Known Loss Scenario
The insured sought retroactive insurance coverage for his land after erosion issues between his land and his neighbor's land arose. The problem was that the insured chose not to tell the insurer about this issue until after the property damage had manifested itself. This case is Harleysville Mutual Insurance Company v. Dapper, 2010 WL 2925779 (M.D.Ala.).
Harleysville filed this action seeking a declaration that it is not contractually required to defend or indemnify its insured, Dapper. This followed a lawsuit filed against Dapper by Fantail that sought to recover damages for damage to property owned by Fantail that was allegedly caused by work performed by Dapper on land it owns directly adjacent to the Fantail property. Subsequent to the filing against Dapper, Dapper requested Harleysville to provide a defense and the insurer refused. Harleysville argued that the known loss exclusion in the policy precludes coverage.
The United States District Court noted that the insurer properly identified the pertinent sections of the insurance policy and Dapper did not dispute the language, only the application of it. The pertinent language is that the coverage applies only if “prior to the policy period, no insured knew” that the damage had occurred in whole or in part. Therefore, the court said, the crux of the matter is when Dapper knew of the damage to Fantail's property. The court then reviewed the facts of the case.
In 2003, Dapper purchased 4 acres of property directly adjacent to the land owned by Fantail. In April, 2006, counsel for Fantail contacted Dapper to inform it that excavation done on the Dapper property created erosion issues on the Fantail property. In addition, Dapper received notice from the Alabama Department of Environmental Management that erosion was occurring on the Dapper property that would require remediation. In July, 2006, Dapper attained coverage from Harleysville and received coverage retroactive to September, 2005. Based on the chronology of events, the court said it was clear that Dapper knew of erosion issues between the Dapper land and the Fantail land prior to purchasing the Harleysville policy. It was undisputed that Dapper received notice of the Fantail property damage at least two months before the policy was issued.
The court said that an insurance company relies upon representations by the customer when making its decisions on whether to insure a risk. Full disclosure shields legitimate policy holders from premium increases that would follow when benefits are paid to those who deliberately hid pertinent matters from the insurer. The important point in this case is that Dapper knew of the potential for a claim and chose not to tell Harleysville about it. The court could find no good reason in law or in equity to shield Dapper from the unambiguous known loss provision of the insurance contract.
The court found that the known loss provision in the policy applied. As the property damage at issue manifested prior to the policy inception, Harleysville was relieved of any duty to defend or indemnify Dapper.
Editor's Note: This case is cited not only for its upholding of the known loss exclusionary language in the insurance policy, but also for the court's reflections on the duty to defend and the duty to indemnify.
The court said that the duty to indemnify is not ripe for adjudication until the insured is in fact held liable in an underlying lawsuit. In contrast to this, courts recognize a justiciable controversy exists when the insurance company denies it has an obligation to defend the insured under the terms of the policy, and the duty to defend is determined by the language of the insurance policy and by the allegations in the complaint giving rise to the action filed against the insured.