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May 5, 2000


The opinion of the court was delivered by: Hurd, District Judge.



Plaintiff Better Environment, Inc. ("plaintiff") commenced the instant action on June 1, 1998, alleging that defendant Hartford Insurance Company ("defendant") improperly denied coverage for plaintiffs alleged theft loss and interruption of business operations. Plaintiffs complaint sets forth causes of action sounding in breach of contractual obligations, violation of 42 U.S.C. § 1981, tort, and punitive damages. Plaintiff moves for partial summary judgment on its first cause of action for breach of contractual obligations. Defendant opposes and cross-moves for summary judgment dismissing plaintiffs action in its entirety pursuant to Rule 56 of the Federal Rules of Civil Procedure. Oral argument was heard on December 17, 1999, in Utica, New York. Decision was reserved.


Plaintiff is a corporation whose purpose was the manufacture of a product invented by its two principals, Charlene Marsh ("Marsh") and Viola Surgick ("Surgick"), and trademarked as "FONECAP." The FONECAP is a material designed for placement over the mouthpiece or earpiece of a telephone to prevent the transmission of germs without affecting the sounds being transmitted or received.*fn1

Plaintiffs production of FONECAPs was a new business venture, and plaintiff entered into a lease agreement for premises located at 3301 West Arthington, in Chicago, Illinois (the "premises") for the period October 1, 1995, through September 30, 1996, for the purpose of manufacturing FONECAPs for sale. At the same time, plaintiff arranged for property insurance coverage from defendant, initially through its agent Amsure Associates of Albany, New York, and later through Alexander & Alexander, of Kansas City, Missouri. The policy upon which this lawsuit is based was arranged through Alexander & Alexander and became effective January 28, 1996, (the "policy"). According to the complaint, a representative from Alexander & Alexander visited the premises prior to issuing the policy.

The policy covers the "direct loss of or damage to covered property at the premises described in the Declarations caused by or resulting from a Covered Cause of Loss." Consistent with its terms, the policy covers loss of goods due to theft (excluding theft by employees). It also contains a provision stating:

We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your "operations" during, the "period of restoration." The suspensions must be caused by direct physical loss of or damage to property, including personal property in the open (or in a vehicle) within 100 feet, at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.

The policy excludes coverage for:

Property that is missing, where the only evidence of the loss or damage is a shortage disclosed on taking inventory, or other instances where there is no physical evidence to show what happened to the property.

A loss falling within the above exclusion would not constitute a "Covered Cause of Loss" under the policy.

Plaintiff alleges in the complaint that on February 5, 1996, upon arriving at the premises, Marsh and Surgick "immediately noticed that several boxes of finished products were missing and that the alarm was on." (Compl. ¶ 14.) Plaintiff also submits an affidavit from Surgick stating that "[w]hen we entered [the building] on the morning of February 5th, it was immediately apparent that some of the bags [of FONECAPs] were missing." Plaintiff alleges that following this visual observation, its principals contacted the Chicago police and Alexander & Alexander, reporting that they had been victims of a robbery. According to plaintiff, an inventory calculation was then performed in order to determine "the magnitude of what had been stolen." (Compl. ¶ 15.) Based on a comparison with a previous inventory count, plaintiff calculated that 88,000 FONECAPs were missing.*fn2 In further support of its position, plaintiff offers a copy of a police report containing the language, "victim related to R/Os that upon arrival to the work place, victim observed that some of the merchandise that was produced was stolen."

Defendant, however, points to sworn testimony from plaintiffs principals which indicates that no visual observation of missing inventory preceded the inventory count. When defendant's agent questioned Marsh under oath on June 14, 1996, in the presence of an attorney, as to how the loss was discovered on February 5, 1996, Marsh responded that she had previously asked an employee to do a count of the FONECAPs in stock on that day and he gave her a number "much lower than what [Surgick] had told me we had and when we had counted before ourselves." (Spetz Aff. Ex. G at 135.) Similarly, when Surgick was asked how she found out there was a shortage on February 5, 1996, she replied, "When [Marsh] told me the count was off." Id. at 247.

According to Marsh's testimony, the employee had been assigned the task of counting the night before, February 4, 1996, in order to prepare the FONECAPs for packaging and sterilization. Id. at 141-142, 151. Further, it was only after Marsh and Surgick determined the count was short, and calculated the number of FONECAPs missing, that they called the police and reported a theft. Id. at 158. When Marsh was asked what she informed the police regarding how she discovered that the FONECAPs were missing, she replied as follows:

Same thing I told you. I asked them to count and then the count was short, and then I asked [Surgick], and then [Surgick] went and checked it and, I guess, deducted the amount from the count she had.

Id. at 165. Marsh also stated in her deposition that while the alarm was on that day, it had been buzzing "since the last time we had been there," and "was always going." (Plaintiff claims that it had been having trouble with petty theft and vandalism ever since setting up its operations). Id. at 137, 172. Marsh was asked, "When you first walked into your space, did you notice anything different about it?" Her answer was "No." Id. at 141. In fact, Marsh expressly states that the only reason she knew that bags of FONECAPs were missing was "from the [inventory] count." Id. at 167. Plaintiff apparently does not deny that it has no physical evidence to show what happened to the allegedly missing stock.

Defendant sent a Senior Property General Adjuster, Gregory DeBoer ("DeBoer"), to the premises shortly after the theft was reported. According to the complaint, DeBoer asked plaintiffs principals, Marsh and Surgick, who was in charge but when they introduced themselves, DeBoer asked, "No, I mean who is really in charge?" Id. ¶ 46. DeBoer was thereafter "openly disdainful and refused to treat [Marsh and Surgick] with any respect." Id. ¶ 47. Plaintiff alleges that in "words or substance," DeBoer suggested that the theft was staged based on the race or gender of plaintiffs ...

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