Friday, November 21, 2008

How to read an insurance policy: the known loss doctrine, part 2

I am making time to post again at the inspiration of Michael Aylward, a partner at Morrison Mahoney specializing in insurance coverage issues. I met Michael years ago when we represented codefendants in a rather silly copyright violation case. Since then I have relied on his excellent articles on allocation issues; been riveted (no, I'm not kidding) by his talks at seminars on insurance coverage; and imposed upon him for advice both legal and practical which he has always graciously given.

In my last post I discussed the known loss doctrine. One question that frequently comes up with respect to that doctrine is whether there is coverage when the insured knew of the facts that created tort liability before the policy period, but did not subjectively know that such facts could actually lead to liability.

The United States Court of Appeals for the First Circuit explored this issue under Massachusetts law in United States Liab. Ins. Co. v. Selman, 70 F.3d 684 (1995). In that case the insured was a landlord who was informed prior to the policy period that his apartment had lead paint in it and his tenant's child had lead paint poisoning. The court held that the lead paint injury was not a known loss because discovery had shown that the insured had not made a subjective connection between the lead paint in his building and the underlying plaintiff's future medical risks.

In my next post I'll discuss how the known loss doctrine should affect an insured's decision about reporting to its insurer a potential claim.