How to read an insurance policy: the known loss doctrine, part 1

The insuring agreement often incorporates the "known loss doctrine," generally with words to the effect that the policy covers "bodily injury or property damage that was not, prior to the policy period, known to have occurred by any insured."


The known loss doctrine is one of the most basic concepts of insurance coverage. Insurance is supposed to be a gamble: You pay $1.00 in premiums now as a gamble against the risk that without the insurance you would have to pay $10.00 in loss (or attorney's fees) in six months. You can play the odds by negotiating premiums against limits. If the premiums become too high vis a vis the chances of the insured event occurring (many people--but not me--say this is the case with disability insurance) or the maximum payout is too low (generally, dental insurance), you choose not to purchase the insurance.


The whole system falls apart if you purchase insurance for a loss you already know has occurred. In law school parlance, the insurance is no longer against a "fortuitous" event.


Litigation around the known loss doctrine predictably concerns what it means to be "known": who knew, what they knew, and when they knew it. The issue frequently comes up in environmental contamination litigation: An insured may argue that although there was some evidence of contamination at the time the policy began, the insured did not know the extent of the contamination. The Supreme Judicial Court of Massachusetts has stated in this context that the only requirement for the loss to be exempt from coverage is that "the insured has evidence of a probable loss when it purchases the policy." SCA Services, Inc. v. Transportation Ins. Co., 419 Mass. 528, 533 (1995).


Another common context for the known loss doctrine is construction defect litigation. Arguments frequently arise about punch lists demonstrating problems such as lack of caulking or other insufficiencies in the building envelope. Insurers argue that those punch lists show that the insured contractor was aware of probable water infiltration into the building, while the insureds argue that the punch list only demonstrated that the contractor had work to do before the job was finished.


In a future post I will discuss how the known loss doctrine applies where the insured knew of the occurrence but did not know that the occurrence could lead to liability.

Massachusetts Superior Court explores definition of "resident of your household"

Massachusetts Lawyers Weekly reports a new Superior Court case in which the court denied summary judgment to an insurer because of a factual dispute about whether the policyholder's brother was a household member. This post is based on the Lawyers Weekly summary as I have not been able to obtain a copy of the decision.

In Hingham Mut. Fire Ins. Co. v. Gee, a tree on the property of the policyholder, Michael Gee, fell on the policyholder's brother, Wan Xing. The policy excluded coverage for bodily injury to "if residents of your household, your relatives."


The insurer argued that Xing was a resident of Gee'shousehold, because the brothers and their families lived in the same apartment. The defendants argued that the brothers and their respective families maintained the apartment as two separate, financially independent households coexisting in a small space.


The court denied summary judgment, holding that there was a dispute of fact regarding Xing's financial dependence on his brother and the two families' day-to-day interactions with each other.

Getting business from insurers

Ryan Belka, an attorney at Cooke Clancy & Gruenthal LLP, emailed this question:

I am aware that insurance companies keep lists of lawyers who handle various matters and generally allocate work accordingly. My question is: as a firm or a lawyer, how do you make it on those lists? Is there a formal application process through the general counsel of the insurance company? Do insurance companies hire boards and panels in order to allocate the work? Do you apply directly to them? Can this information be found?

That's a great question and one that I would love an answer to myself, as I am expanding my own book of business with insurers.

So, for any insurance adjusters or supervisors: How do you find outside counsel? What is the best way for an attorney to get onto your list?

And for any insurance defense attorneys: What strategies have been effective for you in obtaining new business? What have you tried that has not worked?

A Texas view of occurrences

In an earlier post I noted that the Massachusetts Appeals Court has stated in unpublished opinions that a construction defect is not an occurrence vis a vis the contractor responsible for the defect. Mike Tracy at Rudolph Friedmann has brought to my attention a recent decision from the Supreme Court of Texas, which assumed that a construction defect is an occurrence without directly addressing that question. The case is also a good example of the timing issues with respect to occurrences, which I mentioned in my last post. Finally, for those of you keeping score, Texas, like Massachusetts, has declined to adopt a blanket approach to triggers of coverage.


In Don's Building Supply, Inc. v. Onebeacon Ins. Co. the Texas court answered questions certified from the Fifth Circuit Court of Appeals about when property damage "occurs" and, more specifically, whether an insurer's duty to defend is triggered where damage is alleged to have occurred during the policy period but was inherently undiscoverable until after the policy expired. The court stated with respect to the first question that the key occurrence date is "when the injury happens, not when someone happens upon it," and answered yes to the second question.


Don's Building Supply ("DBS") sold and distributed a synthetic stucco product called EIFS. The product was installed on various homes from 1993 to 1996, during which DBS had a CGL policy. From 2003 to 2005 homeowners filed suit against DBS, alleging that the EIFS was defective and not watertight. The homeowners alleged that moisture penetration began within six months to a year after the application of the EIFS.


DBS's insurer, OneBeacon, filed a declaratory judgment action. The Texas court held that under the policy definition, the property damage occurred when a home suffered wood rot or other physical damage; the date that the damage was or could have been discovered is irrelevant.


The court refused to adopt an overall approach to triggers of coverage, stating that the trigger determination should be driven by the contract language, which varies from one policy to another.

Some occurrence issues

In a previous post I discussed occurrence-based policies. Basic to those policies is what the word "occurrence" means. Although policy definitions of occurrence have some variation, a typical definition is "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."


In the vast majority of cases, whether or not something is an occurrence is straightforward. A car accident is an occurrence. A doctor accidentally amputating the patient's wrong leg is an occurrence. A power saw malfunctioning and injuring someone's hand is an occurrence. A fire is an occurrence. An assault by an insured person is not an occurrence; but an assault by an employee of an insured business may be an occurrence.


Not surprisingly, disputes over whether or not an event was an occurrence have to do with the intentions of the insured. If the insured expected or intended to cause an injury, there is no occurrence.


About a year ago, in the case of Terra Nova Ins. Co. v. Fray-Witzer, the Supreme Judicial Court of Massachusetts addressed the question of whether unsolicited faxes sent by an auction company, Metropolitan, were an occurrence. Metropolitan had purchased and faxed, through a contractor, unsolicited advertisements, including 360,000 such advertisements to Massachusetts fax machines. Unfortunately for Metropolitan, it is illegal under federal and Massachusetts law to send unsolicited faxes. When Metropolitan was sued in a class action lawsuit over the faxes, it sought insurance coverage from its commercial general liability insurers.


The Supreme Judicial Court of Massachusets decided that the sending of unsolicited faxes were not an occurrence. The class action plaintiffs (who would benefit from the insurance coverage) argued that although Metropolitan may have intended to transmit the advertisements, they did not intend to violate the law. The court disagreed with that argument. It stated that the injury to the class members (the consumption of paper and toner and unwanted use of the fax machines) was an inherently foreseeable result of Metropolitan's conduct.

In future posts I will discuss other issues raised by the definition of occurrence.