Businesses frequently find themselves in legal disputes with insurers about whether a loss is covered under the insurance policy.  Among the many recurring debates between insurer and insured is whether an insured “knew” about the loss prior to initiating insurance coverage.  The legal rule prohibiting insurance coverage of existing losses is the “known-loss doctrine” or “loss-in-progress doctrine,” and has been described by courts as the common-sense rule that, “one may not insure against loss of a building after the building has burned down.” Travelers Cas. & Sur. Co. v. Neth. Ins. Co., 312 Conn. 714, 748, 95 A.3d 1031, 1054 (2014).  While the prudence of this legal rule is easy to understand, its application is complicated.  As a result, many businesses and individuals may be leaving valuable insurance dollars on the table by not understanding how courts determine whether an insured “knew” of a loss.

The leading California case on this point is Montrose Chem. Corp. v. Admiral Ins. Co. (1995) 10 Cal. 4th 645.  In Montrose, the California Supreme Court found that an insurer had a duty to provide insurance coverage to a chemical company relating to polluted land.  The Court’s holding was somewhat surprising considering the following facts:  1) the chemical company had received a letter from the EPA prior to initiating its insurance coverage that the EPA considered it potentially liable to clean the polluted land; 2) the chemical company did not notify the insurer about the EPA letter prior to initiating coverage; and 3) at the time the insurance policy began, the chemical company thought it would likely be found liable to restore the land.  

Even though the facts appeared to show that the chemical company “knew” of the liability prior to initiating coverage, the Montrose Court nevertheless interpreted the known-loss doctrine narrowly resulting in coverage under the insurance policy.  The Court reasoned that because some uncertainty about the imposition of liability at the time the insurance contract was executed, and there was no established legal obligation to pay, it could not be said that the insured “knew” about loss such that the exclusion would apply.  The “known” in “known-loss doctrine” reflects knowledge of a certain legal liability, not mere knowledge of the underlying facts that might lead to liability.

This is not to say the known-loss doctrine is never applied by California courts and coverage is unlimited.  At some point courts do find the insured had sufficient knowledge of a loss to exclude coverage.  As is often the case, the enforceability of these provisions boils down to solid legal experience and judgment.  In making this determination, the Montrose Court stated that the exclusion should be enforced at the point where the threat of loss “is so immediate that it may fairly be said that the loss was in progress and the insured knew of it at the time the policy was applied for or issued….”  Critically, Montrose found that the application of the known-loss doctrine is a question of fact.  The practical application of this rule is that an insurer can “seldom” rely upon the exclusion to deny a defense to its insured prior to a factual determination of what the insured knew and when.  Consequently, if your insurer has refused to defend your claim under the known-loss doctrine, you may be not be receiving the insurance coverage you paid for. 

ECG attorneys recently leveraged its experience and knowledge of these legal principles to obtain a favorable settlement on behalf of its client in a heavily contested and litigated matter, resulting in a significant recovery for the client prior to trial.  If you are unsure about whether your insurance policy covers a “known” loss, contact ECG and its award-winning insurance professionals today.  

Author: Michael S. Wilde, Enterprise Counsel Group, Associate