclusion and the same “carrier for hire” exception, and it did not exclude insurance for a loss caused by shortage found upon taking inventory.

Regarding the Property Floater Coverage exclusion, and its exception, the Court held that the discovery of the theft loss did not did not qualify it as one caused by or resulting from a shortage found while taking inventory. In reaching that conclusion, the Court distinguished exclusions found in two New York Court of Appeals decisions, Ace Wire & Cable Co. v. Aetna Casualty & Surety Co. 60 N.Y.2d 390 (1983), and New York University v. Continental Insurance Co., 87 N.Y.2d 308 (1995). In both cases the insureds had purchased insurance for losses caused by an employee’s dishonest or criminal acts. In slightly different wording, the two policies excluded coverage for loss, the proof of the existence or amount of which depended upon an inventory or profit and loss computation.

The Court in the Warehouse Wines & Spirits decision noted, that unlike the exclusions at issue in the two New York state court decisions, the exclusion under discussion related to the method of discovery of the loss, not how the fact or amount of that loss would be proved. The method of discovery in the new case began with the insured’s first-hand observation that it had received a significantly incomplete delivery of liquor at its retail store, followed by a telephone call from the president of another company that shared the insured’s warehouse, informing the insured that its inventory might be in “jeopardy” of having been stolen. An inventory was then conducted to confirm the theft and to evaluate its extent. The Court held that an inventory conducted after independent discovery “cannot pull the loss within the inventory exclusion. To read the policy in such a way would both conflict with the plain text of the exclusion and nonsensically suggest that after a loss was discovered by any method whatsoever, an inventory could never be conducted or used as part of the claim lest an insured lose coverage.”

Next, the Court considered whether the carrier for hire exception to the exclusion in the transportation coverage section of the policy applied to create coverage, i.e., whether the exception to the exclusion for property in the custody of the carrier for hire was triggered by the facts of the case. As an initial matter, the Court discussed whether the phrase “property in the custody of the carrier for hire” referred to a person or entity that was a carrier for hire or instead a person or entity that was performing carriage-specific services at the time of the loss. “In other words,” the Court asked, “is being a carrier for hire an identity or activity?” By considering neighboring provisions of the insurance policy, the court was persuaded that the reference to the carrier for hire was to the carrier’s identity, not its activity at the time of the loss. Thus, for example, the policy generally excluded loss caused by water from coverage, but provided that the water exclusion did not apply to property “in transit.” The contrast between the two exclusion exceptions, the Court held, demonstrated Travelers’s intent to provide different coverage to goods in transit. The Court observed, “Travelers clearly knew how to, and in fact at times did, distinguish the coverage provided for property in transit from the coverage it otherwise provided, which runs counter to a meaning of the phrases ‘in transit’ and ‘in the custody of a carrier for hire’ as synonymous.”

As a fallback, the Court held that the phrase “in the custody of a carrier for hire” is, at best for Travelers, ambiguous, and thus must be interpreted against the insurer, since it drafted the policy. That principle gains added force, the Court noted, when as here, ambiguity is found in a policy exclusion.

The Court then turned to the question of whether property stolen was, at the time of the theft, in the custody of a carrier for hire. The state of the evidence before the Court was that only one of two companies operated by the thief, James Ceseretti, was licensed as a carrier for hire, and it was unclear which of the two companies, if any, was involved in the actual theft. Fortunately for the policyholder, however, Travelers conceded that both of Ceseretti’s companies were mere instrumentalities and alter egos of him. The Court held Travelers to its admission, thereby eliminating any factual issue on this point that would have precluded summary judgment.

With regard to damages, the insurer criticized the policyholder’s method of evaluating the claim in several respects, but Travelers did not fulfill its obligation on summary judgment to do more than raise theoretical questions about the accuracy of record keeping to resist an adverse ruling. In short, it did not offer its own version of the amount of the loss. Furthermore, its arguments about the accuracy of the policyholder’s records ran counter to its own accountant’s report, which indicated substantial agreement between the records the policyholder relied upon.