Does your warehouse contract have a “dishonest acts” exclusion? If so, beware. That may be the takeaway from a recent court decision. (Warehouse Wines & Spirits, Inc. v. Travelers Property Casualty Company of America. S.D.N.Y. No. 13-Civ. 5712. March 31.)
Warehouse Wines operated a wine and spirits store in Manhattan. Steven Goldstein, president and owner, employed a strategy of making large wholesale purchases to obtain discount offers and using public warehouses to store excess inventory.
In 2008, Goldstein entered into a business relationship with James Ceseretti to warehouse merchandise at Ceseretti’s new facility in Hauppauge, N.Y.
Ceseretti ran two companies—Bestway Logistics Transportation and Bestway Warehouse & Transportation—for which he handled all operations, paid the rents, employees, vendors and taxes. The two Bestway companies shared a common bank account and maintained no separate records of their individual revenues or expenses, but invoiced for the storage and delivery separately.
Ceseretti testified that the warehouse company, not the transportation company, operated the warehouse, and this became a key issue in the litigation.
Ceseretti eventually began to come up short with his deliveries to Warehouse Wines: In February 2011, he was unable to deliver Captain Morgan rum. Shortages of Dom Perignon and Belvedere vodka followed.
On Jan. 3, 2012, Goldstein inspected the warehouse and discovered a loss of about 4,000 cases that he calculated to be worth about $1.2 million. He learned from Mitch Herman, Bestway’s other major wine and liquor customer, that he was missing 4,701 cases out of 9,056 for a loss of about $700,000.
On May 23, 2013, Ceseretti was arrested and charged with the theft of property belonging to Warehouse Wines and Herman from his warehouse. Ceseretti, Bestway Logistics Transportation, and Bestway Warehouse & Transportation were each indicted in connection with the theft.
Ceseretti pled guilty on Jan. 9, 2015, in the Supreme Court of the State of New York County of Suffolk to grand larceny in the second degree to one count in the indictment and in exchange indictments against the two Bestway companies through which Ceseretti conducted business with Warehouse Wines were dismissed.
Prior to the theft, Warehouse Wines and Travelers had agreed to a first-party property insurance policy, which insured Warehouse Wines against certain risks of direct physical loss to its property.
The “Property Floater Coverage” section of the policy provided coverage only while the goods were in storage at the Bestway warehouse, subject to a limit of $4 million and a $25,000 deductible.
The “Transportation Coverage” section of the policy provided coverage while the goods were in transit by a motor carrier, subject to a $60,000 limit and a $1,000 deductible.
Both sections of the policy contained “dishonest acts” exclusions which read: “We will not pay for a ‘loss’ caused by or resulting from any of the following.… Dishonest acts by you, anyone else with an interest in the property, your or their employees or authorized representatives or anyone entrusted with the property, whether or not acting alone or in collusion with other persons or occurring during the hours of employment. This exclusion does not apply to property in the custody of a carrier for hire.”
On April 24, 2012, Warehouse Wines filed a sworn statement in proof of loss, stating a loss of 4,095 cases of wine and liquor with a claimed value of $1,155,480.
The court said there was no dispute the policy contained an exclusion covering loss resulting from the dishonest act of someone entrusted with the insured property. And given Ceseretti’s guilty plea, there was no dispute that he stole the property of Warehouse Wines which he was entrusted to store in his warehouse.
This dispute instead centered on whether the “carrier for hire” exception to the “dishonest acts” exclusion in the insurance contract between Warehouse Wines and Travelers applied.
The judge writing this decision found it did not and granted summary judgment to Travelers and denied summary judgment Warehouse Wines.
Since companies transporting goods for a fee are considered carriers, Warehouse Wines argued that Bestway Logistics Transportation—Ceseretti’s company that transported goods in its delivery trucks—also operated the warehouse. It asserted that the goods stolen from the warehouse were therefore in the custody of a carrier.
The judge said once a plaintiff has established that it sustained a loss to covered property, the burden shifts to the insurance company to prove the loss is subject to an exclusion. Courts in New York have held that exclusions for the dishonest acts of persons to whom the insured entrusts its property are enforceable.
Travelers presented “a slew of evidence pointing to the conclusion that Ceseretti and the company which operated the warehouse were responsible for the theft,” so to avoid summary judgment in Travelers’ favor, Warehouse Wines had to demonstrate that its loss was covered by the insurance policy because its property was “in the custody of a carrier for hire.”
Warehouse Wines tried to connect the trucking and warehousing by arguing “because the operator of the storage facility was responsible for the custody of Warehouse Wines’ inventory from the time of its storage until its delivery to the plaintiff, it was operating as a carrier for hire.” It further argued that, in the very least, there was a triable issue of fact as to the true operator of the warehouse, because Travelers had written in a response to a “Request for Admission” that it was “unclear which of James Ceseretti’s companies operated the warehouse.”
But the judge said Warehouse Wines merely relied on the use of confusingly similar names by the Bestway companies in its attempt to create a triable issue where none existed.
“Warehouses are not carriers. James Ceseretti stole the goods while they were in storage at the warehouse—not while they were in any stage of transport,” the judge wrote.
This column was published in the June 2015 issue of American Shipper.
