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

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.

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

How to read an insurance policy: The insuring agreement

How to read an insurance policy: The insuring agreement

The "insuring agreement" is found on the first page of the "coverage form." (Note that this is generally not the first page of the insurance contract; that will be the declarations page. The other forms follow in more or less random order.)

The insuring agreement tells you in general terms what the insurance policy covers--but it doesn't actually provide much information. A typical first sentence of the insuring agreement of a commercial general liability policy is: "We will pay those sums the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." You still have to look elsewhere to figure out what "bodily injury" and "property damage" mean; I have been involved in cases where the meaning of "legally obligated to pay" has been an issue; "damages" can also be a term of the art. And of course, the phrase "to which this insurance applies" means that the policy covers what it covers and doesn't cover what it doesn't cover.

The insuring agreement also states that the policy doesn't cover exclusions, which are listed elsewhere in the policy; that it provides coverage up to the policy limits, which are listed elsewhere in the policy; and so on.

Although every word of an insurance policy can be and probably has been litigated, disputes over the insuring agreement generally focus on the meaning of the word "occurrence," which might or might not actually appear in the insuring agreement. I will discuss some of those disputes in future posts. (Additionally, not all policies are occurrence based. In a different future post I will explain the difference between occurrence based and claims based policies.)

How to read an insurance policy: The insuring agreement

How to read an insurance policy: the known loss doctrine, part 3

How to read an insurance policy: the known loss doctrine, part 3

In previous posts I have discussed the known loss doctrine here and here. The insuring agreement typically defines when a loss is deemed to have been known to have occurred as the earliest of when:


--An insured reports a loss to any insurer; or


--An insured receives a written or verbal demand or claim; or

--An insured becomes aware by any other means that a loss has occurred or has begun to occur.


Those definitions are important not only for the known loss doctrine, but also because insureds are required to report losses to their insurers immediately ("as soon as practicable") and their failure to do so could result in denial of coverage for the loss. (I will discuss in a future post when an insurer can get away with denying coverage as a reult of late notice).


Insureds often fear to report claims because the mere reporting of a claim may result in their premiums going up. Although I am not an expert in this subject (and any of you who are should feel free to chime in here), my understanding is that reporting a single potential claim that never materializes into an actual claim typically does not affect premiums. On the other hand, failing to report a potential claim that does materialize could substantially affect your right to insurance coverage for that claim.


The lesson: Report to your insurer any claim as soon as you learn of it.

How to read an insurance policy: the known loss doctrine, part 3