Insured Must Produce Physical Evidence of Loss
Insurance policies invariably contain a condition that requires the insured to produce a sworn statement in proof of loss that establishes a first party loss due to a peril insured against and not specifically excluded. People insured, who have not read, let alone understood the policy, believe that all they have to do is make a claim and the insurer must pay.
In First Class Tire Shredders, Inc. v. Employers…, Slip Copy, United States District Court, E.D. Michigan, Southern Division 2016 WL 7242143 (12/15/2016) the USDC in Michigan disabused an insured of that thought. In an insurance coverage dispute both parties moved for summary judgment. The plaintiff argues that the property insurance policy (insuring “contractors’ equipment” against theft, among other things) issued to it by the defendant covered a one-off, custom-built car crusher that disappeared from a storage location, and the defendant’s refusal to pay the loss breaches the insurance contract. The defendant argues that the policy’s “missing property” exclusion absolves it from having to pay for the loss.
First Class Tire Shredders, Inc. operates a facility in Flint, Michigan. The plaintiff’s main business is collecting and shredding used tires. The owner of First Class Tire Shredders, Harry Powell, started the company more than 20 years ago. In 2008, Powell constructed a mobile car crusher of his own design that was built onto a 50-foot semi-truck trailer. The crusher took about a year to build, and it originally was built by Powell for use by First Class Homes. When it was finished, the crusher measured approximately 50 feet long and stood 17 feet tall.
Defendant Employers Mutual Casualty Company (EMC) issued a business insurance policy to First Class Tire Shredders, effective from July 3, 2011 through July 3, 2012, which insured against, among other things, “direct physical loss” of “contractors’ equipment,” including certain items listed on a schedule attached to the policy. The crusher was listed on a schedule of covered items as “Mobile Car Crusher,” with a scheduled value of $100,000. The policy states that it covers “scheduled equipment” that is subject to a “direct physical loss caused by a covered peril,” including “contractors’ equipment,” unless the “property is excluded or subject to limitations.” The policy also includes a “missing property” exclusion, which states: “’We’ do not pay for missing property where the only proof of loss is unexplained or mysterious disappearance of covered property, or shortage of property discovered on taking inventory, or any other instance where there is no physical evidence to show what happened to the covered property.”
At some point, the crusher was moved from the First Class commercial property to a storage yard at Junk Iron & Metal, which is a salvage business operated by Powell’s friend, Donald Sampson. The crusher was stored there for several years.
On June 1, 2012, Powell sent one of his employees, Rex Moore, to retrieve the crusher from the Junk Iron facility. However, when Moore arrived, he could not find the crusher in the area where it had been kept (apparently in a space beside Sampson’s residence on the lot). Moore noted that a new gravel parking lot had been constructed in the area where the crusher was stored. He searched the salvage yard and two adjacent storage facilities also operated by Sampson, but could not find the crusher anywhere.
On June 1, 2012, Powell submitted a claim to EMC for the missing crusher, claiming a loss for the full scheduled value of $100,000. EMC responded and asked for certain documents evidencing the ownership interest in the crusher, such as a proof of title or registration for the trailer, any tax returns disclosing ownership of the crusher as a business asset, and any other invoices or documents related to its acquisition or ownership. EMC also asked Powell to submit a signed statement in proof of loss in support of his claim. Powell then submitted a number of documents, which EMC determined were not satisfactory to show that the First Class Tire Shredders, Inc. entity owned or had spent any funds to build or acquire the crusher, or that the insurable value of the crusher, if any, was as much as Powell claimed. EMC also asserts that Powell never has produced any “physical evidence” to show what happened to the crusher, and that the loss therefore is excluded under the “missing property” provision.
The plaintiff’s claim is for breach of contract under Michigan law. The allocation of the burdens of proof in a case involving the breach of an insurance contract is well settled under Michigan law. The insured bears the burden of establishing coverage under the policy and the insurer’s breach.
The parties do not dispute that a valid contract of insurance was in force when the plaintiff submitted its claim, that the policy at least nominally covered the crusher, and that — if the exclusion and misrepresentation defenses did not apply — the loss of the crusher due to theft would be a covered peril under the policy.
The term “physical evidence” is not defined in the policy, and the cases do not elaborate on the term. But the common dictionary understanding is that it is the species of evidence that “itself plays a direct part in the incident in question,” as in “real evidence.” Where the language of the writing is not ambiguous the construction is a question of law for the court on a consideration of the entire instrument.
Because there is no physical evidence showing what happened to the car crusher, the unambiguous insurance policy language allows defendant EMC to refuse to pay for its “unexplained or mysterious disappearance.” Because the “missing property” exclusion is triggered by the absence in the record of physical evidence of what happened to the car crusher, the defendant is entitled to summary judgment on the plaintiff’s breach of contract claim.
The undisputed facts in the record establish that the defendant has carried its burden of showing that the “missing property” exclusion applies to absolve the defendant from paying for the loss claimed by the plaintiff in its complaint.
For a machine 50 feet long and 17 feet tall mounted on a 50 foot long trainer to be removed from a storage lot would require a powerful tractor and, if stolen, would require a great deal of time and the ability to remove it from a locked and fenced storage facility. No such evidence was presented. The machine was there for years and then was not. There was no physical evidence that it was stolen or otherwise damaged or destroyed. The insured failed to prove its loss.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
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