Known Claim Exclusion Trumps Common-Law Known Loss Doctrine

The known loss doctrine is a common-law concept deriving from the fundamental requirement in insurance law that the loss be fortuitous. General Housewares Corp. v. National Surety Corp., 741 N.E.2d 408, 416 (Ind. Ct. App. 2000) (citing Pittston Co., Ultramar America Ltd. v. Allianz Ins. Co., 124 F.3d 508, 516 (3rd Cir. 1997)). Under the known loss doctrine, an insured may not obtain coverage for a loss that has already taken place. Thus, if the insured has actual knowledge that a loss has occurred, or is occurring, or is substantially certain to occur on or before the effective date of the policy, the common-law known loss doctrine typically will bar coverage. However, some courts have concluded that where the insurer also knows of the loss, the insurer will not be able to assert the known loss doctrine to defeat coverage. See, e.g., General Housewares Corp., Id. at 414.

In the aftermath of Montrose Chemical Corp. of California v. Admiral Ins. Co., 10 Cal.4th 645, 42 Cal.Rptr.2d 324, 913 P.2d 878 (1995), insurance companies began including language in their insurance policies excluding coverage for losses that occurred at least partially before the policy began. In Montrose, the Court held that the insurer’s CGL policy, which covered bodily injury or property damage “which occurs during the policy period” with no further elaboration, covered property damage that had begun before, but continued into the policy period. The Montrose Court reasoned 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 throughout successive CGL policy periods, is potentially covered by all policies in effect during those periods.” As a consequence, following Montrose, insurance companies began to incorporate in their standard CGL policies language expressly excluding coverage for injury or damage that occurred in part before the policy period began. This language has become commonly described as a “known loss exclusion.” Quanta Indem. Co. v. Davis Homes, LLC, 606 F.Supp.2d 941, 947 (S.D. Ind. 2009).

Recently, the Indiana Court of Appeals in Indiana Ins. Co. v. Kopetsky, 14 N.E.3d 850 (Ind. Ct. App. 2014) considered the question of whether the insurer’s knowledge of the loss prior to policy inception estopped the insurance company from utilizing the known loss doctrine to bar coverage for an environmental contamination loss that began prior to the Indiana Indemnity’s policy inception. Under Indiana law, if the insurer knew of the loss before its policy incepted, the insurer’s knowledge would estop the insurer from voiding coverage. Indiana’s variation of the known loss doctrine looked not only to the knowledge of the insured prior to the policy inception, but also the insurer.

In the Kopetsky case, the Indiana Insurance Company policy contained a fortuity principle in the policy’s coverage clause. The policy provided as follows:

This insurance applies to “bodily injury” and “property damage” only if:
….
(3) Prior to the policy period, no 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. 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.

The Indiana Court of Appeals in Kopetsky characterized the foregoing language as a “known claim” exclusion.

The Kopetsky case involved four successive one year CGL policies issued by Indiana Insurance Company. During the first policy term, it was undisputed that the insured became aware of the contamination claim. It was also undisputed that during the first policy term Indiana Insurance Company also became aware of the environmental contamination. The insured argued that under Indiana’s known loss doctrine, even if a jury were to find that the insured knew of the contamination before taking out the insurance with Indiana Insurance Company, coverage would be barred during only the first of the four coverage years at issue. Indiana Insurance, citing the “known claim” exclusionary language argued that there was no coverage for the final three coverage years regardless of what a jury might find regarding the insured’s knowledge and, a finding that the insured knew of the loss before obtaining coverage, would bar coverage in the first year as well. The Indiana Court of Appeals agreed with Indiana Insurance.

According to the Indiana Court of Appeals, the known claim exclusion did not make an exception for cases where the insurer also knew of the loss beforehand. Only the insured’s prior knowledge was relevant for purposes of the known claim exclusion. Therefore the issue was whether the known loss doctrine or the known claim exclusion applied under Indiana law.

Courts in Indiana were required to start their analysis with the policy language to determine if (1) the loss would be covered under the general coverage clause and (2) if any exclusions applied that would preclude coverage, without regard to whether the loss constituted “economic loss.” See Sheehan Const. Co., Inc. v. Continental Cas. Co., 935 N.E.2d 160 (2010), opinion adhered to as modified on reh’g, 938 N.E.2d 685 (Ind. 2010). The Indiana Court took that approach and therefore applied the language of the known claim exclusion as it appeared in the policies without regard to the common-law known loss doctrine. Because the known claim exclusion trumped the common-law known loss doctrine, Indiana Insurance Company’s knowledge of the contamination became irrelevant.