Security Nat. Fire Ins. Co. v. Schott Drug Co.

The principal question for decision in this case is, Did appellee breach the ironsafe warranty clause contained in the policies of insurance issued by the respective appellants, and which is quoted in the next paragraph, and thus void its policies? "Record Warranty Clause (Applied to Stock only) "The following covenant is hereby made a part of this policy and a warranty on the part of the assured: "Section 1. The Assured will take a complete itemized inventory of stock on hand at least once in each calendar year, and within twelve months of the last preceding inventory, if such has been taken. "Unless such inventory has been taken within twelve calendar months prior to the date of this Policy, and together with a set of books showing a complete record of business transacted since the taking of such inventory, is on hand at the date of this policy, one shall be taken within thirty days after the date of this Policy, or in each and either case, this entire Policy shall be null and void. "Sec. 2. The assured will make and prepare, in the regular course of business, from and after the date of this Policy, a set of *Page 980 books, which shall clearly and plainly present a complete record of business transacted including all purchases, sales and shipments, both for cash and on credit, or this entire Policy shall be null and void. "The term `Complete record of business transacted' as used above, is meant to include in said set of books, a complete record of all the property which shall go into the premises and be added to the stock, and of all property taken from the stock, whether by the Assured or by others, even though not technically purchases or technically sales. "If the business of the Assured under this Policy be that of manufacturing, this complete record of business transacted must, in addition, show all the raw material received and all products manufactured therefrom, including the cost of manufacture, and must show waste in process of manufacture, and must show all the raw material and manufactured property which is taken from the building described. "Sec. 3. The Assured will keep and preserve all inventories of stock taken during the current year and also all those taken during the preceding calendar year, which are on hand when this Policy is issued, and will keep and preserve all books which are then on hand, showing a record of business transacted during the current calendar year and the preceding calendar year. "The assured will also keep and preserve all inventories taken after the issuance of this Policy, and all books made and prepared after the issuance hereof, showing a record of business transacted. "The books and inventories, and each of the same, as called for above, shall be by the Assured kept securely locked in a fireproof safe at night, and at all times when the building mentioned in the Policy is not actually open for business; or, failing in this, the Assured shall keep such books and inventories, and each of them, in some secure place not exposed to a fire which would destroy said building; and, in event of a loss or damage insured against to the personal property mentioned herein, said books and inventories, and each of same, must be by the Assured delivered to this Company for examinations; or this entire Policy shall be null and void, and no suit or action shall be maintained hereon for any such loss. "It is understood and agreed that this clause and the requirements thereof is one of the inducing causes to the acceptance of the risk herein assumed and the issuance of this Policy, and that the terms and requirements hereof are material to the risk, and to this insurance, and to any loss or damage happening to the property described in this Policy. "It is further agreed that the receipt of such books and inventories, or the request for them, or either of them, and the examination of the same, shall not be an admission of any liability under this policy, nor a waiver of any provision or condition of this Policy, or of any defense to same." To the action of appellee Schott Drug Company brought on the fire insurance policies the appellants each answered, in effect, that appellee failed to keep its books so as to comply with the warranty clause just quoted, and so forfeited any right to recover thereunder. The evidence disclosed that, when a shipment of goods arrived, a record was made by appellant in a journal from the original invoice, showing only the name of the shipper, the date of the invoice, and the total amount of the invoice. The various items of the invoices making up the total were not recorded. Typical records were: Sept. 1, 1933, McKesson-Southern Drug Co., .......... $187.30 Sept. 2, 1933, Mountain Valley Water Co., ............. 55.00 The invoices were retained, but not filed in the safe, and were destroyed by the fire which occurred February 23, 1934. Whenever goods were returned to a shipper, entries were made upon the journal showing their value, and for which appellee took credit, but no memos of the returned items were preserved. From this record of purchases, the appellants complain there was no way for them to ascertain what went into the stock of goods, whether the items were covered by the policies, or fair prices were paid for them, or what their real values were — in short, anything about such additions to appellee's stock. The record appellee kept of its credit sales was on charge tickets which, for the current month, were kept in the safe. But at the end of each month the total for that month was transferred to the journal, and the charge tickets taken from the safe and filed away. They, too, were destroyed by the fire. And the only record appellee had of its customers' accounts, after the fire, was *Page 981 a record showing the total purchases by a given customer for a given month, but which did not show the items of which such total consisted — appellee, indeed, had had such a record, but it was not kept in the safe and was destroyed by the fire. The record appellee kept of its cash sales was not complained of. Appellee's bookkeeper testified that with the use of the inventory taken in January, 1934, and the books in evidence which were not destroyed by the fire, he could and had determined the value of the stock on hand at the time of the fire. This he did by taking the inventory total, adding thereto the amounts of the purchases thereafter made, as shown by the journal entries, and then deducting the cash sales shown by the cash book, and the credit sales shown by the journal entries, less 33 1/3 per cent. estimated profits, as: Total inventory, January, 1934 ...................... $32,744.28 Merchandise purchases for January ..................... 2,571.12 Soda-fountain supplies .................................. 130.00 Merchandise for February .............................. 2,387.49 Soda-fountain supplies for February ...................... 98.42 Cash sales Merchandise for January .................... 2,793.21 " " Soda-Fountain ...................................... 181.37 " " Merchandise for February ......................... 2,222.05 " " Soda " " ........................................... 167.79 Credit Sales for January .............................. 1,093.94 " " " February ......................................... 991.20 The bookkeeper further testified, from nearly fifty years' bookkeeping experience for various mercantile establishments, that it was customary to check invoices received against the shipments of merchandise, and to enter on the journal the date of the invoice, the name of the firm, and the total amount, and it was not customary for the various items on the invoices to be entered on the books; that is, appellee but followed the usual custom in such respect. A. F. De Loach, a public accountant, testified in effect that it was customary for retail merchants to keep the sort of record invoices of purchased merchandise, such as were here kept by appellee; and he further testified in substance that the method of recording credit sales by retail merchants generally was that followed by appellee; and so of the record of cash sales kept by appellee. And so likewise testified A. L. Joyce, accountant. And none of this evidence was disputed. The appellants make no claim of fraud on appellee's part. As stated in Merchants' Manufacturers' Lloyd's Ins. Exch. v. Southern Trading Co. (Tex.Com.App.) 229 S.W. 312, 315: "The purpose of the bookkeeping provision is to provide a means by the books themselves for ascertaining the amount of the loss. The insured binds himself to provide such means, and a clear violation of this provision of the contract carries with it its own consequences, which the courts have no power to alter." Of the same provision, the court in Home Insurance Co. v. Flewellen Produce Co. (Tex.Com.App.) 247 S.W. 833, 834, said: "The authorities are in accord that the warranties in insurance policies, such as are under inquiry here, must be substantially complied with, but in determining what is required a fair and reasonable construction is to be adopted, so as to effectuate the contract of indemnity rather than defeat it. What is a substantial compliance withthese requirements must be determined largely by the facts of eachparticular case, and this has resulted in numerous decisions, differingin results, but not necessarily in conflict with each other. * * * "The purpose of all these warranties, and particularly the one requiring the keeping of books, is accomplished when it is shown that the insured has kept such a record of his business as will enable a man of ordinary intelligence to ascertain from the same with reasonable certainty the amount and the value of the goods destroyed. The obligation imposed upon the insured is to furnish the insurance company, in case of loss, with such — `book account of his invoices, purchases, and sales as will show the amount of goods on hand at the time of the fire, and *Page 982 thus furnish data from which to make a reasonably correct estimate of the loss or damage.'" (Italics ours.) In Fidelity Union Fire Ins. Co. v. Barnes (Tex.Civ.App.) 293 S.W. 279,282, the court, after quoting from Liverpool L. G. Ins. Co. v. Kearney, 180 U.S. 132, 21 S.Ct. 326, 45 L.Ed. 460, said: "Applying this reasoning to the instant case, the parties to the contracts of insurance must have had in mind the system of bookkeeping usually employed by merchants. If that system was regarded by the ordinary, prudent merchant as sufficient to enable him at all times to estimate with fair accuracy the value of the stock of goods carried by him, it would not be reasonable to suppose that further information was desired by the insurance company. It was concerned chiefly with providing a fair and accurate way of arriving at the loss, in case of fire." And this court, speaking through our Chief Justice, in Scottish Union National Ins. Co. v. Andrews Matthews, 40 Tex. Civ. App. 184,89 S.W. 419, 422, said: "The terms of the iron-safe clause, before set out, do not provide that all of the books used by the insured in the conduct of their business should be preserved but only required them to keep and preserve a set of books which shall clearly and plainly present a complete record of the business transacted, including all purchases, sales, and shipments, both for cash and on credit, from the date of the inventories provided for in subsequent clauses of the policy." Under the foregoing authorities, failure of the insured to itemize the goods added to its stock is no breach of the iron-safe warranty clause. Also see Standard Fire Ins. Co. v. Willock (Tex.Civ.App.) 29 S.W. 218,219, where insured's record of purchases was shown by entries in merchandise account similar to those of appellee, and there was no itemization of goods purchased, and the books were held to be in substantial compliance with the warranty. In Ætna Ins. Co. v. Lipsitz,130 Ga. 170, 60 S.E. 531, 14 Ann.Cas. 1070, and Western Assur. Co. v. Redding (C.C.A.) 68 F. 708, it was held that the warranty did not require the articles purchased to be shown on the books. Since the courts have long held the warranty in question does not require an itemization of the goods purchased and sold, it seems reasonable to suppose that, had the insurance companies desired this itemization, they would have expressly required it in the contracts contained in the policies they themselves prepare. As already indicated by the evidence in this case, retail merchants generally keep their books as appellee kept its books. Were the courts of the state now to change their holding and construe the warranty to require a complete record of all items shown on invoices as received and such as are returned, and a complete itemization of all credit sales, the result would be to nullify the insurance for which they nevertheless continue to pay in the full confidence they are securing protection against fire, though the only records kept of their business is like the record kept by appellee, and which is found sufficient by the ordinary prudent merchant to enable him at all times to estimate with fair accuracy the value of the goods he has stocked. The fact that the records kept of the daily credit sales were burned up, and the only record preserved of these in the safe was a monthly summary, does not prevent such monthly summary from being a substantial compliance with the warranty. Such, according to the undisputed evidence, is the customary mode to keep a record of such sales; and no language of the policy specifies that the books kept shall be original entries, nor that the vouchers, statements, or memoranda supporting such entries shall be kept. Reasons for not keeping the sales tickets in the safe after their totals had been transferred to the books are apparent. To construe the warranty in the policies contrary to the custom prevailing as to keeping such records, and in the absence of language that expressly required this additionally to what satisfied custom and the needs of appellee's business, and thus forfeit the insurance to which appellee would be entitled except for doubtful construction, is a length to which no Texas court, so far as appellants' diligence has pointed out to us, has yet gone. Appellants have cited Commonwealth Underwriters' Agency v. Lawrence Grocery Co., 244 S.W. 200, decided by this court, as authority to the contrary. But the facts in that case were entirely different from the facts here. There was in that case a failure to make any substantial compliance with the requirements as to taking inventory. Also the family withdrew from the stock of merchandise of the value of from $50 to $90 per month, *Page 983 and no record of such withdrawals was kept. There was also a pronounced breakdown in the record kept of the cash and of the credit sales. There was never any itemized record of such sales, but merely memoranda showing lump sums for the day's sales, without details of any nature, and these were not regularly or accurately kept, for the lists containing the amounts were sometimes lost and never entered on the books at all. Members of insured's family freely took small sums of cash from the cash drawer without keeping any account of them whatever; cash collected on account of credit sales was often indiscriminately mingled with the sales for cash, and lump sum records of sales for credit were kept sometimes. Many days when cash sales were made, no entry of them of any kind was made. In other words, there was no experienced bookkeeper in charge of the books in that case, and they were not kept in conformity with custom followed by merchants in such instances; and we have no doubt of the correctness of the decision of that case. No reliance could be placed in books so kept in the one case; while in the instant case the books were kept by an experienced, expert bookkeeper conformable to usual practice. And this carries us back to the portion of Home Ins. Co. v. Flewellen Produce Co., supra, which we have placed in italics for emphasis. Now appellee took an item by item inventory in January, 1934, covering 218 pages. It showed, as heretofore stated, a total stock then on hand of the value of $32,744.28. The taking of this inventory of January, 1934, however, did not fulfill the requirement of the warranty in question. The insured was required to take an inventory of stock on hand at least once in each calendar year, and within twelve calendar months of the Name of Company Policy Number Amount Date Security National Fire Insurance Company ..................... 64988 $1000.00 October 5, 1933. Security National Fire Insurance Company ..................... 64955 1000.00 June 1, 1933. North British Mercantile Insurance Company, Ltd ............... 134924 1000.00 October 15, 1933. New Hampshire Ins. Co ................. 2947535 1000.00 October 9, 1933. Westchester Fire Ins. Co ................. 2187 500.00 June 1, 1933. American Equitable Assurance Company ............................. F485978 1000.00 October 18, 1933. Albany Insurance Company .................. 826 1500.00 June 1, 1933. North British Mercantile Insurance Company, Ltd. .............. 134901 2000.00 July 21, 1933. Now the stock of merchandise of appellee Schott Drug Company had formerly been owned by the J. J. Schott Drug Company, which stock was employed in conducting a like drug business at the same location for many years. The J. J. Schott Drug Company filed a petition in bankruptcy and ceased to do business on May 15, 1933; and Farb, who subsequently became president of the Schott Drug Company, when it was organized, was appointed receiver on that day, and acted as such until May 27, 1933, when the entire stock of merchandise and fixtures were sold under proper orders to one Seaman, who, in making the purchase, acted for appellee First National Bank of Galveston, from whom appellee Schott Drug Company obtained legal title on June 10, 1933. During the time the business was conducted by the receiver, it sold only for cash at retail in the ordinary course, there being no purchases to replenish stock, or sales on credit. With this stock and fixtures, appellee Schott Drug Company continued the retail drug business upon the same premises, and continued to use the same books and records, and obtained the following policies of insurance, at the dates indicated, which were more than 30 days prior to the taking of the January, 1934, inventory: *Page 984 The last inventory taken of the stock of merchandise was taken by the J. J. Schott Drug Company in February, 1933. It was fully itemized. The books of the J. J. Schott Drug Company from January, 1933, to the time it went into bankruptcy, covering all purchases and sales by it, and of the sales made by the receiver, and of the purchases and sales made by the Schott Drug Company to February 23, 1934, the date of the fire, are in evidence. And in this opinion such books have been treated, as they were treated by the different owners of the business, viz., as a unit. While the Schott Drug Company did not take an inventory within 30 days of the issuance of the policies last herein above tabulated, and did not have on hand an inventory of its stock taken by itself within 12 months preceding the date of said policies, it did have the inventory taken by its predecessor within 12 months preceding the dates of such policies and a set of books containing a complete and continuous record of all additions to, and all withdrawals from, such stock of merchandise after the taking of such inventory. So far as the bookkeeping was concerned before and after the Schott Drug Company took over the business, there was no difference. The inventory taken by J. J. Schott Drug Company in February, 1933, fitted into and bore the same relation to the retail drug business conducted at the same location in February, 1933, as did that taken in 1934. From the standpoint of the business, and of the books in which the records reflecting the business was concerned, the business was a unit, unbroken and uninterrupted by the change in ownership. In Dorroh-Kelly Mercantile Co. v. Orient Ins. Co., 104 Tex. 199,135 S.W. 1165, 1166, the court said: "The contract, having been prepared by the Insurance Company to express the terms of its own undertaking, must be construed most favorably to the assured, and a substantial compliance with such terms will satisfy the obligation. * * * "The object of having the inventory made was not to ascertain the gross value of the property insured, but to ascertain the different articles which went to make up the stock in order that the insurance company might test the correctness of the claim in two respects: (1) Whether the articles of which the stock was composed all belonged to the classes of property covered by the policy; and (2) whether the valuation attached to the different items and which went to make up the total sum expressed was reasonable. The failure to produce an inventory or that which is equivalent in these particulars could not be held to be a substantial compliance with the requirements of the policy. Roberts, Willis Taylor Co. v. Insurance Co., 19 Tex. Civ. App. 338, 48 S.W. 559. If the assured had furnished anything from which the information contracted for could be with reasonable certainty ascertained, then the question of substantial compliance would be before the court; but, when there is no compliance whatever, there can be no question of a substantial compliance with such requirements." In Westchester Fire Ins. Co. v. McMinn (Tex.Civ.App.) 198 S.W. 638,639, the policies were issued on December 2, 1914, January 5, 1915, January 8, 1915. The court said: "It is clear that it appeared from the testimony recited that thestipulation in the policy invoked by plaintiff in error was not literallycomplied with, in that an inventory of the stock of goods not having been taken within 12 months before the policy was issued, one was not taken within 30 days after it was issued. But whether it was a sufficient basis for a finding that the stipulation had been substantially complied with is another question. We think it was. The inventory or invoice made when defendant in error purchased the stock of goods in November, 1913, was preserved by him and tendered to plaintiff in error. * * * If the testimony of defendant in error that not exceeding $25 worth of stock covered by that inventory was sold before January 1, 1914, was true, then certainly the inventory showed, substantially, all the articles in the stock on January 1, 1914. If it did, then we see no reason why the production of that inventory was not such a compliance with the stipulation as to relieve defendant in error of the forfeiture claimed because he failed to take an inventory of his stock within 30 days after the policy was issued. By the terms of the stipulation, if he had taken an inventory within the 12 months preceding the issuance of the policy, he was not bound to take one within 30 days after it was issued. Having produced an inventory which furnished, substantially, all the information one taken within 12 months before the date of the issuance *Page 985 of the policy would have contained, we think the one furnished should be held sufficient compliance with his undertaking, notwithstanding it was not taken within the limit of the time specified." We do not consider there was any breach of the warranties in question, and, being of the opinion there was a substantial compliance with the warranty by appellee, we hold the judgment of the trial court should be affirmed, and it is so ordered. Affirmed. On Motion for Rehearing. The undisputed evidence in this case shows that all the books kept by the insured were locked in the safe at the time of the fire, and were preserved. The inventory, taken in January, 1934, was an item by item record of the stock on hand when taken, and their values; and the invoices and credit sale tickets for the current month had the effect of carrying the inventory down to the date of the fire. Such inventory, invoices, and tickets were in the safe, and not destroyed by fire. The majority of the court do not think that the failure of the insured to keep the invoices and credit sale tickets covering former months was a breach of the iron-safe clause of the warranty. The books of insured, together with the inventory of January, 1934, and the invoices and credit sales tickets, that covered all additions made to, and deductions made from, the stock of merchandise from the time of the taking of the inventory in January, 1934, satisfied the requirements of the warranty. The majority of the court think the motion for rehearing should be overruled, and it is so ordered. Overruled.