Insurance Coverage Exclusions for Known Loss, Prior Knowledge, and Prior Notice: Evolving Judicial Standards

Description

Insurance coverage is premised on the concept of fortuity--a loss that occurs by chance or accident. When an insurance company issues a policy, it insures against the risk of possible loss, not a certainty. Insurance carriers do not intend to provide coverage for a loss that has occurred, is in progress, or is substantially certain to occur. But situations inevitably arise where policyholders try to obtain insurance coverage for a prior loss.

While insurers can avoid these problems by either excluding coverage for known losses in the insuring agreement or requesting information about known losses during the application process, it is not always practicable to seek this information across all business lines. And courts continue to recognize the known-loss rule and refuse to allow insurance coverage for a loss that has already occurred.

Many courts interpreting exclusions for prior loss, or losses as to which the insured had prior notice or knowledge, have found them clear and unambiguous and adequate to support summary judgment. To cite but one example, in First Horizon Nat'l Corp. v. Houston Cas. Co., (6th Cir. July 10, 2018), the court affirmed summary judgment for the insurers where the insured bank concealed critical facts about a government investigation until the eve of settlement. The court held that the insured failed to provide timely notice of, or adequate notice of, a potential claim.

Sometimes policyholders argue that the exclusions do not apply because the insured lacked notice of the right or lacked knowledge that the facts they knew could result in a covered claim. E.g., Greene v. Westfield Ins. Co., 963 F.3d 619 (7th Cir. June 25, 2020). On the other hand, some courts have found that the prior knowledge exclusion does not apply or that issues of material fact exist that prevent the court from granting an insurer summary judgment.

Listen as our panel of veteran coverage counsel discusses these exclusions and highlights their benefits and shortcomings as useful tools for both the insured and insurer to identify and manage specific categories of risk that will--or will not--be included in the underlying policy.