In our March 24 post, we summarized the decision of the U.S. District Court for the Middle District of Alabama in W.L. Petrey Wholesale Co., Inc. v. Great American Insurance Company. In that decision, the Court applied the Great American policy’s Inventory Shortages exclusion in holding that no coverage was available to the insured, notwithstanding that the insured (“Petrey”) had been indemnified in respect of a (superficially) similar claim two years before.

The Eleventh Circuit Court of Appeals recently affirmed the District Court’s decision. The Eleventh Circuit held that, while evidence of an employee’s exclusive access to insured property may support an inference of employee involvement in a loss which is independently demonstrated by other evidence, evidence of exclusive access, coupled only with an inventory discrepancy, will not take a claim outside the Inventory Shortages exclusion.

The Facts

Petrey was a wholesaler of 5-Hour Energy drinks and employed salespeople to deliver the product along prescribed delivery routes in trucks provided by Petrey. Petrey also leased storage units to individual salespeople. The salespeople ordered the product based on customer demand, delivered it, and were supposed to account for the deliveries by entering the relevant data in Petrey’s computer system. Petrey would conduct a physical inventory of each salesperson’s truck and storage facility at least twice a year.

Petrey employed Justin Bree as a salesperson from 2007 until 2013, when Bree was dismissed because his primary customer requested that he no longer service its stores. After Bree’s dismissal, Petrey took possession of Bree’s delivery truck and its contents; his computer equipment; and the storage unit where Bree kept Petrey’s inventory.

A month after Bree’s termination, Petrey discovered that the inventory in the storage unit was short by 82,510 bottles. Petrey then audited Bree’s route inventory and took a physical count of the storage unit, confirming the discrepancy. Petrey also compared Bree’s orders for the products with his sales. This comparison revealed a pattern of Bree’s ordering more products than his sales would have required.

The Inventory Shortages Exclusion

Petrey submitted a claim to Great American alleging that Bree had stolen the product. Great American denied the claim on the basis of the policy’s Inventory Shortages exclusion, which provided that:

We will not pay for loss as specified below: …

 Loss, or that part of any loss, the proof of which as to its existence or amount is dependent upon:

 a.) an inventory computation; or

b.) a profit and loss computation.

The District Court held that the Inventory Shortages exclusion applied to exclude the claim in its entirety. Petrey could point to no independent evidence linking Bree to the discrepancy. The District Court rejected Petrey’s contention that “the proof of the existence of the loss is the missing items themselves”, noting that there was no basis for this assertion other than the inventory calculations. Consequently, there was no basis to conclude that there had been a loss due to employee dishonesty or, for that matter, that there had been any loss at all.

On appeal to the Eleventh Circuit, Petrey advanced two primary arguments. First, Petrey contended that its physical inventory count provided independent evidence of employee theft by demonstrating that Bree ordered the products, received them from Petrey, did not deliver them to his customers, and did not have them on hand in his storage locker. The Court rejected Petrey’s contention, observing that “this argument is circular, as Petrey has supported these assertions only with order and sales records – which boil down to inventory comparison computations.”

Second, Petrey argued that it provided independent evidence of an employee dishonesty loss by showing that only Petrey employees had access to Bree’s inventory (the “exclusive access” argument). The Court also rejected this argument, relying on the Second Circuit’s 1973 decision in Dunlop Tire & Rubber Corp.:

We agree with the Second Circuit that “circumstantial evidence that, if a loss in fact was sustained, [the insured’s] employees were the perpetrators” is not independent evidence of the existence of a loss. … Petrey’s assertion that only its employees could have stolen the 5-Hour Energy bottles “presupposes the factual existence of a loss” and “merely tends to foreclose the possibility of theft by persons other than employees,” rather than prove that employees stole anything from the company.

As such, Petrey was unable to identify any independent evidence linking Bree to the inventory discrepancy.


The Eleventh Circuit’s decision in W.L. Petrey Wholesale reaffirms the commercial crime policy’s requirement that there must be independent corroborating evidence of both a loss in fact, and employee dishonesty causing that loss, in order for an insured to rely on its inventory records or computations in support of a claim for indemnity. The Court reiterated an important distinction with respect to the “exclusive access” argument sometimes advanced by insureds in inventory loss claims: while “exclusive access” may provide circumstantial evidence supporting an inference of employee involvement, it does not, without more, demonstrate that a loss has occurred. Consequently, evidence of exclusive access, coupled only with a paper inventory shortage, should not take a claim outside of the inventory exclusion.

W.L. Petrey Wholesale Co., Inc. v. Great American Insurance Company, 2015 WL 4646599 (11th Cir.)