Alabama Puts The Mystery Back Into All-Risk Coverage
“There is, one knows not what sweet mystery about this sea …”
Insuring property against loss creates an unavoidable moral hazard: policyholders often have an incentive to cause or allow their property to disappear. Early efforts to limit insurers’ exposure to that risk—such as requiring the insured to prove the cause of a loss by “direct and affirmative evidence”—proved unsustainable. Eventually, the problem gave rise to express exclusions for losses caused by “mysterious disappearance”—but even these have had only mixed success in keeping suspect claims from reaching a jury. Earlier this year, in St. Paul Fire & Marine Ins. Co. v. Britt, No. 1140423 (Ala. Jan. 29, 2016), the Supreme Court of Alabama refused to join the ranks of the disenchanted, and it gave some important ammunition to insurers. In a case of first impression, the court affirmed an award of summary judgment, finding that some things in life really are mysterious—as a matter of law.
The Case of the Mysterious Disappearance Exclusion
The concept of “mysterious disappearance” originated in theft policies. In the early Twentieth Century, policyholders making claims under theft policies bore the burden of proving that the insured property had been “feloniously taken,” but insurers established differing rules for how policyholders could satisfy that burden. Under many policies, the burden could be met only by “direct and affirmative evidence.” A showing that the property had vanished—that is, purely circumstantial evidence of theft—was not sufficient. E.g., Schindler v. U.S. Fid. & Guar. Co., 109 N.Y. Supp. 723 (App. Term 1908).
In 1943, responding to customer dissatisfaction, insurers began inserting language into those policies, to the effect that any “mysterious disappearance” of property would be “presumed to be due to theft.” This language was not intended to expand the scope of coverage, but, rather, only to lessen the evidentiary burden of policyholders whose property had been stolen. See Davis v. St. Paul Mercury & Indem. Co., 40 S.E.2d 609 (N.Car. 1946).
The practical effects of the new language included considerable litigation over how strong the “presumption” of theft should be considered, and what kind of evidence was necessary to rebut it. Thus, in 1956, insurers abandoned the presumption approach and, for the first time, made “mysterious disappearance” a distinct category of insured peril. That is, insurers promised to pay for “loss by theft … or mysterious disappearance,” or they included “mysterious disappearance” within the definition of “theft.” Courts enforced those promises, even where there was no evidence suggesting that the lost property had been stolen. E.g., Englehart v. Assurance Co. of America, 139 So. 2d 108 (La. App. 1962) (insured’s ring disappeared from atop a dresser in his daughter’s home).
The mysterious disappearance concept also migrated from theft polices to marine policies, which insure against the perils of the sea. Courts routinely recognize that, absent a specific exclusion, “all risk” marine insurance policies cover the mysterious disappearance or fortuitous loss of an insured vessel. For this reason, standard inland marine “all-risk” insurance policies often try to limit moral hazard, by incorporating mysterious disappearance exclusions.
Exclusions, however, must be narrowly construed, and some courts have not been generous. In Davis v. St. Paul Mercury, supra, which interpreted the original mysterious disappearance clause, the court provided a definition of “mysterious disappearance” that would be widely accepted. It found that a “mysterious disappearance” is
any disappearance or loss under unknown, puzzling, or baffling circumstances, which are difficult to understand.
Some cases applying mysterious disappearance exclusions follow this broad approach. They hold that coverage is excluded “in situations where no single theory can sufficiently explain the claimed loss.” Trademark Plastics Corp. v. Hartford Fire Ins. Co., No. 13-5039 (D.N.J. March 31, 2015). See also C.T.S.C. Boston, Inc. v. Continental Ins. Co, 25 Fed. Appx. 320 (6th Cir. 2001).
But other courts are much more severe. In Nussbaum Diamonds, LLC v. Hanover Ins. Co., 838 N.Y.S.2d 509 (1st Dep’t 2009), a New York appellate court held that a mysterious disappearance exclusion could apply only if
there was no plausible explanation for the loss of [the insured’s property].
On that basis, the court affirmed a ruling that denied the insurer’s motion for summary judgment. See also Lovas v. St. Paul Ins. Co., 240 N.W.2d 53 (N.D. 1976) (where theft was one plausible explanation for the disappearance of 79 hogs, even if the manner of the theft could not be explained, verdict that the loss was outside the scope of the exclusion would not be overturned,).
The Mystery of the Vanishing Debtor
In 2004, Michael Britt bought a Beneteau sailboat and insured it with St. Paul Fire & Marine Insurance Co. The policy provided coverage up to $85,000 for accidental direct physical loss or damage to the boat. Mr. Britt used the boat as his principal residence for the next seven years.
In September 2011, Mr. Britt telephoned his father to say he had landed a job as a commercial trucker. He planned to sail his boat from West Palm Beach, Florida, to Jacksonville, and store it there while he drove to Oklahoma City for his training.
Mr. Britt set sail from West Palm Beach on September 11, 2011. Four days later, members of the U.S. Coast Guard boarded the boat, off the coast of Cape Canaveral, for a “cold hit” inspection. They found it to be seaworthy. On the same day, Mr. Britt called his father again, to say that calm weather would delay his arrival in Jacksonville. He promised to call when he arrived in the capital city, but he never did. Neither he nor the boat was ever seen again.
The Coast Guard investigated the disappearance, but it discovered little more than that Mr. Britt last used his cell phone on September 17, 2011—two days after his last call to his father. Mr. Britt placed that call to call a debt-collection agency that had a lien on the sailboat. The Coast Guard determined that, when he made that call, Mr. Britt was traveling in a southerly direction. That course would have taken the boat away from Jacksonville—but into the Bermuda Triangle—where they practically invented mysterious disappearance.
Gone – But Still Insured
In February 2012, Michael Britt’s father, Willis Britt, was appointed conservator of his son’s estate, and, in that capacity, filed a claim with St. Paul for the lost sailboat. St. Paul denied the claim, asserting that the loss fell within the following exclusion:
We will not provide … Coverage for any loss or damage caused by or resulting from … mysterious disappearance ….
The elder Mr. Britt brought an action in state court in Alabama, seeking coverage and damages for bad faith. The trial court awarded summary judgment to the insured, in the amount of $74,950, and St. Paul appealed to the Supreme Court of Alabama.
In response to the appeal, the plaintiff conservator argued that the loss of the sailboat was precisely the kind of loss that “all risk” policies are designed to cover. He contended that his burden was merely to show that the loss was fortuitous—that is, that it had been caused by a chance event, outside the insured’s control, and was not an ordinary and likely consequence of using a sailboat—and he argued that the circumstantial evidence in this case satisfied that burden.
He further argued that St. Paul was impermissibly attempting to shift to the insured the burden of proving that the loss had not been a mysterious disappearance. On the contrary, he argued, it was the insurer who—like the insurer in Nussbaum Diamonds, supra—bore the burden of showing that there was no plausible explanation for the loss of the boat.
Noting that Alabama courts had not previously construed an insurance policy containing a mysterious disappearance clause, the Supreme Court determined that the exclusion in this case was not ambiguous, and it declined to construe the language in favor of the insured. It also rejected an argument that the exclusion should be construed more narrowly in an “all risk” policy than in a theft policy. Since it found that the phrase “mysterious disappearance” is not ambiguous, the court could “see no reason why the common, everyday meaning of the phrase … should vary depending on” the scope of the policy’s coverage.
The court appeared to find that the “common, everyday meaning” of the phrase is the one that Mr. Britt proposed—i.e., an event for which there is not even one plausible explanation:
If … there is evidence to support a logical inference as to what happened to the insured property, even though that evidence is inconclusive, a person of ordinary intelligence would not find the circumstances so ‘unknown, puzzling[,] or baffling” as to determine that the disappearance … was inexplicable.
Still, the court found that the insurer in this case had “carried the burden of showing that the circumstances surrounding the loss of the sailboat brought the loss within … the mysterious-disappearance exclusion”—in other words, that there was no “logical inference” explaining the boat’s disappearance that the available evidence would support. It observed that there was no shortage of speculation as to what happened to the sailboat, but it found that the evidence did not point to any of the available theories.
In other words, it was not enough—as it had been in Nussbaum Diamonds—for the insured to show that the circumstantial evidence rendered “plausible” at least one explanation for the loss. In Britt, the court held that there must be some affirmative evidence in support of at least one such explanation. Although it did not say so explicitly, the court appeared to have concluded that circumstantial evidence that plausibly supports a possible explanation is insufficient to take a loss out of the exclusion:
“There is no shortage of speculation as to what happened to the sailboat. Michael’s mother … stated … that the disappearance … could be attributed to a rogue Coast Guard employee who alerted drug traffickers to the presence of a single-passenger sailboat in the Atlantic; to modern pirates; or to the jet stream carrying the sailboat to Iceland or Ireland. … [The elder Mr.] Britt stated that he believed the sailboat was on the bottom of the Atlantic Ocean … . [A] close friend of Michael’s … believed Michael ‘just wanted to disappear is and likely living somewhere aboard [the sailboat] ad purposely ‘got lost.’
[A]ny of the speculations put forth by Michael’s family and friends are just that – speculations. There is no evidence in the record to support any theory as to what happened to the sailboat.
Summing up these considerations, the court concluded:
If the undisputed facts in this case do not constitute a mysterious disappearance, then this Court is at a loss as to what facts would.
Reading between the lines, it is possible to conclude that the justices actually believed they had solved the mystery of the sailboat’s disappearance—and that they were disinclined to reward the boat’s owner for fleeing his creditors. It is at least arguable, after all, that the fact of Michael Britt’s having changed his course at about the same time he spoke with the boat’s lienholder is more than merely circumstantial evidence. Be that as it may, the court’s ruling sets a precedent, showing that mysterious disappearance exclusions can have real impact.
In Science as a Vocation, Max Weber wrote about the “disenchantment” of the world, declaring:
[I]ncreasing intellectualization and rationalization … means that principally there are no mysterious incalculable forces that come into play, but rather that one can, in principle, master all things by calculation.
Alabama has struck a blow against this trend.