Physical Evidence Requirement
The insured sought a declaratory judgment that its insurer owed it $141,640 as reimbursement for lost inventory consisting of jewelry. This case is Elegant Slumming, Inc. v. NGM Insurance Company, 2011 WL 6000764 (Sup. Ct. , DE). Note that this is an unpublished opinion.
Elegant Slumming is a jewelry and home accessories store owned and operated by Livingston. On June 24, 2010, two packages of jewelry were delivered to the store and received by Killibrew, an employee. After working all day and then cleaning up the store for closing, Killibrew accidentally threw out the packages with the garbage. The jewelry was never recovered.
Livingston sought reimbursement for the lost jewelry from his insurer. NGM declined coverage and the insured filed a declaratory judgment action.
The insurer argued that the policy does not pay for “loss or damage to property that is missing, but there is no physical evidence to show what happened to it, such as shortage disclosed on taking inventory”; NGM said that this exclusion is clear and unambiguous. The insured argued that the exclusion was ambiguous because it can reasonably mean either evidence in material form or evidence perceived by the senses, such as verbal descriptions or observations.
The court said that the exclusion is usually referred to as the physical evidence requirement or the inventory limitation, and that courts in other jurisdictions have reached differing conclusions about the physical evidence requirement. In this instance, the evidence showed that Killibrew recalled that he threw out the unopened packages that contained the jewelry. To the court, this was evidence about what happened to the packages, unlike an inventory case where no suggestion or explanation exists. So, viewed in conjunction with Livingston's testimony, it was clear to the court that Killibrew maintained a generally consistent explanation over time for the loss and this created, at a minimum, an inference that Killibrew did indeed throw out the packages.
The court ruled in favor of the insured.
Editor's Note: Property policies may exclude losses of covered property that “mysteriously disappears”, with no suggestion or explanation of what happened to the property. This court reviewed opinions from other jurisdictions and found that exclusions requiring physical evidence were usually upheld when the property disappeared without any explanation at all as to what happened. On the other hand, if some evidence existed as to what happened, a question of fact existed for a jury to decide.
In this case, the Superior Court of Delaware, Sussex County , decided that there was an explanation for the loss of the jewelry. The employee offered a reasonable explanation for the lost property and this satisfied the requirement in the policy that the insured provide physical evidence to show what happened to the missing property.