Exclusions Relating to Proof of Loss

Mysterious Disappearance Exclusion & Loss or Shortage Disclosed on Inventory

Exclusions

An exclusion is a provision of an insurance policy referring to hazards, perils, circumstances, or property not covered by the policy. Exclusions are usually contained in the coverage form or causes of loss form used to construct the insurance policy.[1]

Where an insurer asserts that coverage is precluded by an exclusion, the burden is upon the insurer to establish that the exclusion is applicable. [Caledonia Community Hosp. v. St. Paul Fire & Marine Ins. Co., 307 Minn. 352, 354, 239 N.W.2d 768, 770 (1976); Ministers Life v. St. Paul Fire and Marine Ins. Co., 483 N.W.2d 88 (Minn. App. 1992)

The Mysterious Disappearance Exclusion

The term “mysterious disappearance” first appeared in insurance policies in 1943. Johnson v. General Accident, Fire & Life Assur. Corp., 454 S.W. 2d 837, 838 (Texas California Civil Code. App. 1970). The term has been defined several ways, but all share the sense of an unexplained loss.

It has been held that:

‘mysterious disappearance’ means a disappearance which is ‘unexplainable, unaccountable, or which occurred in an unknown manner.’ Orenstein v. United Services Automobile Association, 32 App. Div. 2d 227, 301 N.Y.S. 2d 208 (1969); Levine v. Accident & Casualty Ins. Co., 203 Misc. 135, 112 N.Y.S. 2d 397 (1952).

In Alabama, after a sail boat disappeared from the seas off Cape Canaveral, Florida, without explanation the court concluded that the mysterious-disappearance exclusion is not ambiguous and the loss of the sail boat was mysterious. Concluding that the policy, when read as a whole, and because there is no genuine issue of material fact concerning the disappearance of the sailboat, the trial court should have entered a summary judgment in St. Paul’s favor. [St. Paul Fire & Marine Ins. Co. v. Britt, 203 So.3d 804 (Ala. 2016)]

In an action to recover damages for conversion, in which the defendants US Art Co., Inc., and U.S. Art International, LTD., commenced an action for a judgment declaring that Certain Underwriters at Lloyd’s, London (“Lloyd’s), had a duty to defend and indemnify them in the main action. The court refused the motion for summary judgment based on a “mysterious disappearance” exclusion. It also sought defense to the action by the owners of the art. The court found:

[U]nderwriters failed to establish as a matter of law that coverage should be barred based on the “mysterious disappearance” exclusion. The explanation for the loss proffered by the US Art employees, if believed by the trier of fact, could reasonably support an inference that the artwork was accidentally thrown away, which would take the loss out of the “mysterious disappearance” exclusion (Citations omitted.)

In the event that it is determined that the “mysterious disappearance” exclusion does not apply; Underwriters will only have the duty to indemnify US Art for its losses. Pursuant to the language of the policy, Underwriters had the option to defend, not the duty to defend, the main action (Citations omitted.)[2]

Although the Underwriters were unable to establish their defense based on the exclusion at summary judgment, they did establish that the policy issued by them did not require a defense but, rather allowed the insurer the option to defend which Lloyd’s properly refused to exercise.

Mysterious disappearance has been defined as:

loss under unknown, puzzling or baffling circumstances which arouse wonder, curiosity, or speculation, or circumstances which are difficult to understand or explain. A mysterious disappearance is a disappearance under circumstances which excite, and at the same time baffle, wonder or curiosity. Davis v. St. Paul Mercury & Indemnity Co., 227 N.C. 80, 40 S.E. 2d 609 (1946).[3]