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More Holes in the Parachute
By Robert N. Hughes, CPCU, ARM
When last we met I was in the process of listing the more prevalent reasons insurance companies offer for not paying liability claims (commonly known as affirmative defenses). You may recall I compared them to holes in your parachute. Here are some more for your edification, amusement (perhaps) and aggravation (most likely).
The concept of fire insurance in the United States arose in the late eighteenth century out of fire protection societies. The idea was that, in order to get a fire at your house extinguished, you would subscribe to one of the fire-fighting societies, affix a medallion to your house and when it caught on fire (as houses often did in those days) someone would see the medallion, or "fire mark," summon the proper firefighters, and all would be well. The issue never arose as to whether your house was already burned down or indeed on fire at the time you joined the society, because it made no difference in the bargain. Eventually, fire insurance policies which agreed to indemnify the homeowner for damage by fire replaced the agreement to actually fight the fire. Early policies simply agreed to cover damage by fire and did not state when such fire might have occurred. Apparently, a group of highly enterprising rogues made a considerable amount of money by purchasing burned-out property, buying insurance on it and making claims for coverage. Ultimately, however, their effort were thwarted by the courts, which decided, logically, that one should not be able to purchase coverage for property that was already damaged or destroyed. This has become known over the years as the "known loss doctrine."
Unfortunately, insurance companies are beginning to attempt to contort this perfectly logical doctrine into a justification for refusing to defend or indemnify their general liability policyholders. Let me give you an example. Suppose your company makes automotive radiators. You use a solvent approved and recommended by the U.S. government and your state government to degrease the final product. You dispose of that solvent in the manner dictated by federal and state governments. Further, the manner of disposal is also recommended by your insurance carrier through a national organization of which it is a subscribing member. Further suppose that some years later, new technology becomes available that shows the solvent to be actually dangerous and the disposal methods inadequate, and, lo and behold, John Jones sues you for making his family sick because your solvent allegedly polluted his water supply. You notify your insurance carrier. When you finally do hear from your carrier it denies the claim for many reasons, one of which is that you knew you were using a solvent, you knew you were disposing of it and, therefore, you have suffered a known loss. Your carrier will probably mention that it doesn't believe it was "fortuitous."
Sound ridiculous? Most policyholders think so. The fact is, in the context of liability insurance, you haven't even suffered a "loss" in the same context as the burned house example. In order to have suffered a "loss" in the liability context, you have to have had an "occurrence" (which requires damage), a claim for damages, an adjudication of your liability for those damages and a quantification of the damages. The only elements you have in the previous example are an "occurrence" and a claim for damages. so if you haven't even had a "loss" how could it have been a "known loss"?
Now, as if that were not bad enough, suppose you answer that argument by stating truthfully that you had no idea the solvent was dangerous and that you disposed of it in the manner prescribed by all the prevailing authorities. The insurance company counters with what has become known as "objective" policy interpretation (as opposed to "subjective" interpretation). In other words, it says, "never mind what you (subjectively) actually knew or believed. You, as the user of the product, should have known it was dangerous and should have known better than to dispose of it in the manner prescribed." Now, you tell me how in the world you know what you are buying when you buy insurance that is going to be interpreted, not on the basis of what you actually do know or believe, but on the basis of some vague and unknown (perhaps even unknowable) objective standard. The answer, of course, is "YOU DON'T."
Now that I've got your attention I unfortunately have time this issue only to really make you mad. Many insurance carriers and their lawyers, unsatisfied with the aforementioned defenses, are taking the issue even one step further. they are saying, "Since we know that you are prevented by the ‘known loss' doctrine from obtaining coverage for something you know has already happened, isn't it therefore correct to say that you shouldn't have been able to buy coverage when you knew there was the 'risk' that the occurrence insured against would happen?" This little gem has been dubbed in legal circles as the "known risk theory." In other words, you have a meeting with your insurance agent and he/she says that you should consider purchasing liability coverage for injury or damage caused by one of your products, so you take the advice and purchase that coverage. This loop-legged "known risk theory" would hold that, because you perceived the risk, it was uninsurable.
I'm sure the ludicrousness of this position is clear to you, but I cannot resist closing with a true anecdote on the issue. The names have been omitted to protect the guilty. A paid expert testifying on behalf of a prominent U.S. insurance company being sued by a policyholder actually testified that because a large trucking firm could expect to have vehicular accidents which resulted in property damage and/or bodily injury, such an exposure was a "known risk" and as such not "fortuitous" and inherently uninsurable. I'll tell you what my response is to that. If this is so, then all the insurance companies in the world which have ever written general liability insurance should immediately declare that their coverage was a sham and should return every dime of premium ever collected. I have listened, but I don't hear any of them making that offer.
You have a couple of months to recover before I go on. By the way, if anyone has any special requests, please contact me by e-mail at firstname.lastname@example.org. Until then, be safe.
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