July 27, 2010
We represented a major clothing manufacturer and separately, an apparel retailer, each of whom lost millions of dollars to ongoing thefts of merchandise by warehouse employees. In both cases, we encouraged prompt notice to the clients’ commercial crime insurance companies and cooperation with law enforcement authorities in the investigation and prosecution of the dishonest employees. We also worked with the clients’ accounting team to quantify the loss.The proofs of loss for insurance purposes necessarily relied upon the clients’ inventory records, since the employees left intentionally unreliable paper trails in an effort to cover up their theft.In each claim,the insurance company denied coverage based on the so-called “inventory loss exclusion,” contending they had no obligation to pay for theft losses proven through inventory records.We litigated and prevailed in persuading the carriers to drop that defense, based on independent proof of the employees’ dishonesty obtained through confessions, convictions and other corroborating evidence. So long as there is independent proof of dishonesty, policyholders may use their own inventory records to establish the value of stolen property.The inventory loss exclusion has a much narrower application than insurers will readily admit, and policyholders should press for the coverage they bought.