Whether there is insurance coverage for a loss known by the insured prior to purchasing an insurance policy depends on several factual issues. By its very nature, insurance is fundamentally based on contingent risks which may or may not occur. One dictionary defines “insurance” as “a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from an unknown or contingent event and is applicable only to some contingency or act to occur in the future.” The risk ceases to be contingent and becomes a probable or known loss when the insured knows or has reason to know when purchasing a commercial general liability policy that there is a substantial probability that it will suffer or has already suffered a loss. Under such circumstances, the loss is uninsurable under that policy unless the insurer otherwise agrees because the “risk of liability is no longer unknown.” Therefore, the insurer has no duty to defend or indemnify the insured with respect to the known loss unless the parties intended the known loss to be covered. Outboard Marine Corporation v. Liberty Mutual Insurance Co., 154 Ill.2d 90, 103-104 (Ill. 1992) (citations omitted).
There is no bright line test to determine whether and at what point in time the insured knew or had reason to know of the substantial probability of the loss at issue. The extent of the insured’s knowledge of the loss must be determined on a case-by-case basis. In a motion for summary judgment, the court must determine whether any factual questions exist with respect to the insured’s knowledge at the time it bought each policy. If the court finds there is no question of fact, the issue is one of law for the court to decide. Id. at 104.
In resolving a factual issue regarding the level of the insured’s knowledge, the insurers do not need to prove that the insured knew or had reason to know of the exact nature and extent of the loss or that a loss or liability was certain to occur. Rather, the 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 commercial general liability policy, that a probable loss or liability would occur. Id. at 107.
Like many aspects of insurance coverage law, whether a loss qualifies as a known loss depends on the facts of each specific case. However, a known loss can potentially lead to a legitimate denial of insurance coverage.
The insurance defense attorneys at McKenna Storer are available to provide further information about the known loss doctrine and other issues of affecting the rights of insurers and insureds under insurance coverage law. Contact Kelley Purkey for more information.