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

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.

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

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

Reading an insurance policy: schedule of forms and endorsements

Reading an insurance policy: schedule of forms and endorsements

In my last post I began discussing how to read an insurance policy, beginning with the coverage selection page. The next thing you should understand is the order in which you should read a policy. (Hint: it's not necessarily front to back.)


The coverage selection page of many policies includes a section called "Schedule of forms and endorsements" or some variation of that. That section will contain a list of names of forms referred to by a combination of numbers and letters that make no sense to anyone who is not an underwriter (a person who puts together insurance policies). An example from a malpractice policy I had a few years ago:


U-PL-871-A CW (4/98)


The schedule identifies the forms and endorsements (which, for practical purposes are the same thing) that make up your policy. Some policies, such as a motor vehicle policy, may contain only a coverage selection page and the main policy form. Others, such as commercial general liability policy, will contain a coverage selection page and up to a couple of dozen forms, some as short as one page and others quite lengthy.


Generally the form identification, corresponding to the entries in the schedule of forms and endorsements, is at the bottom of each form. Each listing on the schedule of forms and endorsements should correspond to a matching form, and vice versa. If you have a form that is not listed on the schedule, or an entry on the schedule without a corresponding form, you should follow up with your insurer to see if the mistake is on the schedule or (more likely) in the insurer putting together the forms.

Reading an insurance policy: schedule of forms and endorsements

Reading an insurance policy: The first step

Reading an insurance policy: The first step

An insurance policy consists of several sections, and to understand what coverage you have purchased you need to understand what each section means.


The "coverage selection page," also called the "declarations page" or "dec page" is created for you personally when you purchase or renew your insurance. It indicates how much insurance you have bought ("the limits," discussed in a previous post) and any other information unique to the policy your policy. For example, the dec page of an auto policy will indicate what cars are included in the policy. A Commercial General Liability policy will indicate what premises are covered in the premises liability portion of the policy. A dec page may also indicate the names of the people or businesses that are covered under the policy.


Each and every time that you purchase or renew insurance, you should review the dec page to make sure that the insurer has issued to you the policy that you meant to purchase. In an auto policy it is not unknown for an insurance agent to raise your insurance limits (and your premiums) without discussing that with you. If your policy renews automatically, it is a good time to consider if the limits you chose still meet your needs.


In future posts I will discuss other parts of an insurance policy, beginning with the "insuring agreement."

Reading an insurance policy: The first step