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May 02, 2017 Articles

Applying the Known Loss Doctrine to Liability Insurance

There is no valid reason to limit the known loss doctrine to only first-party property insurance claims or situations where liability has already been established, but courts have struggled in determining whether to apply the rule to third-party claims

by David M. Atkinson and Eleanor G. Jolley

Insurance can be defined as a contractual arrangement for transferring and distributing risk.[1] For that reason, insurance coverage is premised on the exchange of risk and the chance that an unintended or unexpected event will occur.[2] Consistent with this principle, insurance carriers do not intend to provide coverage for a loss that has already occurred, is in progress, or is substantially certain to occur.[3] Yet, situations will arise where policyholders attempt to obtain insurance coverage for a loss that has already occurred or that is in progress. A classic example is the homeowner who calls his agent to obtain flood insurance while water from a burst pipe rises on the floor around his ankles. In response, courts have developed a common-law rule most often referred to as the “known loss” doctrine, which provides that there is no coverage for a loss that has already occurred at the time the insured applied for the policy. While this might appear to be a straightforward principle—surely, one cannot purchase insurance coverage for a loss that has already occurred—courts have not reached consistent results regarding the determination of what constitutes a “loss” or the standard by which the insured’s knowledge must be proven.

These questions become more complicated in the context of liability insurance for third-party claims. The application of the known loss doctrine to first-party property insurance is relatively straightforward. Once the event giving rise to the claim occurs—such as a flood or a fire—there will rarely be any uncertainty about whether there has been a loss, even if the full extent of the loss is not yet known.[4] However, there may still be uncertainty about whether a particular event will give rise to liability claims.[5] And it is not always clear what the “loss” is or what the insured “knew.” This article discusses the application of the known loss doctrine in the context of liability insurance for third-party claims and the issues courts have struggled with in determining whether to apply the rule.

The Fortuity Requirement

The basic principle of insurance coverage is fortuity—a loss that occurs by chance or accident.[6] In effect, insurance coverage is a contractual relationship between insurer and insured in which the parties “wager against the occurrence or non-occurrence of a specified event.”[7] When an insurance company issues a policy, it insures against a risk, not a certainty. For that reason, fortuity doctrines have developed as common-law affirmative defenses that may apply to bar coverage for losses that are not uncertain.[8] Because insurance is based on the transfer of a risk of possible loss, insurance is not available for losses the policyholder knows of, planned, intended, or is aware are substantially certain to occur.[9]

While some aspects of the fortuity rule focus on whether the insured’s actions and the resulting harm were accidental, such as the “occurrence” requirement under a commercial general liability (CGL) policy or policy provisions that bar coverage for intentional acts, the focus of the known loss doctrine is on the insured’s knowledge of the loss before the policy was issued.[10] As the Fourth Circuit has explained:

[T]he known loss doctrine in common law insurance jurisprudence excludes coverage of a loss to the insured of which the insured had actual knowledge prior to the policy’s effective date or knew was substantially certain to occur. The known loss doctrine seeks to prevent the concept of an  insurable risk from becoming a mere fiction when the insured knows there is a substantial probability that it has suffered or will suffer a loss covered by the policy.[11]

The public policies underlying the known loss doctrine include (1) the recognition that insurance covers risks, not certainties, and (2) the principle that insureds should not benefit when they wrongly withhold material information from insurers in order to obtain insurance.[12]

Three Variations on the Known Loss Doctrine

Under the known loss doctrine, an insured “may not obtain insurance to cover a loss that is known before the policy takes effect.”[13] Courts have recognized three commonly applied variations of the doctrine: “known loss,” “known risk,” and “loss in progress.”[14] While courts have often used the terms interchangeably, and some have only focused on known loss, the concepts are different and the applicability of a particular rule will depend on the context in which it is applied. [15]

Known loss. “The known loss doctrine is applied when the insured has knowledge, before the inception of an insurance policy, that the insured has suffered the threat of an immediate economic loss, as a result of some event, and that the reality of that loss occurring is a certainty.”[16] As one treatise explains, “this doctrine is designed to prevent fraud when coverage is sought to be misused to insure a certainty rather than a fortuity.”[17] Consistent with the principle of fortuity, “the rule is based on the realization that the purpose of insurance is to protect insureds against unknown risks.”[18]

Known risk. The term “known risk” is probably a misnomer because all insureds purchase insurance coverage knowing (or at least believing that they know) that there is a risk that a loss will occur in the future. While an insured may not intend to cause a loss or end up being found liable for a particular tort, the insured is certainly aware of the possibility that a loss or claim may occur when purchasing insurance.[19] Only when the possibility of the risk becomes a certainty—or as some cases have held, a “substantial probability”—does the known loss doctrine apply.

While a number of courts continue to discuss a “known risk” doctrine, these cases are more properly characterized as involving “known loss.” Thus, it is more accurate to refer to the “known risk” decisions as actually applying a “known loss” rule.[20]

Loss in progress. While a “known loss” is one that occurs before the policy is issued, the “loss in progress” rule applies when the loss is imminent or still occurring when the policy becomes effective.[21]         The classic example in the first-party context is a flood or other property damage that has already begun prior to the inception date of the policy.[22] In the liability context, at least one court has cited the loss-in-progress doctrine to bar coverage under a policy purchased after suit had been initiated against the insured.[23]

The “loss in progress” defense may apply where the insured is aware or should have been aware of an ongoing loss at the time the policy became effective.[24] In cases involving environmental contamination or liability for other progressive property damage that occurs over time, questions will arise as to whether the insured actually knew of some loss that was “in progress” on the inception date of the policy. In Montrose Chemical Corp. v. Admiral Insurance Co., the insured was notified by the Environmental Protection Agency that it was a potentially responsible party several years before the inception of the CGL policy issued by Admiral.[25] The California Supreme Court rejected Admiral’s argument that coverage was barred by the loss-in-progress rule, distinguishing between the risks insured against under a first-party property policy and a third-party liability policy.[26] The Montrose court held that “the loss-in-progress rule will not defeat coverage for a 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.”[27] The letter the insured received “did not establish any legal obligation to pay damages or cleanup costs in connection with the contamination at the . . . site, such as would implicate the loss-in-progress rule and preclude [the insured] from seeking to obtain the liability coverage sought.”[28]

Because the “loss” in the third-party liability context is the insured’s liability for the occurrence, and not the occurrence itself, the loss-in-progress rule will not apply to liability claims unless there is some evidence that the insured is aware (or should be aware) that it will be held liable for the ongoing loss. Simply knowing that a loss has occurred, or is in progress, is not enough. Rather, in the third-party context, the insured should have some knowledge of its potential liability. As discussed below, the extent of that knowledge, or the certainty required, will vary depending on the jurisdiction.[29]

What Is Considered a “Loss” for Purposes of the Rule?

Some courts have held that the known loss defense should be limited to only those situations where a loss has actually occurred,[30] while other courts have applied the known loss rule when the insured knew a loss was substantially certain to occur.[31]

Questions may also arise as to what constitutes a “loss,” particularly in the context of third-party liability claims. A first-party policy provides insurance for the risk of loss or damage to the insured’s property.[32] Thus, there should rarely be a question as to whether a “loss”—such as a flood or fire—has occurred. While first-party policies provide coverage for a particular occurrence, liability policies provide insurance for the risk that the insured will be found liable for the occurrence.[33] The risk of loss “is not the property damage itself, but rather the company’s legal liability arising therefrom.”[34] Even though some event may have occurred, there may still be uncertainty as to whether the insured will be found liable and, thus, whether the “event” will become a “loss.”[35] For that reason, some courts have refused to apply the known loss rule to third-party liability claims.[36] However, other courts have found that there is no valid reason for distinguishing between two types of policies with regard to the rule and have applied the known loss doctrine in the context of third-party claims.[37]

Courts have reached varying (and conflicting) results when analyzing the application of the known loss rule in context of third-party liability claims. Some courts have concluded that the known loss doctrine will bar coverage only when the legal liability of the insured is a certainty.[38] In Pittston Co. Ultramar Am. v. Allianz Insurance Co., the Third Circuit held that the known loss doctrine “will not defeat coverage for a 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.”[39] As the court explained, “This rule does not undermine the basic concept of fortuity because, in the third-party liability context, the insurable risk is the uncertainty of liability.”[40]

There could be situations where the insured’s liability for a particular occurrence is reasonably certain, even though actual liability has not yet been established. In such circumstances, it could be inconsistent with the principle of fortuity to limit application of the known loss rule to only those situations in which the insured has actually been found liable. Thus, while “the insured must know more than the fact that there has been an occurrence that has caused damage to . . . a third party,” courts have held that the rule applies if the insured knows that it is “substantially probable” that the insured will be liable for the damage.[41]

Some situations should be more straightforward. In Bartholomew v. Appalachian Insurance Co.,[42] the lawsuit for which the insured sought coverage had already been filed prior to the inception date of the insurance policy at issue; thus, the risk of “loss” to the insured was a “virtual certainty” by the time insurance was purchased.[43] When the insurer subsequently sought to void coverage, the court applied the known loss rule and held that the policy did not provide coverage for the claims against the insured.[44] However, other courts have held that the filing of a lawsuit is insufficient to trigger application of the known loss rule unless the insured knows, before obtaining coverage, that entry of a judgment against it in the underlying lawsuit was “substantially certain” to occur.[45]

The known loss rule may also come into play when an insured seeks to obtain coverage with a retroactive date. For example, in American Family Mutual Insurance Co. v. Bateman, the insured contacted her agent to request insurance coverage for her daughter’s car five days after it had been involved in an accident, requesting that coverage be issued retroactive to one day prior to the accident.[46] At the time the insured requested coverage with a retroactive date, she knew that her daughter had been in an accident, she knew that she was legally responsible for any negligence by her daughter, and she knew the other driver had retained a lawyer to attempt to recover from her.[47] Because it was certain that a claim would be made against the insured, “there was simply no risk to insure with respect to that accident.”[48]

The Insured’s Knowledge of the Loss

Courts have also disagreed as to what level of knowledge is required on the part of the insured. A number of courts have required actual knowledge of the loss.[49] Other courts have required something less than actual knowledge, and have required only a “reason to know” or “evidence of probable loss,” or considered whether a “reasonable prudent” insured would know that the loss is highly likely to occur.[50]

Because the known loss doctrine turns on what the insured knows, or should know, questions arise as to whether courts should apply an objective or subjective standard in evaluating the insured’s knowledge. For example, the insured may claim that he or she was aware of a loss but was not aware that he or she could potentially be held liable. Under a subjective standard, courts will give deference to the insured’s subjective belief that he or she bore no liability for the loss and thus had no duty to disclose the loss to the insurer. Under an objective standard, the court will examine whether the insured’s justification for not reporting the loss is reasonable.

In the third-party liability context, the “loss” is the insured’s liability, rather than the occurrence giving rise to the liability. Courts that have required actual knowledge of the looming loss will apply a subjective standard.[51] If the court adopts a “substantial probability of liability” standard or concludes that the insured’s liability must be “substantially certain,” then it may be more appropriate to apply an objective standard.[52]

In American Special Risk Management Corp. v. Cahow, the Supreme Court of Kansas surveyed case law from around the country regarding the appropriate standard to be used in determining whether the applicant knew of claims that should have been disclosed in a policy application.[53] The court concluded that a minority of jurisdictions have adopted a purely subjective standard in determining whether the insured knew of a claim that should be disclosed.[54] The court further concluded that most of the courts considering the issue have adopted an objective approach, determining the applicant’s knowledge based on what a reasonable and similarly situated party would have known or should have known based on the facts of the underlying event.[55] The Cahow court explained:

It has been suggested that the theoretical basis for the objective standard stems directly from insurers’ primary purpose of avoiding acceptance of known risks—or at least adjusting policy language or premiums to reflect such risks. . . . In contrast, a subjective standard by itself could “defeat the ability of an insurance company to assess risks prior to issuing insurance” because the insured would be permitted to determine “unilaterally whether the risk is material and accordingly, whether it should be reported.”[56]

Ultimately, the Cahow court applied a two-prong, subjective-objective test.[57] “Under this inquiry, the court first asks the subjective question of whether the insured knew of certain facts and then asks the objective question of whether such facts could reasonably have been expected to give rise to a claim.”[58]

This two-prong approach would appear to make the most sense when applying the known loss rule to a liability insurance claim. The subjective prong is “whether the insured knew of certain facts” and the objective prong is “whether such facts could reasonably have been expected to give rise to a claim.”[59] If a reasonable insured could have “reasonably foreseen” that the facts might result in a claim, coverage is barred.[60]

Thus, the first question to ask is whether the insured knew of the potential for liability arising out of the occurrence. If the insured claims that he or she did not anticipate liability or that he or she was somehow unaware that claims would be made, the question is whether the insured’s subjective belief was objectively reasonable. While the term “known loss” implies that the insured must have actual knowledge, the insured should not be able to intentionally “turn a blind eye in order to avoid application of the known loss doctrine.”[61]

The “Known Claim” Exclusion

Following the Supreme Court of California’s decision in Montrose Chemical Corp. of California v. Admiral Insurance Co., the standard CGL policy was revised to exclude from coverage bodily injury or property damage that occurs “in whole or in part” before the policy begins, if known to the insured.[62] There are few reported cases interpreting the exclusion, which has also been referred to as the “Montrose endorsement,” but courts have required insurers to establish a close connection between the injury or damage known by the insured prior to the policy period and the injury or damage for which coverage is being sought.[63] In liability claims involving progressive damage that occurs over a period of time, such as environmental contamination, the known claim exclusion may make the known loss doctrine irrelevant.

The “Expected or Intended” Exclusion

Courts have also considered the interplay between the known loss rule and policy language excluding coverage for an “expected or intended” occurrence. Some courts have refused to apply the known loss doctrine based on the “expected or intended” policy language, concluding that the element of fortuity was sufficiently addressed by existing policy provisions that would then be rendered superfluous by the known loss rule.[64] Other courts have disagreed, recognizing that the existing policy exclusions and the known loss doctrine serve different functions:

The “expected or intended” claim requires consideration of whether, at the time of the acts causing the injury, the insured expected or intended the injury, an inquiry that generally asks merely whether the injury was accidental. The “known loss” defense requires consideration of whether, at the time the insured bought the policy (or the policy incepted), the loss was known. The contentions may overlap, but they are distinct. . . .[65]

Misrepresentation or Concealment Provisions

In some instances, policy provisions regarding misrepresentation or concealment of a loss, as well as similar state insurance statutes, may apply to a situation where the insured fails to disclose a known loss when applying for insurance coverage. While there is some overlap, coverage will be void only if the insured has a duty to disclose certain information, typically in response to affirmative questions asked during the application process. The known loss doctrine focuses on the insured’s knowledge of a loss prior to the policy inception date, as related to the fortuity requirement, and not whether the insured failed to disclose information that it was required to disclose during the application process.

The Insurer’s Knowledge of the Loss

Some courts have held that the insurer may not use the known loss doctrine to defeat coverage if it also knew of the loss prior to the policy’s inception date.[66] For example, claims may be disclosed through loss runs provided during the policy application or renewal process. In that situation, the insurer arguably had knowledge of the loss, yet agreed to issue coverage anyway. As a result, the insurer should be barred from asserting a known loss defense if the insured later seeks coverage for a claim that was disclosed.

Conclusion

As with most coverage issues, there will be disagreements as to what constitutes a “loss” or what the insured must “know.” Yet, if a “known loss” is uninsurable as a matter of public policy and according to the basic principle of fortuity in insurance, there is no valid reason to limit the known loss doctrine to only first-party property insurance claims or situations where liability has already been established. “One who knows of a loss or liability, whether as a first or third party, should not be allowed to insure against either.”[67]

Keywords: litigation, insurance coverage, known loss, third party, liability

David M. Atkinson is a partner and Eleanor G. Jolley is an associate with Swift, Currie, McGhee & Hiers, LLP, in Atlanta, Georgia.

 

[1] Stephen A. Cozen & Richard C. Bennett, “Fortuity: The Unnamed Exclusion,” 20 Forum 222 (Winter 1985). See also Eric Mills Holmes, “Solving the Insurance/Genetic Fair/Unfair Discrimination Dilemma in Light of the Human Genome Project,” 85 Ky. L.J. 503, 531 (Spring 1996/1997) (“Risk transference and distribution are the keys to understanding the nature of insurance and insurance underwriting. Insurance is an arrangement for the transference of the risks of fortuitous losses to an insurer and the distribution of those risks among insureds who pay a premium to a common fund.”).

[2] Cozen & Bennett, supra note 1, at 224 (“[T]he concept of risk is central to the idea of insurance itself.”).

[3] 43 Am. Jur. 2d Insurance § 479 (2004).

[4] UTI Corp. v. Fireman’s Fund Ins. Co., 896 F. Supp. 362, 376 (D.N.J. 1995).

[5] UTI Corp., 896 F. Supp. at 376.

[6] R.E. Keeton, Insurance Law § 5.4(a), at 288 (1971) (“A requirement that loss be accidental in some sense to qualify as the occasion for liability of an insurer is implicit, when not express, because of the very nature of insurance.”). See also Cozen & Bennett, supra note 1, at 224 (“If risk is central to insurance, then certainty is antithetical to it. The requirement that any loss be accidental in some sense in order to be compensable is implicit in the very nature of insurance.”); 7 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 102:7, at 17 (3d ed. 1997) (“Implicit in the concept of insurance is that the loss occur as a result of an event that is fortuitous, rather than planned, intended, or anticipated.”); Black’s Law Dictionary 721 (5th ed. 1979) (insurance is “applicable only to some contingency or act to occur in [the] future”).

[7] Sosebee v. Certain Underwriters at Lloyds London, 566 F. App’x 296, 297 (5th Cir. 2014). See also Leo P. Martinez, “A Unified Theory of Insurance Risk,” 74 U. Pitt. L. Rev. 713, 719 (Summer 2013).

[8] Unwired Solutions, Inc. v. Ohio Sec. Ins. Co., 2016 U.S. Dist. LEXIS 170432, at *16 (D. Md. Dec. 8, 2016) (citing Stonehenge Eng’g Corp. v. Emp’rs Ins. of Wausau, 201 F.3d 296, 301 (4th Cir. 2000); Mayor & City Council of Baltimore v. Utica Mut. Ins. Co., 145 Md. App. 256, 306 n.49 (Md. Ct. App. 2000)).

[9] Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes § 8.02, at 561–62 (14th ed. 2008) (collecting cases).

[10] General Housewares Corp. v. Nat’l Sur. Corp., 741 N.E.2d 408 (Ind. Ct. App. 2000) (“The ‘expected or intended occurrence’ exclusions and the known loss doctrine serve different functions. The expected or intended exclusions focus upon the time of the act for which insurance is sought, while the known loss doctrine looks to the time the insurance contract is entered into.”).

[11] Stonehenge Eng’g Corp., 201 F.3d at 301–302 (citing U.S. Liab. Ins. Co. v. Selman, 70 F.3d 684, 690–91 (1st Cir. 1995) (applying Massachusetts law); Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1210 (Ill. 1992) (applying Illinois law); 7 Couch on Insurance § 102:8).

[12] Am. Family Mut. Ins. Co. v. Bateman, 726 N.W.2d 678, 687 (Wis. Ct. App. 2006) (citing State v. Hydrite Chem. Co., 695 N.W.2d 816 (Wis. Ct. App. 2005)). See also Essex Ins. Co. v. Redtail Prods., 1998 U.S. Dist. LEXIS 18507, at *10–11 (N.D. Tex. Nov. 12, 1998) (“It is contrary to public policy for an insurance company to knowingly assume a loss occurring prior to its contract.”) (citations omitted)).

[13] Id. (quoting Utica Mutual, 145 Md. App. 256). See also Nat’l Union Fire Ins. Co. v. Stroh Cos., 265 F.3d 97 (2d Cir. 2001) (quoting Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1214 (2d Cir. 1995)), modified on other grounds, 85 F.3d 49 (2d Cir. 1996).

[14] Ins. Co. of N. Am. v. Kayser-Roth Corp., 770 A.2d 403, 415 (R.I. 2001); see 7 Couch on Insurance § 102:8, at 20.

[15] Stonehenge Eng’g Corp., 201 F.3d at 302 n.5 (citing Pittston Co. Ultramar Am. Ltd. v. Allianz Ins. Co., 124 F.3d 508, 516 n.9 (3d Cir. 1997)).

[16] Kayser-Roth Corp., 770 A.2d at 415 (citing 3 Eric Mills Holmes, Holmes’s Appleman on Insurance § 16.4, at 290 (2d ed. 1998)).

[17] Holmes’s Appleman on Insurance § 16.4, at 290.

[18] Appalachian Ins. Co. v. Liberty Mut. Ins. Co., 676 F.2d 56, 63 (3d Cir. 1982) (“an insured cannot insure against something which has already begun”) (citing Bartholomew v. Appalachian Ins. Co., 655 F.2d 27, 29 (1st Cir. 1981); Summers v. Harris, 573 F.2d 869, 872 (5th Cir. 1978)).

[19] Pub. Util. Dist. No. 1 v. Int’l Ins. Co., 881 P.2d 1020, 1031 (Wash. 1994) (“The knowledge that some loss may occur in the future is the driving force behind the purchase of insurance. A finding that this general knowledge precludes coverage would be much too broad.”) See also General Housewares Corp. v. Nat’l Sur. Corp., 741 N.E.2d 408, 413 n.2 (Ind. Ct. App. 2000) (“[A]ll insureds have some knowledge of a risk of loss, otherwise they would have no reason to seek insurance coverage.”) (citing 7 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 102:7, at 21 (3d ed. 1997)).

[20] See Mapco Alaska Petroleum v. Cent. Nat’l. Ins. Co. of Omaha, 795 F. Supp. 941, 949 (D. Alaska 1999) (“The term ‘known risk’ is responsible for much of the debate between the parties on a rather basic principle of insurance. Much of the debate disappears when the word ‘loss’ is substituted for the word ‘risk’. The heart of [the insurer’s] argument is that insurance companies do not insure for losses that have already occurred. The court has no trouble accepting this common sense approach.”).

[21] Sentinel Ins. Co. v. First Ins. Co. of Haw., 875 P.2d 894, 919 (Haw. 1994); 7 Couch on Insurance § 102:8, at 20. See also Inland Waters Pollution Control v. Nat’l Union Fire Ins. Co., 997 F.2d 172, 178 (6th Cir. 1993) (stating that loss in progress “operates only where the insured is aware of a threat of loss so immediate that it might fairly be said that the loss was in progress and that the insured knew it at the time the policy was issued or applied for”).

[22] Summers v. Harris, 573 F.2d 869, 872 (5th Cir. 1978) (applying the loss-in-progress doctrine to bar coverage for the insured’s claim under a flood insurance policy purchased after flood water posed an immediate threat to his home, because “when a loss already is in progress at the time a policy is issued, the contract of insurance does not take effect”); Cummings v. Omaha Prop. & Cas. Ins. Co., 1995 U.S. App. LEXIS 43505 (5th Cir. Mar. 22, 1995) (no coverage based on the loss-in-progress rule because flooding on the dwelling began two days prior to the policy’s effective date).

[23] Hooper v. Zurich Am. Ins. Co., 552 N.W.2d 31, 35 (Minn. Ct. App. 1996) (citing Inland Waters Pollution Control, 997 F.2d at 178–79).

[24] Am. & Foreign Ins. Co., Inc. v. Sequatchie Concrete Servs., Inc., 441 F.3d 341, 344 (6th Cir. 2006); Inland Waters Pollution Control, 997 F.2d at 176.

[25] Montrose Chem. Corp. v. Admiral Ins. Co., 913 P.2d 878, 882–83 (Cal. 1995).

[26] Montrose Chemical Corp., 913 P.2d at 886.

[27] Montrose Chemical Corp., 913 P.2d at 906.

[28] Montrose Chemical Corp., 913 P.2d at 906.

[29] For example, some courts have held that receipt of a “potentially responsible party” letter or notice of a lawsuit does constitute sufficient knowledge to preclude coverage. E.g., Time Oil Co. v. Cigna Prop. & Cas. Ins. Co., 743 F. Supp. 1400, 1400–15 (W.D. Wash. 1990).

[30] See, e.g., Domtar, Inc. v. Niagara Fire Ins. Co., 363 N.W.2d 724, 737 (Minn. 1997) (rejecting known loss defense when there was no evidence that a loss had actually occurred).

[31] Stonehenge Eng’g Corp. v. Emp’rs Ins. of Wausau, 201 F.3d 296, 301 (4th Cir. 2000); 7 Couch on Insurance § 102:8, at 20.

[32] Black’s Law Dictionary 722 (5th ed. 1979) (first-party insurance is “insurance which applies to the insured’s own property or person”).

[33] Black’s Law Dictionary at 723 (liability insurance “indemnifies against liability on account of injuries to the person or property of another”).

[34] UTI Corp. v. Fireman’s Fund Ins. Co., 896 F. Supp. 362, 376–77 (D.N.J. 1995) (“[The insured] did not purchase liability insurance to compensate it for all property damage, but rather to compensate it for all sums for which it is held liable as a result of claims in which damage to property of third parties is alleged.”) (emphasis in original)).

[35] See UTI Corp., 896 F. Supp. at 376 (reasoning that “the occurrence of the event . . . does not destroy the requisite element of statistical uncertainty in the third-party liability context, as the relevant events remain to be determined, including: is there any harm . . . ; will claims be filed at all; what number of claims will be filed; what sums of money will the claims demand”).

[36] UTI Corp., 896 F. Supp. at 377.

[37] General Housewares v. Nat’l Sur. Corp., 741 N.E.2d 408, 415 (Ind. Ct. App. 2000). 7 Couch on Insurance § 102:8, at 20.

[38] Pittston Co. Ultramar Am. v. Allianz Ins. Co., 124 F.3d 508, 518 (3d Cir. 1997).

[39] Pittston Co., 124 F.3d at 518 (quoting Montrose Chem. Corp. of Cal. v. Admiral Ins. Co., 913 P.2d at 906).

[40] Pittston Co., 124 F.3d at 518 (citations omitted).

[41] State v. Hydrite Chem. Co., 695 N.W.2d 816, 828–29 (Wis. Ct. App. 2005). A number of other courts have also applied a “substantial probability” test. See, e.g., Pub. Util. Dist. No. 1 v. Int’l Ins. Co., 881 P.2d 1020, 1030–31 (Wash. 1994); Time Oil Co. v. Cigna Prop & Cas. Ins. Co., 743 F. Supp. 1400, 1414–15 (W.D. Wash. 1990); Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1211 (Ill. 1992); CPC Int’l. v. Aerojet-General Corp., 825 F. Supp. 795, 809 (W.D. Mich. 1993).

[42] Bartholomew v. Appalachian Ins. Co., 655 F.2d 27, 29 (1st Cir. 1981).

[43] UTI Corp., 896 F. Supp. at 376 n.14 (citing Bartholomew, 655 F.2d at 29).

[44] Id. at 687.

[45] See Stonehenge Eng’g Corp. v. Emp’rs Ins. of Wausau, 201 F.3d 296, 302–303 (4th Cir. 2000) (doctrine does not apply where the insured has “sufficiently viable defenses” in the underlying lawsuit); In re Wallace & Gale Co., 275 B.R. 223, 245–46 (D. Md. 2002) (known loss doctrine does not apply if “there is any uncertainty about the insured’s liability for a specific claim and where no legal obligation to pay has been imposed upon the insured prior to the issuance of the policy”).

[46] American Family Mutual Insurance Co. v. Bateman, 726 N.W.2d 678, 680 (Wis. Ct. App. 2006).

[47] Bateman, 726 N.W.2d at 680.

[48] Bateman, 726 N.W.2d at 680.

[49] U.S. Liab. Ins. Co. v. Selman, 70 F.3d 684, 691 (1st Cir. 1995) (collecting cases).

[50] Carter Lake v. Aetna Cas. & Sur. Co., 604 F.2d 1052, 1059 (8th Cir. 1979) (addressing whether damage is accidental); Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1210 (Ill. 1992); Mo. Pac. R.R. v. Am. Home Assurance Co., 675 N.E.2d 1378, 1382 (Ill. App. Ct. 1997).

[51] See Selman, 70 F.3d at 691 (because the application of the known loss doctrine depends on the insured’s actual knowledge of the loss, an objective test is appropriate).

[52] See Outboard Marine, 607 N.E.2d at 1212 (“known loss doctrine may be invoked if the insurers demonstrate that [the insured] knew or had reason to know, at the time it purchased the CGL policy, that there was a substantial probability that loss or liability would ensue due to the [pollution] for which it is seeking coverage”).

[53] Am. Special Risk Mgmt. Corp. v. Cahow, 192 P.3d 614, 623–27 (Kan. 2008).

[54] Cahow, 192 P.3d at 623–24 (noting that these decisions applied a subjective standard based on policy language that focused on the insured’s subjective belief).

[55] Cahow, 192 P.3d at 624–25 (“[G]enerally, these decisions focus upon the fact that the ‘prior knowledge’ clause includes the phrase ‘reasonably foreseeable,’ ‘reasonably believe,’ or similar language.”).

[56] Cahow, 192 P.3d at 625 (quoting Mt. Airy Ins. Co. v. Thomas, 954 F. Supp. 1073, 1079 (W.D. Pa. 1997)).

[57] Cahow, 192 P.3d at 628.

[58] Cahow, 192 P.3d at 625.

[59] Cohen-Esrey Real Estate Servs. v. Twin City Fire Ins. Co., 636 F.3d 1300, 1303 (10th Cir. 2011) (internal quotations omitted) (citations omitted). See also HSB Grp., Inc. v. SVB Underwriting, Ltd., 664 F. Supp. 2d 158, 183–84 (D. Conn. 2009).

[60] Cohen-Esrey Real Estate Services, 636 F.3d at 1304 (citations omitted).

[61] General Housewares v. Nat’l Sur. Corp., 741 N.E.2d 408, 414 n.3 (Ind. Ct. App. 2000).

[62] Insurance Services Office, Occurrence Form CG 00 01. See 4 David L. Leitner, Reagan M. Simpson & John M. Bjorkman, Law and Practice of Insurance Coverage Litigation § 46:21 (2005). In Montrose, the court held that the insurer’s CGL policy provided coverage for property damage that had begun before but continued into the policy period. 913 P.2d at 893 (reasoning that “the weight of authority, consistent with our own interpretation of [the] express policy language, is that bodily injury and property damage that is continuous or progressively deteriorating through successive CGL policy periods, is potentially covered by all policies in effect during those periods”). See also Quanta Indem. Co. v. Davis Homes, LLC, 606 F. Supp. 2d 941, 946 n.4 (S.D. Ind. 2009).

[63] John H. Mathias Jr., John D. Shugrue & Thomas A. Marrinson, Insurance Coverage Disputes § 10.02[1], at 10-64–10-65 (2010).

[64] See Owens-Corning Fiberglass Corp. v. Am. Centennial Ins. Co., 660 N.E.2d 770, 778 (Ohio Ct. C.P. 1995) (“[I]n this court’s view, to embrace the ‘known loss’ theory offered by the defendants might well swallow up the more narrow doctrine regarding (1) fraud and misrepresentation, and (2) damages that are ‘expected or intended’ by the insured.”).

[65] Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1215 (2d Cir. 1995) (citations omitted), modified on other grounds by 85 F.3d 49.

[66] See General Housewares v. Nat’l Sur. Corp., 741 N.E.2d 408, 414 (Ind. Ct. App. 2000) (“[T]he known loss doctrine is inapplicable ‘if the insurer also knew of the circumstances on which it bases the defense.’”) (quoting 7 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 102:7, at 23 (3d ed. 1997)).

[67] General Housewares, 741 N.E.2d at 415.

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