How to read an insurance policy: the known loss doctrine, part 1

The insuring agreement often incorporates the "known loss doctrine," generally with words to the effect that the policy covers "bodily injury or property damage that was not, prior to the policy period, known to have occurred by any insured."


The known loss doctrine is one of the most basic concepts of insurance coverage. Insurance is supposed to be a gamble: You pay $1.00 in premiums now as a gamble against the risk that without the insurance you would have to pay $10.00 in loss (or attorney's fees) in six months. You can play the odds by negotiating premiums against limits. If the premiums become too high vis a vis the chances of the insured event occurring (many people--but not me--say this is the case with disability insurance) or the maximum payout is too low (generally, dental insurance), you choose not to purchase the insurance.


The whole system falls apart if you purchase insurance for a loss you already know has occurred. In law school parlance, the insurance is no longer against a "fortuitous" event.


Litigation around the known loss doctrine predictably concerns what it means to be "known": who knew, what they knew, and when they knew it. The issue frequently comes up in environmental contamination litigation: An insured may argue that although there was some evidence of contamination at the time the policy began, the insured did not know the extent of the contamination. The Supreme Judicial Court of Massachusetts has stated in this context that the only requirement for the loss to be exempt from coverage is that "the insured has evidence of a probable loss when it purchases the policy." SCA Services, Inc. v. Transportation Ins. Co., 419 Mass. 528, 533 (1995).


Another common context for the known loss doctrine is construction defect litigation. Arguments frequently arise about punch lists demonstrating problems such as lack of caulking or other insufficiencies in the building envelope. Insurers argue that those punch lists show that the insured contractor was aware of probable water infiltration into the building, while the insureds argue that the punch list only demonstrated that the contractor had work to do before the job was finished.


In a future post I will discuss how the known loss doctrine applies where the insured knew of the occurrence but did not know that the occurrence could lead to liability.

Massachusetts Superior Court explores definition of "resident of your household"

Massachusetts Lawyers Weekly reports a new Superior Court case in which the court denied summary judgment to an insurer because of a factual dispute about whether the policyholder's brother was a household member. This post is based on the Lawyers Weekly summary as I have not been able to obtain a copy of the decision.

In Hingham Mut. Fire Ins. Co. v. Gee, a tree on the property of the policyholder, Michael Gee, fell on the policyholder's brother, Wan Xing. The policy excluded coverage for bodily injury to "if residents of your household, your relatives."


The insurer argued that Xing was a resident of Gee'shousehold, because the brothers and their families lived in the same apartment. The defendants argued that the brothers and their respective families maintained the apartment as two separate, financially independent households coexisting in a small space.


The court denied summary judgment, holding that there was a dispute of fact regarding Xing's financial dependence on his brother and the two families' day-to-day interactions with each other.

Getting business from insurers

Ryan Belka, an attorney at Cooke Clancy & Gruenthal LLP, emailed this question:

I am aware that insurance companies keep lists of lawyers who handle various matters and generally allocate work accordingly. My question is: as a firm or a lawyer, how do you make it on those lists? Is there a formal application process through the general counsel of the insurance company? Do insurance companies hire boards and panels in order to allocate the work? Do you apply directly to them? Can this information be found?

That's a great question and one that I would love an answer to myself, as I am expanding my own book of business with insurers.

So, for any insurance adjusters or supervisors: How do you find outside counsel? What is the best way for an attorney to get onto your list?

And for any insurance defense attorneys: What strategies have been effective for you in obtaining new business? What have you tried that has not worked?

Extreme sport means sudden death for life insurance

It’s official; if you are into base jumping, deep-sea diving or any other extreme sports, chances are that you are going to have a terribly hard time getting life insurance.
A new report from financial services research firm Cannex found that hobbies involving the sea, the sky or the racetrack can either disqualify potential policy holders from getting cover for trauma, total and permanent disablement or death – or at least make it very expensive.
The head of Cannex adviser services, Stephen Mitchell, says an extreme sport participant’s eligibility for cover will depend on how often they participate and the nature of their participation.
“If you are part of a 10-man crew in the Sydney to Hobart yacht race, death and trauma cover are standard, but if you are a lone sailor, trauma cover is out and you will only get death cover if you pay a hefty premium loading,” he says.
“The difference is in perception of risk by the insurer, who would argue that a bigger crew should mean more help at hand in an emergency. There is also the thinking that a yacht requiring such a crew would be more expensive and the crew more likely to be proficient.”
Cannex recently rated all product premiums according to gender and across four common occupation categories; professional, white collar/clerical, light manual/retail and blue collar.

AIG

My advice to AIG clients is to sit tight.

Over the past few days I have received calls from clients, reporters, analysts, and insurance people.

Yes, this is a mess. AIG has some work to do. The offer of loans will help. There will be some changes that need to be made.

However, AIG's insurance business (the normal stuff) is healthy with a reasonable (based on the current shape of the industry) loss ratio and profitability.

Recall also that the insurance operations of AIG is segregated into hundreds of separate insurers. What happens in one segment does not necessarily affect others.

Pulling out of a policy now will involve penalties and effort that probably will not pay off. Regulators are watching and will step in at some point if things go further south.

State guarantee funds are available if actual losses occur (not a perfect solution, but a help). There is also the idea that another insurer would buy the obligations of AIG.

Too much is up in the air to make a switch mid stream.

Renewals are a different matter. Certainly consider the AIG situation as you look to renew a policy.

Rural dwellers downplay importance of life insurance

A specialist insurance company has warned that majority of people in the countryside do not consider life insurance a top priority for them.

Following a recent poll the firm revealed that about 44 per cent of rural dwellers consider life cover less important, and that just one-in-ten see life cover as important for protecting their family and dependents.

While a fifth of people overspend each month, only one quarter of them are saving for their long-term future, said the insurance firm.

An expert with the firm commented that the figures were quite disturbing, adding that people in the countryside might think that the wider rural community, due to close links with family and friends, would provide alternative support in event of the demise of their breadwinner.

The expert dismissed such assumption as a ‘risky strategy’ even as she stressed the importance of life insurance.

The credit crunch and rising cost of living have put much pressure on people’s budgets and ability to save. Many end up resorting to credit to survive.

A Texas view of occurrences

In an earlier post I noted that the Massachusetts Appeals Court has stated in unpublished opinions that a construction defect is not an occurrence vis a vis the contractor responsible for the defect. Mike Tracy at Rudolph Friedmann has brought to my attention a recent decision from the Supreme Court of Texas, which assumed that a construction defect is an occurrence without directly addressing that question. The case is also a good example of the timing issues with respect to occurrences, which I mentioned in my last post. Finally, for those of you keeping score, Texas, like Massachusetts, has declined to adopt a blanket approach to triggers of coverage.


In Don's Building Supply, Inc. v. Onebeacon Ins. Co. the Texas court answered questions certified from the Fifth Circuit Court of Appeals about when property damage "occurs" and, more specifically, whether an insurer's duty to defend is triggered where damage is alleged to have occurred during the policy period but was inherently undiscoverable until after the policy expired. The court stated with respect to the first question that the key occurrence date is "when the injury happens, not when someone happens upon it," and answered yes to the second question.


Don's Building Supply ("DBS") sold and distributed a synthetic stucco product called EIFS. The product was installed on various homes from 1993 to 1996, during which DBS had a CGL policy. From 2003 to 2005 homeowners filed suit against DBS, alleging that the EIFS was defective and not watertight. The homeowners alleged that moisture penetration began within six months to a year after the application of the EIFS.


DBS's insurer, OneBeacon, filed a declaratory judgment action. The Texas court held that under the policy definition, the property damage occurred when a home suffered wood rot or other physical damage; the date that the damage was or could have been discovered is irrelevant.


The court refused to adopt an overall approach to triggers of coverage, stating that the trigger determination should be driven by the contract language, which varies from one policy to another.

Some occurrence issues

In a previous post I discussed occurrence-based policies. Basic to those policies is what the word "occurrence" means. Although policy definitions of occurrence have some variation, a typical definition is "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."


In the vast majority of cases, whether or not something is an occurrence is straightforward. A car accident is an occurrence. A doctor accidentally amputating the patient's wrong leg is an occurrence. A power saw malfunctioning and injuring someone's hand is an occurrence. A fire is an occurrence. An assault by an insured person is not an occurrence; but an assault by an employee of an insured business may be an occurrence.


Not surprisingly, disputes over whether or not an event was an occurrence have to do with the intentions of the insured. If the insured expected or intended to cause an injury, there is no occurrence.


About a year ago, in the case of Terra Nova Ins. Co. v. Fray-Witzer, the Supreme Judicial Court of Massachusetts addressed the question of whether unsolicited faxes sent by an auction company, Metropolitan, were an occurrence. Metropolitan had purchased and faxed, through a contractor, unsolicited advertisements, including 360,000 such advertisements to Massachusetts fax machines. Unfortunately for Metropolitan, it is illegal under federal and Massachusetts law to send unsolicited faxes. When Metropolitan was sued in a class action lawsuit over the faxes, it sought insurance coverage from its commercial general liability insurers.


The Supreme Judicial Court of Massachusets decided that the sending of unsolicited faxes were not an occurrence. The class action plaintiffs (who would benefit from the insurance coverage) argued that although Metropolitan may have intended to transmit the advertisements, they did not intend to violate the law. The court disagreed with that argument. It stated that the injury to the class members (the consumption of paper and toner and unwanted use of the fax machines) was an inherently foreseeable result of Metropolitan's conduct.

In future posts I will discuss other issues raised by the definition of occurrence.

People lying on life insurance applications

A new report has shown that due to the current economic climate an increasing number of people are lying on their life insurance applications.

Research by AXA revealed that one in 14 people who have taken out insurance have knowingly misled insurers when completing application forms in order to save money during the credit crunch.

Health and lifestyle habits are often hidden from insurers as almost one in ten people do not disclose their smoking habits, while 25 per cent of men understate their alcohol consumption.

Iain Mallon, head of protection at AXA said: "Insurers are not looking for reasons not to pay out. Our business is designed to support people not constrain claims.

"However, quite simply if your insurer finds out you have deliberately not disclosed relevant information, they may not be obliged to pay out the full amount."

AXA discovered that 25 per cent of the British population incorrectly believe that they will face premium increases if they are honest about lifestyle habits or medical conditions.

Life insurance is essential part of healthy financial plan

Do you have people in your life who rely upon your income for their financial wellbeing? If you do, consider the following questions.

What would happen financially to your dependents if you should die prematurely and your income ceased? Would your family be able to continue to pay their living expenses?

These are not fun questions, but they must be answered if one is to have a healthy financial plan.

I remember when I considered these two questions, and I did not have a strong answer for either of them. I could not imagine my wife and daughter having to struggle through the loss of their loved one while at the same time figuring out a way to replace my income.

I solved this issue by acquiring 30-year level term life insurance equal to 10 times my annual income. If I should die prematurely, the life insurance will produce income that is near the amount that I was earning. This would allow my bride and daughter to focus on grieving without having to wonder how to pay the bills.

I acquired 30-year level term life insurance for several reasons. The word “level” means that the premiums will not change over the policy’s term. The term will cover me all the way to retirement. Term life insurance is extremely cheap.

I like the fact that term life insurance is also free of investments. I have found that when life insurance and investments are consolidated (commonly called whole or permanent life insurance), the product becomes much more costly.

I can obtain quotes on term life insurance without speaking to anyone by visiting zanderins.com and clicking on “Instant Term Life Quote.” This gives me a quote in less than 60 seconds — without talking to anyone. I like that! I have found that my local insurance agent has access to the exact same term life insurance company quotes as well.

The process for obtaining life insurance is simple. The insurance company will have a health professional meet you at a place of your choice to conduct a brief interview (less than 15 minutes), obtain a blood sample, weight, and body measurements. For me, the entire health review process took less than 30 minutes and my policy was in effect within 15 days. It will remain in effect for the next 30 years at a fixed premium. Awesome!

One more thing to consider. My bride does not have an income-producing job, but she still has life insurance. Why? Because if she should die prematurely, there are a TON of things she does to make our household run efficiently that I would have to pay others to do!

If you have others dependent upon your income, I urge you to obtain life insurance.

Time for a financial check: Got a will? Is your insurance up to date?

By KAREN BLUMENTHAL

The Wall Street Journal

The most important decision you’ll make this fall may be whether to vote for John McCain or Barack Obama.

But as you mull that over, you might also take the opportunity to make some important choices for your financial future.

So consider this suggestion: Make the list below your presidential election-year financial duty, something you commit to taking care of between the conventions and the elections every four years. It won’t avert every disaster, but it will help you stay on top of important issues for yourself and your family.

•Check your beneficiaries. This one is easy. The beneficiary form makes clear where you want your retirement account, 401(k) and life insurance to go, regardless of what your will says.

•Update your will. It sounds so obvious, but it is so easy to put off this miserable task even as your life changes in dramatic ways. Have you had children since your last will was written? Is your executor still up to the task? Has your financial or marital situation changed?

There are plenty of online and software options for drawing up a simple will, though consulting a lawyer is a good idea if your situation is even a little bit complicated.

•Review other key documents. In an ideal world, you have formally designated someone to make financial and health-care decisions for you if you aren’t in a position to make them for yourself. If so, you simply need to be sure that those documents reflect your state’s current laws and that the people are still alive, healthy and the ones you want making the decisions.

If you haven’t done this, a lawyer can draw up these documents. Though it may seem premature, even young adults should make their wishes clear. Sadly, both Karen Ann Quinlan and Terri Schiavo, who were at the center of legal life-and-death battles, were impaired while in their 20s.

•Reconsider your life insurance. Life insurance is intended to replace income that others rely on. But if you are older, your children are grown and your savings and retirement accounts are enough to cover your spouse’s needs, it’s possible that you don’t need it anymore.

•Ask about your other insurance policies. Once you’re thinking about life insurance, it doesn’t hurt to be sure your other policies are up-to-date as well. Has your homeowner’s policy kept pace with higher construction costs? Have you acquired art or jewelry that needs separate coverage?

•Think about the big picture. Occasionally, you should take stock of your long-term goals, says Bonnie Hughes of the Enrichment Group, a financial-planning firm in Miami. Are you still planning on taking that 2010 vacation to Africa? Did you sell your house rather than remodel it? Have your ideas about when or where you want to retire changed?

If you periodically step back and assess your goals, you can adjust your savings and investments to get you where you want to go.

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