Some Knowledge Isn’t Enough to Trigger Known-Loss Exclusion

The purpose of insurance is to protect insureds against unknown, fortuitous risks, and the purpose of insurance policies is not to insure liability incurred prior to the policy issuance. Because of this, modern general liability policies often contain a known-loss provision which states that the policy “applies to … ‘property damage’ only if … no insured … knew that the ‘property damage’ had occurred, in whole or in part.” Recently, the Ninth Circuit Court of Appeals in Kaady v. Mid-Continent Cas. Co., 790 F.3d 995 (9th Cir. 2015) held that the insured’s knowledge of cracks in manufactured stone and masonry caps that he installed prior to the purchase of an insurance policy did not constitute knowledge of damage to the deck posts and wall sheathing furnished by others upon which the manufactured stone and masonry caps rested.

In this case, the insured, Kaady, was an Oregon subcontractor that installed manufactured stone at a multi-unit residential project. Kaady had affixed manufactured stone to the wall sheathing of certain buildings, wrapped deck posts with manufactured stone, and installed masonry caps on the top of the stone that was wrapped around the deck posts. After construction on the project was completed, Kaady was called back to the construction site to inspect cracks in the manufactured stone and masonry caps that he installed. He explained to the general contractor on the project that the cracks “had something to do with settling, being struck, or the substrate contracting or expanding.” Three months after he had inspected the cracks, Kaady bought a one-year CGL policy from Mid-Continent. Six months later, the owner of the residential project sued the general contractor who, in turn, sued all the relevant subcontractors including Kaady. Kaady settled the claim against him and tendered the claim for indemnification to Mid-Continent. Mid-Continent denied the claim arguing that so long as Kaady knew about any damage to a structure, the known-loss provision in the policy barred coverage for any other damage to the same structure. The Ninth Circuit Court of Appeals disagreed.

In doing so, the Court asked the following question: “Is the ‘property’ we must examine the structure as a whole or only the components—the deck posts and wall sheathing—that Kaady claims coverage for?” The Court also asked whether Kaady’s prior knowledge of one type of physical injury to property automatically precluded coverage of all types of physical injury to the property.

Although Mid-Continent had suggested that Kaady’s prior knowledge of any damage to property barred coverage for any other damage to that property, regardless of its type, the Court noted that the known-loss provision in the policy barred coverage of “property damage” if the insured “knew that the … ‘property damage’ had occurred, in whole or in part.” The Court noted that “use of the definite article ‘particularizes the subject which it precedes’ and indicates that the claimed damage must be the same as the known damage.” This interpretation made sense to the Court because a CGL policy covers many different types of hazards that have no relationship to one another. Therefore, an insured’s knowledge of one type of damage to property did not automatically constitute knowledge of any and all other damage to the property. According to the Court, the claimed damage must be related to the known damage.

Focusing on the language of the known-loss provision, the Court zeroed in on the provision’s “continuing property damage” language. The provision specifically stated that if the insured “knew, prior to the policy period, that the … ‘property damage’ occurred, then any continuation, change or resumption of such … ‘property damage’ during or after the policy period will be deemed to have been known prior to the policy period.” Focusing on this language, the Court noted that if the insured’s knowledge of any damage to any part of the structure automatically barred coverage of all damage to that structure, as Mid-Continent argued, it wouldn’t matter whether the claimed damage was a “continuation, change or resumption” of the known damage. This problem could be avoided if the known-loss provision was interpreted as barring coverage only if the claimed damage was a “continuation, change or resumption” of the known damage. Such an interpretation permitted coverage for damages unrelated to the damage known before acquisition of the policy but prevented insurance of a loss that was in progress.