New York Law Review

Tag: Employee Dishonesty

  • Ace Wire & Cable Co., Inc. v. Aetna Cas. & Sur. Co., 60 N.Y.2d 390 (1983): Interpreting “Inventory Computation” Exclusions in Insurance Policies

    Ace Wire & Cable Co., Inc. v. Aetna Cas. & Sur. Co., 60 N.Y.2d 390 (1983)

    An “inventory computation” exclusion in a comprehensive dishonesty insurance policy does not bar recovery when the loss is proven by a physical count of individually identifiable units, as opposed to generalized estimates based on dollar values.

    Summary

    Ace Wire & Cable Co. sued Aetna to recover for missing inventory under a comprehensive dishonesty policy. The policy excluded losses dependent on “inventory computation.” Ace used unit-based inventory records to show reels of wire present in 1978 were missing in 1979. The court held that comparing unit-based inventory records with a physical count is not an “inventory computation” within the exclusion. The court also found that the insured presented sufficient independent evidence of employee dishonesty to overcome a summary judgment motion by the insurer. This case clarifies the scope of the “inventory computation” exclusion, protecting insureds who can demonstrate specific losses through physical counts.

    Facts

    Ace Wire & Cable maintained a warehouse on Staten Island managed by a warehouse manager. Louis Deutsch, Ace’s secretary, kept stock records, listing each reel of wire with its footage and, sometimes, a control number. Deutsch conducted annual physical stock inspections. In June 1979, Deutsch discovered 116 reels of wire missing that he had personally verified as present in June 1978. No reels were removed without Deutsch’s authorization. None of the missing reels were sold or authorized for removal between June 1978 and June 1979, and there was no evidence of a break-in. The missing reels were large, heavy, and required specialized equipment to move, and were either slow-moving items or items stored in large quantities. The warehouse manager abruptly quit in late December 1978.

    Procedural History

    Ace sued Aetna to recover the value of the missing reels. The Supreme Court, Special Term, denied Ace’s motion for summary judgment and granted Aetna’s cross-motion, dismissing the complaint. The Appellate Division modified, denying Aetna’s cross-motion and affirming as modified. Aetna appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the comparison of inventory records kept on a unit basis with a physical count of items on hand constitutes an “inventory computation” within the meaning of the insurance policy’s exclusion clause.

    2. What quantum of evidence is needed for a loss alleged to have been caused by employee fraud or dishonesty when the insured cannot designate the specific employee(s) causing such loss, to have the benefit of insuring agreement I, subject to the provisions of Section 2(b) of the Policy.

    Holding

    1. No, because the term “inventory computation” in the exclusion clause refers to generalized estimates, not a direct comparison of unit-based records with a physical count.

    2. The insured must present some independent evidence from which employee dishonesty can be reasonably inferred, but this evidence need not meet the standard required to make out a prima facie case were the preponderance of evidence standard applicable.

    Court’s Reasoning

    The court reasoned that the term “inventory computation” is ambiguous. Construing it to include any reference to inventory records would make it nearly impossible for an insured to recover, except when an employee is caught in the act. This interpretation conflicts with the policy’s requirement that the insured keep records allowing the insurer to accurately determine the amount of loss. Applying the principles of construing insurance policies according to common speech and the reasonable expectations of a businessperson, and construing ambiguities against the insurer, the court concluded that “inventory computation” excludes only losses proven through generalized estimates (e.g., calculated from sales records and average markup). It does not preclude proof via inventory records detailing the actual physical count of individually identifiable units. The court cited cases from other jurisdictions supporting this interpretation, noting, “Where the missing items are identified from such records (unit-type or perpetual inventory records), it has been held that there is no ‘inventory computation’ within the meaning of the inventory exclusion clause.” The court further reasoned that Section 4 of the insurance policy requires only that the evidence submitted “reasonably proves” that the loss was in fact due to the fraud or dishonesty of one or more of the Employees. This requires “more than ‘some independent evidence’ but less than a prima facie case as a condition to the use of inventory” records of the type above referred to. The Deutsch affidavits established that only plaintiff’s property was stored in the warehouse, that only plaintiff’s employees had access to the warehouse, that it was protected by a security service when plaintiff’s employees were not present, that during the period between the 1978 and 1979 inventories there had been no break-in or burglary, that nothing was permitted to be removed from the warehouse without Mr. Deutsch’s authorization and that a record is made of what is removed, that a total of 116 reels were missing, most of which were over four feet in diameter, weighed in excess of two tons and required a fork lift to move (and inferentially a truck to cart away), and that the missing reels were of two categories the absence of which would not be likely to be detected until a physical inventory was taken, knowledge available only to warehouse employees. From these facts, “it is a reasonable inference…that plaintiff’s loss was due to the dishonesty of one or more of its employees.”

  • Gitelson v. Du Pont, 17 N.Y.2d 46 (1966): Enforceability of Pension Board Decisions Regarding Dishonesty

    Gitelson v. Du Pont, 17 N.Y.2d 46 (1966)

    A pension board’s decision regarding an employee’s dismissal for dishonesty, as it relates to pension eligibility, is conclusive absent a showing of bad faith, fraud, or arbitrary action.

    Summary

    Gitelson, a former employee of Du Pont, sued to recover funds from the company’s retirement plan after being discharged. The retirement plan, administered by a board of Du Pont partners, stipulated that employees discharged for dishonesty forfeited their benefits. The board determined Gitelson was discharged for dishonesty due to his involvement in the manipulation of customer funds, leading to an indictment and prison sentence. The New York Court of Appeals reversed the lower courts, holding that the board’s decision was binding absent evidence of bad faith or arbitrary action, and the facts supported the board’s finding of dishonesty directly related to his discharge.

    Facts

    Gitelson, an office manager for Du Pont, requested a leave of absence claiming it was needed for a Securities and Exchange Commission (SEC) matter unrelated to the firm. Du Pont denied the leave and pressed Gitelson for details. Gitelson refused to explain initially, then failed to appear for a scheduled meeting with his attorney at the firm’s main office. Du Pont suspended him and subsequently terminated his employment. Later, Du Pont learned Gitelson had been indicted for larceny related to manipulating customer funds, which was the SEC matter. Gitelson pleaded guilty and was sentenced to prison. The retirement board then denied him his pension benefits, citing his discharge for dishonesty.

    Procedural History

    Gitelson sued Du Pont to recover his retirement funds. The trial court ruled in favor of Gitelson. The Appellate Division affirmed the trial court’s judgment. Du Pont appealed to the New York Court of Appeals.

    Issue(s)

    Whether the Retirement Board’s decision to deny pension benefits to Gitelson, based on his discharge for dishonesty, is binding and enforceable absent evidence of bad faith, fraud, or arbitrary action.

    Holding

    Yes, because the pension plan vested sole authority in the board to determine matters related to an employee’s right to receive retirement payments, and the board’s determination should be considered conclusive unless it is shown to be arbitrary, capricious, or made in bad faith.

    Court’s Reasoning

    The Court of Appeals emphasized that the pension plan’s terms granted the Retirement Board sole authority to determine all matters related to an employee’s right to retirement payments. The court stated that under the plan, an employee’s right to receive pension payments is lost when the Board determines that the employee was discharged for dishonesty. The court relied on precedent, including Menke v. Thompson, which held that the burden is on the claimant to prove that the board’s ruling was motivated by bad faith, fraud, or arbitrary action. The court found no evidence of such dereliction by the Board. The court distinguished the case from situations where dishonesty is discovered after discharge for unrelated reasons, noting that Gitelson’s dishonest acts directly led to the SEC investigation and his subsequent termination. The court explicitly addressed Gitelson’s argument that his dishonesty wasn’t directed at the company, clarifying that in the context of a brokerage firm, dishonesty involving a customer is included under the term. The Court quoted World Exch. Bank v. Commercial Cas. Ins. Co., where Judge Cardozo defined “dishonesty” in a similar context, stating, “The appeal is to the mores rather than to the statutes. Dishonesty, unlike embezzlement or larceny, is not a term of art…‘Our guide is the reasonable expectation and purpose of the ordinary business man when making an ordinary business contract.’” Because the lower courts did not demonstrate that the Board’s decision was arbitrary or capricious, a product of bad faith, or unsupported by the evidence, the Court of Appeals reversed their rulings and enforced the Board’s findings.