Ace Wire & Cable Co., Inc. v. Aetna Cas. & Sur. Co.

• Decision Date: 01 December 1983
• Citation: 60 N.Y.2d 390,469 N.Y.S.2d 655,457 N.E.2d 761
• Court: New York Court of Appeals Court of Appeals
• Parties: , 457 N.E.2d 761, 45 A.L.R.4th 1037 ACE WIRE & CABLE CO., INC., et al., Respondents, v. AETNA CASUALTY & SURETY COMPANY, Appellant.

Page 655

469 N.Y.S.2d 655

60 N.Y.2d 390, 457 N.E.2d 761, 45

A.L.R.4th 1037

ACE WIRE & CABLE CO., INC., et al., Respondents, v. AETNA CASUALTY & SURETY COMPANY, Appellant.

Court of Appeals of New York.

Dec. 1, 1983.

Michael A. Maillet and Jerome Murray, New York City, for appellant.

Leonard M. Simon and Jeffrey M. Schwartz, New York City, for respondents.

OPINION OF THE COURT

MEYER, Judge.

The comparison of inventory records kept on a unit basis with a physical count of items on hand is not an "inventory computation" within the meaning of the exclusion in section 2(b) of a comprehensive dishonesty, disappearance and destruction policy of insurance. Moreover, because section 4 of the policy requires only evidence which "reasonably proves" employee dishonesty, the insurer is not entitled to summary judgment in an action on the policy if the insured presents some independent evidence from which employee dishonesty can be reasonably inferred, even though that evidence is less than would be required to make out a prima facie case were the preponderance of evidence standard applicable. There should, therefore, be an affirmance.

I

Plaintiff sues on the comprehensive dishonesty policy issued to it by defendant to recover the value of 116 reels of wire and cable determined to be missing when its June, 1979 physical inventory was taken. On plaintiff's motion for summary judgment and defendant's cross motion for like relief, the papers present evidentiary proof from which could be found the facts which follow.

Plaintiff manufactures and sells wire and cable products. It maintains a sales office in Woodside, New York, and, through a wholly owned subsidiary, a warehouse on Staten Island where wire and cable not needed in day-to-day sales activity is stored. The warehouse is used exclusively for storage of plaintiff's property and is under the control of a manager, under whose supervision warehouse employees remove wire or cable from the warehouse for delivery either to the Woodside office or to a customer of plaintiff. The warehouse is protected by an alarm system installed and monitored by Honeywell, Inc.

Plaintiff's secretary, Louis Deutsch, maintains the stock records of all wire and cable stored in the warehouse and has done so for the past 30 years. Upon receipt of wire or cable, entries are made on stock record cards showing the total received, the manufacturer or supplier and the date of delivery; 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. A physical stock inspection of the warehouse is conducted by Mr. Deutsch in June of each year. On the physical inspection made by Mr. Deutsch on June 30, 1979, he found that 116 reels of wire and cable which had been in the warehouse at the time of the June 30, 1978 inspection were missing. He had personally reviewed each reel in the warehouse in June, 1978 and verified that the reels shown on his stock record were then present.

No reel is removed from the warehouse without Mr. Deutsch's authority and when a reel is removed it is deleted from the stock record card. During the period between June 30, 1978 and June 30, 1979, none of the missing reels had been sold nor was removal of any of them authorized by Deutsch or any other officer of plaintiff, nor was there any break-in or burglary of the warehouse during that time.

The missing reels were all acquired by plaintiff prior to 1976. The majority of them were at least four feet in diameter and weighed over 5,000 pounds each and could be moved only with a high-lo machine by a person experienced in doing so. Many were stored by stacking one on top of another. All of the missing reels were either items for which there was little demand or of which substantial quantities were maintained. Selection of reels in those two categories for removal required knowledge as to which items were slow moving and which were stored in quantity and of the warehouse location of each, knowledge which was limited to employees of the warehouse. On an afternoon in late December, 1978, the warehouse manager quit his job without explanation and without notice.

Defendant's policy, by insuring agreement I, insures plaintiff and its warehouse subsidiary against "any fraudulent or dishonest act or acts committed by any of the Employees acting alone or in collusion with others." By section 2(b) of the policy conditions, it excludes from that coverage "loss, or * * * that part of any loss, as the case may be, the proof of which, either as to its factual existence or as to its amount, is dependent upon an inventory computation or a profit and loss computation", but section 4 of the conditions provides that "If a loss is alleged to have been caused by the fraud or dishonesty of any one or more of the Employees and the insured shall be unable to designate the specific Employee or Employees causing such loss, the Insured shall nevertheless have the benefit of Insuring Agreement I, subject to the provisions of Section 2(b) of this Policy, provided that the evidence submitted reasonably proves that the loss was in fact due to the fraud or dishonesty of one or more of the said Employees".

Special Term concluded that stock records comparison and inventory computation were indistinguishable and that the circumstantial proof presented was insufficient, apart from the inventory computation, to establish that the loss was due to employee dishonesty and, therefore, denied plaintiff's motion and granted defendant's cross motion, dismissing the complaint. The Appellate Division, 89 A.D.2d 131, 454 N.Y.S.2d 897, finding the loss sufficiently established by such personal observation and knowledge as was detailed by Deutsch rather than by inventory computation, modified by denying defendant's cross motion and, as so modified, affirmed. On defendant's appeal we conclude that the claim is not barred by the inventory computation provision of section 2(b) and that plaintiff has sufficiently met the "reasonably proves" standard of section 4 to withstand a summary judgment motion.

II

The standard exclusion contained in section 2(b) has been through a number of formulations. Originally the standard policy required conclusive proof that an inventory shortage was caused by employee fraud or dishonesty. ¹ After that provision was interpreted to require only proof by a preponderance of the evidence, ² the standard policy was revised to omit reference to proof from the insuring agreement but to state as section 2 an exclusion in essentially the same language as section 2(b) set forth above, with an added "provided" clause. ³ The "conclusively establishes" language of former section 3 was dropped and the remainder of former section 3, modified to make clear that it was "subject to the provisions of Section 2(b) of this Policy" and to use the words "reasonably proves" in place of "reasonably establishes," became the present section 4.

The courts split over whether section 2 in that form was ambiguous ⁴ and over the meaning of "inventory computation". The "provided" clause of section 2 having played a part in some of the ambiguity holdings, that clause was dropped from section 2 sometime prior to 1976, ⁵ in an apparent effort to remove the ambiguity. In our view the policy draftsmen still have not found Ariadne's thread.

The problem is in the words "inventory computation" as used in section 2(b). Defendant would read that phrase to cover any loss the proof of which requires reference to inventory records. Such a reading, however, ignores the fact that the word "computation" carries more than one connotation. Thus, it may mean "the result of computation: amount computed" (Webster's Third New International Dictionary, p. 468). It may, however, also mean "the act or action of computing: calculation, reckoning" or "a way or system of reckoning" (id. ) or "The act of computing, numbering, reckoning, or estimating" (Black's Law Dictionary [5th ed], p. 261). Thus, it involves concepts of both mathematical exactness and of probability or estimation.

To construe it in the first sense would be to make it all but impossible for an insured to recover under the policy for, except in situations in which an employee is caught in the act with the stolen goods in his possession, it will always be necessary in order to prove the amount of a loss to ascertain the number of units involved through an inventory count. To construe it in that fashion is also inconsistent with section 6 of the policy, which requires the insured to "keep records of all insured property in such manner that the Company can accurately determine therefrom the amount of loss" (see Tri-Motors Sales v. Travelers Ind. Co., 19 Wis.2d 99, 106, 119 N.W.2d 327).

The tests to be applied in construing an insurance policy are common speech (Lewis v. Ocean Acc. & Guar. Corp., 224 N.Y. 18, 21, 120 N.E. 56) and the reasonable expectation and purpose of the ordinary businessman (Bird v. St. Paul Fire & Mar. Ins. Co., 224 N.Y. 47, 51, 120 N.E. 86). The ambiguities in an insurance policy are, moreover, to be construed against the insurer, particularly when found in an exclusionary clause (see Breed v. Insurance Co., 46 N.Y.2d 351, 353, 413 N.Y.S.2d 352, 385 N.E.2d 1280). We conclude, therefore, that section 2(b) should be read to exclude only losses the proof of which, as to factual existence or amount, turns upon probabilities deduced or estimations made from comparison of posttheft-discovery dollar, as distinct from unit, inventory amounts with a prediscovery dollar amount, or of a posttheft unit number with a pretheft number calculated from a pretheft dollar inventory amount, but not to exclude a loss which can be established by showing that a particular item or unit of goods observed and identified as present at one physical inventory count is not present at the next.

To conclude otherwise would produce absurd...