It is axiomatic that traditional insurance policies cannot bepurchased to cover losses known to exist. A classic example is thehomeowner standing in his basement, with water up to his ankles,who tries to order flood insurance for the first time.

Insurance companies attempt to expand this general rule byadvocating for a “known loss” bar to coverage (the “Known LossDoctrine”), asking courts to analyze whether circumstances known tothe policyholder before the policy was sold portended a future lossand should have been disclosed to the insurance company. Inother words, insurance companies argue, coverage should be excludedfor any subsequent losses somehow arising from facts thepolicyholder knew about.

Policyholders can theoretically “contract around” the Known LossDoctrine via policy language addressing situations insurancecompanies would otherwise argue are governed by the doctrine. The policyholder should negotiate clear prior circumstances/losseslanguage specifying what information must be disclosed to theinsurance company, and when. For example, what types of factssufficiently indicate a potential future occurrence that they mustbe disclosed? What degree of conflict with a third partysufficiently portends a future claim that it must bedisclosed? The clearer the language the better.

Even when the policyholder has negotiated for a policy thatunambiguously covers a type of loss, however, the insurance companymight invoke potentially more favorable common law by asserting theKnown Loss Doctrine. Two leading state supreme court casesdemonstrate how different results can be reached despite similarfacts.

In Rohm & Haas Co. v. Continental Cas. Co., 781A.2d 1172 (Pa. 2001), the Pennsylvania Supreme Court held that ifthe policyholder was awareor should have been aware of likely future losses triggeringthe policy, the insurance company can deny coverage in certaininstances. The policyholder, a chemical company, knew ofarsenic pollution at its facility since 1964, but did not tell itsinsurance company until 1988. On one hand, the company wasnever sued by private citizens and until 1980 was unhindered bymodern regulations, suggesting future liability was unlikely. On the other hand, the policyholder was previously held liable forthe arsenic pollution under a 1937 law and had voluntarily paidmedical bills likely arising from the pollution for nearbyresidents, seemingly to avoid lawsuits.

After the Comprehensive Environmental Response, Compensation,and Liability Act (CERCLA) was passed in 1980, the policyholder wasassessed significant cleanup costs and subsequently informed itsinsurance company of the pollution. A plurality of the courtheld that even though covered losses were not inevitable in the1960s, the company was or should have been aware of likely futurelosses; it therefore upheld the insurance company's Known LossDoctrine defense.

By contrast, in Montrose Chemical Corp. v. Admiral Ins.Co., 913 P.2d 878 (Cal. 1995), which also involved a chemicalcompany's potential CERCLA liability, the California Supreme Courtapplied its version of the Known Loss Doctrine (the”loss-in-progress” rule) to find for the policyholder. Priorto the policy period, the policyholder received a letter from theEPA informing it of potential CERCLA liability. Thepolicyholder was therefore aware of the potential liability, at thelatest, when it received this letter. Even though the lettersuggested future CERCLA action against the policyholder by the EPA(and Montrose was in fact later sued by the EPA), the Courtemphasized that there was no certainty of liability arisingduring the relevant policy periods—the policyholder was merelypotentiallyresponsible for cleanup costs. Without certainty, the Courtheld, there was a known risk, but no known loss. Theinsurance company was required to provide coverage for thesubsequent lawsuit. In a later California case involving apollution site at issue in Montrose, the court reiteratedCalifornia's pro-policyholder approach: “Being aware of a risk of aparticular event is not equivalent to knowing or believing theevent is highly likely to occur.” State of California v.Allstate Ins. Co., 201 P.3d 1147, 1161 (Cal. 2009).

The Rohm & Haas and Montrose policyholderswere both subject to potential CERCLA liability, yet the courtsreached opposite conclusions. Given this divergence, it isdifficult to predict how a given court will apply the Known LossDoctrine. Even in Pennsylvania, despite what insurancecompanies may consider the favorable Rohm & Haasstandard, courts have subsequently reached pro-policyholderdecisions. See, e.g., CincinnatiInsurance Cos. v. Pestco, Inc., 374 F. Supp. 2d 451 (W.D. Pa.2004); Behringer Saws, Inc. v. Travelers Indemnity Co. ofIllinois, 2003 WL 21962949 (Pa. Com. Pl. Aug. 19, 2003). Policyholders should expect that regardless of how a stateinterprets the Known Loss Doctrine, their insurance company mightargue that the doctrine applies. In response, policyholdersshould: (i) focus on their particular policy language; and (ii)emphasize that the doctrine applies only to known losses, as inMontrose, not to known risks.

Nicholas R. Maxwell is an attorney in the New Yorkoffice of Anderson Kill, a national law firm. Mr. Maxwell'spractice concentrates in insurance recovery, exclusively on behalfof policyholders, and in environmental and employmentlaw. (212) 278-1161 | [email protected].