From The Reference Handbook on the Comprehensive General Liability Policy, Chapter 4
- Learn about the basic concept of fortuity.
- Learn about the known loss doctrine and the loss in progress rule.
The Fundamental Concept of “Fortuity”
In the not-too-distant past, one could discuss the backbone of the commercial general liability (CGL) policy in terms of “fortuity.” Unfortunately, the meaning of “fortuitous” has been slipping away from its etymological moorings. Here, “fortuitous” means “occurring by chance,” not “fortunate” or “lucky.”1 Or, as more comprehensively defined in Black’s Law Dictionary, it means “[h]appening by chance or accident. Occurring unexpectedly, or without known cause. Accidental; undesigned; adventitious. Resulting from unavoidable physical causes.”2
The concept of fortuity has been described as “a fundamental principle of insurance law” and an implied exception in every liability policy: “the concept of fortuity that is relevant to an application of an implied exception—imposed by the courts as a matter of public policy when there is no express exception—almost always involves an analysis of whether the individual intended the consequences which resulted in a claim for insurance coverage.”3 Fortuity also has been described as an unwritten exclusion to coverage.4 Some have called fortuity “the unnamed exclusion.”5 The fortuity doctrine also has been described as an implied exclusion.6
And, perhaps most colorfully, the risk inherent in the concept of fortuity has been called the “Mother Mold” of insurance.7
The U.S. Supreme Court and the overwhelming majority of other courts have adopted the concept of fortuity as a limit on the breadth of coverage under a liability policy.8 Likewise, several states have codified the fortuity requirement into insurance-related statutes.9
In short, for an event to be covered under a liability policy, the event must be fortuitous.10 This does not mean that the risk of the event happening is unknown. If there is no risk of a covered event happening, it would be unwise for an insured to purchase the coverage. For example, the operator of a grain elevator in Kansas who sells grain only to a purchaser in Missouri would be foolish to purchase ocean marine coverage. Because the grain elevator owner recognizes it is possible someone might slip and fall on the grain elevator owner’s property, however, the owner may well purchase a CGL policy. Just because the cautious owner recognizes the risk of a slip and fall does not make an actual slip and fall event nonfortuitous. This distinction between fortuity and appreciation of risk was at issue in Yale University v. CIGNA Insurance Co.11 Here, Yale presented a claim to several insurers for costs of remediating lead paint and asbestos in buildings it owned. According to the court, it was “axiomatic” that covered losses must be fortuitous.12 The court described the “fortuity doctrine” as follows: “Broadly stated, the fortuity doctrine holds that insurance is not available for losses that the policyholder knows of, planned, intended, or is aware are substantially certain to occur.”13 The insurer argued that the loss was not covered because Yale knew that asbestos and lead paint were in the buildings. The court determined that this was of no import, focusing instead on Yale’s claim for remediating the substances, not the mere presence of the substances in Yale’s buildings:
Rather, the fortuity doctrine would bar coverage only if the parties were aware, at the time of the issuance of the policies, that asbestos or lead contamination was substantially likely to occur during the policy period. As the court explained in Sentinel Management Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (C.A. Minn. 1997), although when “[v]iewed in hindsight, the eventual contamination of [an insured’s] buildings [may be] inevitable, due to the presence of asbestos-containing materials . . . so far as all parties were concerned, asbestos contamination was a risk inherent in owning twenty-year-old apartment buildings, but it was not a certainty.” Here, at the time [the insurer] issued the policies, it was entirely plausible and possible that Yale’s buildings would not become contaminated despite the presence of materials containing lead and asbestos in those buildings. As such, the parties could not have “know[n] of, planned, intended, or [been] aware,” that the contamination was “substantially certain to occur” at the time of the issuance of the policies.14
The policyholder’s control over the risk is an important element in determining the fortuity of an event. Even though the district court held that certain of Yale’s claims could have been the result of fortuitous events, it recognized that Yale would have no coverage for known remediation costs to contaminated properties incurred before the policy was issued.15 As a practical matter, the fortuity doctrine would bar coverage if it were substantially certain that the loss would occur; if there is doubt that loss would occur, the doctrine has been held not to apply.16
Similarly, in University of Cincinnati v. Arkwright Mutual Insurance Co.17 the court considered whether the policy covered asbestos removal from a university building. Here, the university decided to demolish rather than remodel its building, and part of the demolition costs were related to removing asbestos containing materials. The university presented the costs to its insurer for coverage. The insurer denied coverage on the ground that the asbestos removal was not a fortuitous loss. After recognizing that the implied fortuity requirement was “universally recognized,”18 so that any insurance policy only insures against fortuitous losses,19 the court of appeals explained:
It is generally recognized that . . . “insurance contracts do not cover economic detriment that is not fortuitous from the point of view of the person (usually the insured) whose detriment is asserted as the basis of the insurer’s liability. For example, a loss is not fortuitous in this sense if caused intentionally by that person.” American Economy Ins. Co. v. Liggett, 426 N.E.2d 136, 141 (Ind. Ct. App. 1981) (quoting Robert E. Keeton & Alan I. Widiss, Insurance Law § 5.3(a) (1971)). Moreover, a fortuitous loss is not one “which the assured brings about by his own act, for then he has not merely exposed the goods to the chance of injury, he has injured them himself.”20
The court of appeals held that the claimed asbestos removal costs were not a matter of chance because the university “exercised total control over whether and when such damage would occur and possessed discretion to execute its own loss.”21 To find the costs covered would convert the policy into “a cash fund for plaintiff’s business plans,” and the court of appeals declined to do so as being against public policy and denigrating the basic function of insurance: “To allow recovery for an insured such as plaintiff, who undertakes deliberate damage-inducing actions with known consequences, would undermine the function of insurance as the sharing of unpredictable risks of damage.”22 In sum, it has been said that insurance “protects against risks of loss rather than certainties of loss.”23
The Known Loss Doctrine
The concept that a loss cannot be fortuitous if it is known by the policyholder before the policy issues is sometimes called the “known loss doctrine.” At its core, the known loss doctrine provides that insurance does not cover liability the policyholder knows about when the policy is sold. A substantial number of courts have accepted some form of the known loss doctrine.24 It has been argued, though, this limitation on coverage need not and should not be recognized beyond the policy language to support it.25
As one might expect, courts have given different constructions to the term “known.” For example, a claim can be barred by the known loss doctrine if, when the policy is purchased, the insured knew “that there was a substantial probability that it will suffer or has already suffered a loss.”26 Further, a policyholder was held to have known of a loss (and no coverage was owed) when it knew only of contaminated property but not that it would be sued for the costs of cleanup.27 Other courts require that a loss be “substantially certain” before the known loss doctrine applies.28 Another court’s formulation of the known loss doctrine would “not defeat coverage for the claimed loss where it had yet to be established, at the time the insurer entered into the contract of insurance with the policyholder, that the insured had a legal obligation to pay damages to a third party in connection with a loss.”29
A practitioner must understand the precise components of the known loss doctrine in any jurisdiction in which he or she intends to assert the doctrine. While many jurisdictions recognize the doctrine, its formulation varies.
The Loss In Progress Rule
If the fortuity doctrine is the tree trunk supporting fundamental liability policy obligations, the known loss doctrine is a branch off that tree. A shoot off the known loss branch is what is sometimes called the “loss in progress” rule. As generally discussed immediately above, a known loss is one that has already occurred and is known by the insured before the liability policy is purchased. A loss in progress is an ongoing, progressive loss known by the insured when the policy is purchased. “[T]he loss in progress rule precludes coverage for losses that were known before the policy period, even if the damage progresses during the policy period.”30
Under the loss in progress rule, one court held that the “relevant inquiry is whether [the insureds] knew at the time they entered into the insurance policy that they were engaging in activities for which they could possibly be found liable.”31 Another court explained in Lone Star Steakhouse & Saloon, Inc. v. Liberty Mutual Insurance Group32 that “an insured who is alerted to a problem of ongoing property damage, its cause, and the likelihood of recurrence, cannot simply ignore the problem and then claim that any resulting future damage is an ‘accident’ for which the insurer is liable.”
Lone Star is instructive. Here, the insured was sued in 1998 by its neighbor for property damages arising out of runoff from the insured’s storm water basin. Lone Star’s insurer defended and settled that case. In 2000, Lone Star was again sued by its neighbor for storm water flooding incidents. Lone Star’s insurer eventually denied the 2000 claim asserting, among other things, violation of the loss in progress rule,33 and cited, among other authority, City of Carter Lake v. Aetna Casualty & Surety Co.,34 where the court found that the first incident of sewage backup was an “occurrence” but subsequent episodes were not occurrences because another backup incident was a substantial probability unless the issue was remediated; the insured, in effect, took a calculated risk by electing to continue operations without remedying its methods.35
The court in Lone Star denied the insurer’s motion for summary judgment, finding a factual issue existed as to whether the flooding complained of in the 2000 suit had the same cause as the flooding alleged in the 1998 suit.36 The court explained that coverage for a subsequent lawsuit would not be barred if it was demonstrated that “the insured took remedial steps that were designed to prevent the damage from reoccurring.”37 In so holding, the court provided the following explanation:
A reasonable jury viewing the evidence in a light favorable to Lone Star could conclude that Lone Star made good faith efforts to remedy the problem, and that property damage incurred by [Lone Star’s neighbor] in the 2000 lawsuit, or at least some portion thereof, was due to an accident that was not expected or intended by Lone Star.38
Like the “known loss” doctrine, the “loss in progress rule” is subject to permutations in each jurisdiction recognizing the rule. The practitioner is cautioned to well understand the particular formulation of the rule in the jurisdiction before invoking it.
CGL Policy Form Basis For Known Loss And Loss In Progress Arguments
The CGL policy forms prior to the current 2004 form provided little support for arguments involving the known loss doctrine and loss in progress rule.39 The basic insuring agreement of the policy provided only that “This insurance applies only to ‘bodily injury’ and ‘property damage’ which occurs during the policy period. The ‘bodily injury’ or ‘property damage’ must be caused by an ‘occurrence.’”40 In the 1988 version of the CGL policy, this language was moved from the first paragraph of the insuring agreement to the second:
b. This insurance applies to “bodily injury” and “property damage” only if:
(1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”; and
(2) The “bodily injury” or “property damage” occurs during the period.41
This language remained in place and unchanged in the 1992,42 1996,43 and 199844 versions of the CGL policy.
The insuring agreement of the 2004 CGL policy exploded with language regarding what an insured knew and when the insured knew it:
b. This insurance applies to “bodily injury” and “property damage” only if:
(1) The “bodily injury” or property damage” is caused by an “occurrence” that takes place in the “coverage territory”;
(2) The “bodily injury” or “property damage” occurs during the period; and
(3) Prior to the policy period, no insured listed under Paragraph 1. of Section II—Who is An Insured and no “employee” authorized by you to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “property damage” had occurred, in whole or in part.45 If such a listed insured or authorized “employee” knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such “bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the policy period.
c. “Bodily injury” or “property damage” which occurs during the policy period and was not, prior to the policy period, known to have occurred by any insured listed under Paragraph 1. of Section II—Who is An Insured or any “employee” authorized by you to give or receive notice of an “occurrence” or claim, includes any continuation, change or resumption of that “bodily injury” or “property damage” after the end of the policy period.
d. “Bodily injury” or “property damage” will be deemed to have been known to have occurred at the earliest time when any insured listed under Paragraph 1. of Section II—Who Is An Insured or any “employee” authorized by you to give or receive notice of an “occurrence” or claim:
(1) Reports all, or any part, of the “bodily injury” or “property damage” to us or any other insurer;
(2) Receives a written or verbal demand or claim for damages because of the “bodily injury” or “property damage”; or
(3) Becomes aware by any other means that “bodily injury” or “property damage” has occurred or has begun to occur.46
The italicized portions of the 2004 Insurance Services Office (ISO) standard CGL policy insuring agreement provide an anchor for a policy language-based argument concerning a known loss or loss in progress. Courts enforcing these provisions have called them a “known claim exclusion,”47 a “known claim exception,”48 and a “deemer clause.”49
Other policy language supporting the notion that known losses are not covered includes the provision requiring the insured to provide the insurer notice of an occurrence “which may result in a claim.”50 Moreover, policy provisions stating that representations by the insured were accurate and complete and that the insurer “issued this policy in reliance upon your representations”51 can support rescinding a policy when, for example, a loss in progress was not reported in response to a question in the policy application.52
1. “Occurring by chance” is listed as the first definition of “fortuitous,” and “fortunate, lucky” as the second definition. Webster’s Ninth New Collegiate Dictionary (1984).
2. Black’s Law Dictionary 2 (5th ed.) (1979).
3. R. Keeton & A. Widiss, Insurance Law § 5.3(a), at 475 (West 1988).
4. Ins. Co. of N. Am. v. U.S. Gypsum Co., 678 F. Supp. 138, 141 (W.D. Va. 1988).
5. S. Cozen & R. Bennett, Fortuity: The Unnamed Exclusion, 20 Forum 222 (1985) (now known as the Tort, Trial & Ins. Prac. L.J.) (discussing “all risk” policies”).
6. E. Holmes, 16 Holmes’ Appleman on Insurance 2d § 116.1, at 6–9 (LexisNexis 2000).
[T]he concept of insurance presupposes that only a small proportion of those exposed to a risk will actually sustain a loss. This premise is challenged when losses result from the designing act of the insured. Thus, it is a fundamental principle of insurance law that insurance contracts do not cover financial loss that is not fortuitous. One corollary to this principle is that a liability insurance contract affords no coverage for losses intentionally caused by the insured.
Id. at 6.
7. E. Holmes & m. Rhodes, 1 holmes’ appleman on insurance 2d § 1.2, at 3–4 (West 1996).
8. B. Ostrager & T. Newman, Handbook on Insurance Coverage Disputes § 8.02[a], at 564 (14th ed. 2008) (citing cases).
9. Id. at 565–67 (citing statutes).
10. This discussion focuses on Coverage A of the standard CGL policy for Bodily Injury and Property Damage liability. Coverage B of the standard CGL policy for Personal and Advertising Injury Liability can include coverage for intentional acts such as false arrest or malicious prosecution. Compare ISO Form CG 00 01 12 04, at 1, with id. at 5 & 14 (2003) (current ISO form).
11. 224 F. Supp. 2d 402 (D. Conn. 2002).
12. Yale Univ. v. CIGNA Ins. Co., 224 F. Supp. 2d 402, 414 (D. Conn. 2002).
13. Id. (citing Nat’l Union Fire Ins. Co. v. Stroh Cos., Inc., 265 F.3d 97, 103 (2d Cir. 2001)).
14. Id. at 415 (citing Nat’l Union Fire Ins. Co., 265 F.3d at 106).
15. Id. at 417.
16. City of Johnstown v. Bankers Standard Ins. Co., 877 F.2d 1146, 1152–53 (2d Cir. 1989) (knowledge of a risk does not make it uninsurable).
17. 51 F.3d 1277 (6th Cir. 1995).
18. Univ. of Cincinnati v. Arkwright Mut. Ins. Co., 51 F.3d 1277, 1281 (6th Cir. 1995).
19. Id. at 1280.
20. Id. at 1282 (quoting Avis v. Hartford Fire Ins. Co., 195 S.E.2d 545, 548 (N.C. 1973)).
21. Id. at 1282.
23. Waller v. Truck Ins. Exch., 900 P.2d 619, 626 (Cal. 1995).
24. B. Ostrager & T. Newman, Handbook on Insurance Coverage Disputes § 8.02[c], at 570–76 (14th ed. 2008) (citing cases).
25. K. Abraham, Peril and Fortuity in Property and Liability Insurance, 36 Tort & Ins. L.J. 777, 796 (2001) (“The known-loss defense not only adds a layer of unnecessary duplication, but, to the extent that it is not mere duplication, the defense goes farther than public policy requires, and farther than public policy needs to or should require.”).
26. Allmerica Fin. Corp. v. Certain Underwriters at Lloyd’s, London, 871 N.E.2d 418, 430 (Mass. 2007).
27. Overton v. Consol. Ins. Co., 38 P.3d 322, 326 (Wash. 2002). (“The dispositive issue is not how the insured was notified of property damage, but whether the insured has such notice before purchasing the policy.”)
28. See, e.g., Gen. Housewares Corp. v. Nat’l Sur. Corp., 741 N.E.2d 408, 413–14 (Ind. 2000).
29. Pittston Co. Ultramar Am. v. Allianz Ins. Co., 124 F.3d 508, 518 (3d Cir. 1997) (quoting Montrose Chem. Corp. v. Admiral Ins. Co., 913 P.2d 878, 906 (Cal. 1995)).
30. Chemstar, Inc. v. Liberty Mut. Ins. Co., 797 F. Supp. 1541, 1551 (C.D. Cal. 1992).
31. Franklin v. Fuigro-McClelland (Sw.), Inc., 16 F. Supp. 2d 732, 737 (S.D. Tex. 1997).
32. 343 F. Supp. 2d 989, 1007 (D. Kan. 2004).
33. Lone Star Steakhouse & Saloon, Inc. v. Liberty Mut. Ins. Group, 343 F. Supp. 2d 989, 992–93 (D. Kan. 2004).
34. 604 F.3d 1052 (8th Cir. 1979).
35. Id. at 1059.
36. 343 F. Supp. 2d at 1008.
38. Id. at 1009.
39. Because of the lack of specific language concerning knowledge or fortuity in earlier policies, courts found it was implied into the policy, or described the fortuity concept as an unwritten exclusion. See supra notes 2–6 and accompanying text. See Gen. Housewares Corp. v. Nat’l Sur. Corp., 741 N.E.2d 408, 415 (Ind. App. 2000) (“Thus, the known loss doctrine is not so much an exception, limitation, or exclusion as it is a principle intrinsic to the very concept of insurance. . . . Therefore, despite the fact that the policies at issue failed to mention the known loss doctrine, we hold that it is applicable to these policies.”) (citation omitted).
40. See, e.g., ISO Form CG 00 01 11 85, at 1 (1982, 1984).
41. ISO Form CG 00 01 11 88, at 1 (1982, 1988).
42. ISO Form CG 00 01 10 93, at 1 (1992).
43. ISO Form CG 00 01 01 96, at 1 (1994).
44. ISO Form CG 00 01 07 98, at 1 (1997).
45. One court described the “in part” provision as a reaction to Montrose Chemical Corp. v. Admiral Insurance Co., 42 Cal. Rptr. 324, 913 P.2d 878 (1995), wherein the court reasoned that earlier ISO policy language covering occurrences during the policy period allowed coverage under subsequent policies even when an occurrence began under a previous policy. Quanta Indem. Co. v. Davis Homes, LLC, 606 F. Supp. 2d 941 n. 4 (S.D. Ind. 2009). Indeed, commentators have referred to the quoted policy language as the “Montrose Endorsement.” R. Maniloff, Trigger of Coverage 2.0: Gun Sounds in New Generation of Disputes—“Montrose” and “First Manifestation” Endorsements Come of Age, 23 Mealey’s Litig. Report: Ins. No. 25 (May 7, 2009); J. Woodward, The 1999 CGL Insuring Agreement: ISO’s “Montrose Endorsement,” IRMI Online (Int’l Risk Mgmt. Inst., Mar. 2000), http://www.irmi.com/expert/articles/2000/woodward03.aspx.
46. ISO Form CG 00 01 12 04, at 1 (2003) (emphasis added).
47. Quanta Indem. Co. v. Davis Homes, LLC, 606 F. Supp. 2d 941, 947 (S.D. Ind. 2009).
48. Westfield Ins. Co. v. Sheehan Constr. Co., Inc., 580 F. Supp. 2d 701, 716 (S.D. Ind. 2008).
49. City of Sterling Heights v. United Nat’l Ins. Co., 2005 WL 5955826, at *8 (E.D. Mich. Mar. 14, 2005).
50. ISO Form CG 00 01 12 04, at 10 (2003) (emphasis added).
51. Id. at 12.
52. See Am. Special Risk Mgmt. Corp. v. Cahow, 192 P.2d 614, 622 (Kan. 2008) (“Simply put, whether enforced through policy language or through rescission of the insurance policy, an insured cannot obtain coverage for the risk of a known loss.”); Cont’l Cas. Co. v. Maxwell, 799 S.W.2d 882, 887–88 (Mo. App. 1990) (a misrepresentation in an application for insurance allows an insurer to avoid the policy when the application, its representations, and the insurers’ reliance on the representations are referenced in the policy).