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Court finds inventory-loss exclusion is not a basis for summary judgment A corporation that included 105 hospitals and 20 surgical centers among its subsidiaries discovered it was missing somewhere between $8 million and $12 million worth of linens, including surgical gowns, bed sheets and pillow slips. The loss was discovered in 1998, when the corporation conducted a physical inventory of hospital linens upon changing vendors to oversee the laundering and maintenance of linen stocks. The corporation concluded that its loss was attributable to the previous vendor's inventory mismanagement and other acts of misfeasance and malfeasance. That vendor's contract with the corporation ran from Jan. 22, 1996, to May 1, 1998.

The corporation sought recovery for its losses from a number of insurers from which it had obtained commercial property insurance. These policies had special (“all-risk”) causes of loss forms. After all of the carriers declined to pay the alleged losses, the corporation sued them.

The insurers generally denied that a loss or losses had occurred within the meaning of their policies. One defense they raised was the exclusion in their policies for losses that can be demonstrated only by taking inventory or by other means that produce no physical evidence of what happened to the property. On the basis of this exclusion, the trial court issued summary judgment in favor of the insurers. The corporation appealed.

The insurers cited a number of other grounds for summary judgment, which the trial court overruled. One was an exclusion for “any unexplained loss, mysterious disappearance.” They said the corporation was unable to explain how or when the linens came to be lost. Therefore, the losses were “unexplained,” and constituted a “mysterious disappearance.”

The insurers also cited an exclusion for losses arising from fraudulent schemes by those to whom property voluntarily has been entrusted. They cited the fact that in other lawsuits, the corporation had asserted that the vendor had converted the linens as part of a fraudulent “rag out” scheme, whereby the vendor was permitted to take possession and title to the items and sell them for salvage value.

Another defense raised by the insurers was that the policies excluded losses caused by normal wear and tear. Linens and gowns, they said, are rapidly depreciating commodities. They wear out and are pilfered. Thus, the insurers asserted, the entire “linen loss claim” is nothing more than normal wear and tear from (the corporation's) business operations.

The insurers also argued that the corporation had sustained multiple occurrences of loss, and that each was subject to a $250,000 deductible. The corporation's individual subsidiaries had assigned their separate losses to the corporation, the insurers maintained; the corporation itself had no independent claim and could not be allowed to aggregate these assigned claims to defeat application of the proper deductible. To the extent that the law allows aggregation of the losses, the aggregation must be based on at least the number of assignor facilities, the insurers said. Application of the deductible in this manner precludes any recovery, the carriers argued, because no individual occurrence or single facility's total loss exceeded the deductible.

After exhaustive referral to many cases on these defenses, the appeals court said, “The record before us leads to several inescapable and interdependent legal conclusions. (1) The evidence in the record offered by the non-moving Plaintiff reflects more than a 'scintilla' of evidence of loss within the meaning of the policies, independent of the September 1998 inventory. (2) Whether the 'inventory exclusion' clause can bar recovery by the Plaintiff as a matter of fact must await trial on the merits. (3) The 'inventory exclusion' clauses of the policies are not applicable as a matter of law at summary judgment stage in order to bar Plaintiff from proceeding further. (4) Whether the 'inventory exclusion' clause will apply as a matter of law upon motion for a directed verdict at the conclusion of trial on the merits must await such trial. (5) Summary judgment granted by the trial court on the only issue that is before this Court on appeal, to wit, the applicability of the 'inventory exclusion' clause as a matter of law must be reversed and the case remanded for further proceedings.”

The court held that “the heart and soul of this controversy concerns an 'all-risk' policy of insurance and not a specified-risk policy.” As the trial court observed:

“The effect of an all-risk policy is to broaden coverage. A policy of insurance insuring against all-risks creates a special type of insurance 'extending to risks not usually contemplated, and recovery under the policy will generally be allowed, at least for all losses of a fortuitous nature, in the absence of fraud or other intentional misconduct of the insured unless the policies contain a specific provision expressly excluding the loss from coverage.' . . . It is not necessary for the plaintiff to show how the property came to be lost or the methods or means by which the property came to be lost. It is sufficient if the plaintiff shows the property is lost and covered by the physical loss provision of the policy of insurance.

“The insurance against 'all-risks' does not convert the policy into a warranty [Mellon v. Federal Ins. Co., 14 F.2d 997, 1002 (S.D.N.Y. 1926)]. Nonetheless, since the trial court in its final judgment overruled the motions for summary judgment of the Appellee/Defendants as to all grounds except the 'inventory exclusion' clause, it follows that upon reversal by this Court of the grant of summary judgment under the 'inventory exclusion' clause, the case will be before the trial court on all issues drawn by the pleadings. Since overruling a motion for summary judgment does not necessarily preclude granting a directed verdict at the conclusion of trial on the merits…such a possibility as to the application of the 'inventory exclusion' clause remains viable upon remand. Defendants' affirmative defenses including their affirmative defenses of 'loss or shortage disclosed on taking inventory,' or 'unexplained loss or mysterious disappearance,' or 'losses caused by normal wear and tear,' together with the…defenses relying on the $250,000 deductible in the policy remain viable on remand.

“The judgment of the trial court is reversed and the case is remanded for further proceedings under the issues drawn by the pleadings.”

HCA, Inc. vs. American Protection Insurance Co., No. M2003-02065-COA-R3-CV (Tenn.App. 01/24/2005) 2005.TN.0000093 (www.versuslaw.com).

Readers can get in touch with Don Renau via e-mail at drenau@ thepoint.com.