Summary: This article presents an analysis of the Montrose decision and the known loss doctrine that is related to that decision. Mr. Randy J. Maniloff is the author of this article. Mr. Maniloff is at time of writing, the Chair of the Insurance Coverage Group at Philadelphia-based Christie, Pabarue, Mortensen, and Young, P.C., where he concentrates his practice in the representation of insurers in coverage disputes. Mr. Maniloff handles a wide variety of insurance coverage matters in both the litigation and non-litigation arenas, including environmental property damage, toxic tort bodily injury/asbestos, construction defect, mold, general liability (products and premises), professional liability, directors and officers liability, media liability, public officials liability, homeowners, first-party property, and health care (including managed care and community associations).
The author expresses his sincere appreciation to Mr. Brad Mortensen for his invaluable assistance in the preparation of this article. The views expressed herein are solely those of the author and are not necessarily those of his firm, its clients, or the FC&S Bulletins.
Note: This article originally published on November 24, 2008, with interdocument links updated on October 21, 2020.
Insurance is about one thing—claims. Many other aspects of an insurance company are critical to its success, but the fact remains that they are still only supporting characters. And no discussion about claims can start anywhere but one place—the words contained in the insurance policy, or coverage form. Of course, not all policy forms are equal in their significance. However, in the property-casualty world, there can be little doubt that, at or near the top of the forms food chain are Insurance Services Office, Inc.'s (ISO) commercial general liability coverage form—CG 00 01 and American Association of Insurance Services (AAIS) commercial liability coverage form—GL-200 Ed. 1.0. These two documents are the backbone of liability insurance in America . For a substantial number of policyholders, they set out what is covered (the insuring agreements), what is not (exclusions), for how much (limits of liability), how the parties" relationship shall be governed (conditions) and what certain terms mean (definitions).
Given the significance and prevalence of these forms, and relative infrequency in which they are altered, any change that is made to them is important—even if it will only have relevance for some claims. But when a change in these forms has the potential to be in play for every claim, regardless of type, it is elephantine. Such is the case with the latest version of ISO's form CG 00 01 10 01 ("the current CGL form") and AAIS's amendment of form GL-200 Ed. 1.0 with the addition of form GL 09 50 12 99, which contain provisions addressing the concept of "known loss"—that one cannot insure against a loss that has already taken place.i (This article is written based on the ISO CGL form.)
There is nothing new about known loss. Indeed, the idea that one cannot purchase insurance to cover a loss that has already taken place sounds like the "Who's buried in Grant's tomb?" of insurance coverage. However, until now, known loss is a concept that has only existed implicitly —as a common law doctrine. The current CGL form is the debutante ball for known loss. While its purpose remains the same—to ensure that no one is getting away with buying fire insurance after their building has burned down—the known loss doctrine is now right there in black and white, for all to see, and is no longer "just a legal technicality that makes for good conversation among lawyers." ii
The incorporation of the known loss doctrine into the CGL form could not have been accomplished in a more high-profile manner. It has been given the insurance policy equivalent of page one and above-the-fold placement: the insuring agreement. Specifically, the insuring agreement of the CGL form reads, in pertinent part, as follows:
b. This insurance applies to "bodily injury" and "property damage" only if:
(3) Prior to the policy period, no insured listed under Paragraph 1. of Section II – Who is An Insured and no "employee" authorized by you to give or receive notice of an "occurrence" or claim, knew that the "bodily injury" or "property damage" had occurred, in whole or in part. If such a listed insured or authorized "employee" knew, prior to the policy period, that the "bodily injury" or "property damage" occurred, then any continuation, change or resumption of such "bodily injury" or "property damage" during or after the policy period will be deemed to have been known prior to the policy period.
c. "Bodily injury" or "property damage" which occurs during the policy period and was not, prior to the policy period, known to have occurred by any insured listed under Paragraph 1. of Section II—Who is an Insured or any "employee" authorized by you to give or receive notice of an "occurrence" or claim, includes any continuation, change or resumption of that "bodily injury" or "property damage" after the end of the policy period.
d. "Bodily injury" or "property damage" will be deemed to have been known to have occurred at the earliest time when any insured listed under Paragraph 1. of Section II – Who is an Insured or any "employee" authorized by you to give or receive notice of an "occurrence" or claim:
(1) Reports all, or any part, of the "bodily injury" or "property damage" to us or any other insurer;
(2) Receives a written or verbal demand or claim for damages because of the "bodily injury" or "property damage"; or
(3) Becomes aware by any other means that "bodily injury" or "property damage" has occurred or has begun to occur.
The current CGL form does not alter the long-standing requirement of the insuring agreement that coverage is only available for bodily injury or property damage that is caused by an occurrence that takes place in the coverage territory and occurs during the policy period. It is that last requirement—that bodily injury or property damage must occur during the policy period—that is at the heart of the known loss provision in the CGL form.
In a January 7, 1999 circular, ISO summarized the reason for the known loss amendment to the insuring agreement as follows:
In Montrose Chemical Corporation v. Admiral Insurance Company, 10 Cal. 4th 645, 42 Cal. Rptr. 2d 324, 913 P. 2d 878 (1995), the California Supreme Court held that, given the wording of the Commercial General Liability (CGL) policies involved in the litigation, the known loss rule does not bar liability coverage for claims alleging continuous or progressive injury or damage as long as there remains uncertainty about damage or injury that may occur during the policy period and the imposition of liability upon the insured. There are court decisions in other jurisdictions, which have ruled similarly on this issue.iii
In light of the reasoning applied in Montrose and other similar decisions, we are introducing mandatory endorsements, which revise the Insuring Agreement of the CGL policy and other affected General Liability Coverage Parts to address the issue of known injury or damage.iv
For obvious reasons, the known loss provision in the CGL form is being informally called "the Montrose Endorsement." This article examines the California Supreme Court's decision in Montrose, the circumstances that led to the so-named endorsement and whether it alters CGL coverage.
Montrose Decision and the CGL Form
While Montrose led to the incorporation of a known loss provision in the current CGL form, the case is probably better known for the Golden State 's adoption of the continuous trigger, for purposes of latent injury and damage claims.v Its known loss aspect, however, arose as follows. In 1983, the United States and the State of California sued Montrose Chemical Corporation of California and numerous other businesses under CERCLA and state environmental statutes, seeking clean-up costs associated with a hazardous waste disposal site known as Stringfellow acid pits in Riverside County, California . The site operated from 1956 to 1972. From 1968 to 1972, Montrose paid a hauling company to transport byproducts of its DDT manufacturing process to the site.vi
On August 31, 1982, six weeks prior to the commencement of the first of four one-year CGL policies issued by Admiral Insurance Company to Montrose, Montrose was notified by the EPA that it was considered a potentially responsible party for money expended for response activities at the Stringfellow site.vii Montrose was also named as a defendant in a private-party suit, seeking damages for bodily injury and property damage allegedly resulting from the release of contaminants at the site.viii Admiral took the position that, based on the loss-in-progress rule—which the Montrose court noted is sometimes also referred to as the known loss rule—there was no potential liability coverage, and, thus, no duty to defend Montrose in the Stringfellow cases.ix The California Supreme Court disagreed. The California Supreme Court analyzed the issue under sections 22 and 250 of the California Insurance Code, noting that, under the Code, "any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against, subject to the provisions of this code."x
The Montrose court rejected Admiral's argument that Montrose's knowledge of the problems at the Stringfellow site defeated coverage: Admiral misses the point. The PRP notice is just what its name suggests—notice that the EPA considered Montrose a "potentially" responsible party. While it may be true that an action to recover cleanup costs was inevitable as of that date, Montrose's liability in that action was not a certainty. There was still a contingency, and the fact that Montrose knew it was more probable than not that it would be sued (successfully or otherwise) is not enough to defeat the potential of coverage (and, consequently, the duty to defend).xi
Indeed, the Montrose court, in its analysis of what qualifies as "contingent" or "unknown," seemed willing to go even farther than a mere notice containing the word "potential" in its name. Citing to Sentinel Ins. Co. v. First Ins. Co., 875 P.2d 894, 920 (Haw. 1994) for support, the court noted that, "The Hawaii Supreme Court has likewise concluded that even where an injured third party has filed a lawsuit or claim against the insured, 'if the insured's liability is in any degree contingent, there is an insurable risk" within the meaning of the loss-in-progress rule."xii
In concluding that Montrose's prior knowledge of the problems at the Stringfellow site not bar potential coverage, or relieve Admiral of its duty to defend, the Montrose court held as follows: [I]n the context of continuous or progressively deteriorating property damage or bodily injury insurable under a third party CGL policy, as long as there remains uncertainty about damage or injury that may occur during the policy period and the imposition of liability upon the insured, and no legal obligation to pay third party claims has been established, there is a potentially insurable risk within the meaning of sections 22 and 250 for which coverage may be sought. Stated differently, the loss-in-progress rule will not defeat coverage for a claimed loss where it had yet to be established, at the time the insurer entered into the contract of insurance with the policyholder, that the insured had a legal obligation to pay damages to a third party in connection with a loss.xiii
From the standpoint of a hyper-technical analysis of Sections 22 and 250 of the California Insurance Code, Montrose may be a correct decision. However, if insurance is a wager against unforeseen circumstances, made between the insurance company and its policyholder, even ardent policyholder advocates would have to admit that the deck is stacked against a CGL insurer that must provide coverage for environmental property damage to a policyholder that is already in receipt of a PRP letter or a lawsuit at the inception of the policy.
Does Montrose Alter CGL Coverage?
ISO takes the position that, including a known loss provision in the CGL form "represents neither a broadening nor a restriction in coverage from the [policy's] original intent."xiv However, ISO also concedes that, "in states in which the reasoning of the Montrose case reflects current law, this revision may be a decrease in coverage under certain of the insured's policies."xv Lastly, ISO speculates that the revision may result in a shifting of coverage between various policies.xvi While the known loss provision in the New CGL Form looks, at first glance, like a tectonic shift in liability insurance coverage, ISO believes that it is far from it.
For now, whatever affects the known loss provision may have on CGL coverage must be limited to conjecture. At the time of this writing, a Lexis search of all state and federal cases did not reveal a single one that has addressed any aspect of this new provision. It is likely that, over time, as claims arise under the known loss provision in the CGL Form, so too will disputes, and a body of case law interpreting it will develop. In the meantime, the insurance world must be content with the next best thing to a claim – discussion of a hypothetical claim.
Known Loss Doctrine
A determination of whether the known loss provision in the CGL form alters coverage will be accomplished by examining a hypothetical claim, and then comparing the coverage implications between common law and the new policy provision. First, a brief look at the common law doctrine of known loss and its counterpart in the CGL form.
While the notion that one cannot insure against loss that has already taken place sounds simple enough, nothing is ever that easy. As noted by the Rhode Island Supreme Court in a [recent] known loss case, "Adding some confusion to the instant case is the fact that the distinction between the theories of known loss, known event, known risk, and loss in progress sometimes is blurred in case law. While at times the terms are used interchangeably, they are different doctrines and have different implications, depending upon the context in which they are applied."xvii The Rhode Island Supreme Court went on to define the known loss doctrine as follows: "The known loss doctrine is applied when the insured has knowledge, before the inception of an insurance policy, that the insured has suffered the threat of an immediate economic loss, as a result of some event, and that the reality of that loss occurring is a certainty."xviii
The Court of Appeals of Indiana, on the other hand, adopted a less stringent approach, which does not require the probability of loss being a certainty: "[W]e hold that if an insured has actual knowledge that a loss has occurred, is occurring, or is substantially certain to occur on or before the effective date of the policy, the known loss doctrine will bar coverage."xix The Appellate Court of Illinois put it this way: "[T]he known loss doctrine may be invoked when the insured knew or had reason to know that there was a substantial probability that loss or liability would result from the conduct for which it seeks coverage."xx The Pennsylvania Supreme Court, addressing the known loss doctrine in the context of excess insurance, adopted the following standard: "[W]hether the evidence shows that the insured was charged with knowledge which reasonably shows that it was, or should [have been], aware of a likely exposure to losses which would reach the level of coverage."xxi
The various known loss standards that have been adopted by courts around the country are easier said than applied. Most known loss cases are extremely fact intensive and must be decided using rules that are replete with the kinds of words that do not make it easy for opposing parties to find common ground.
ISO offers a very simple explanation for the purpose of the known loss provision in the CGL form: "These endorsements revise the Insuring Agreement of each of the applicable Coverage Parts to state that the insurance never, under any circumstance, responds to injury or damage that is known by the insured prior to the policy period."xxii ISO accomplishes this by examining what the insured knew about the existence of bodily injury or property damage at the inception of the policy period, in conjunction with deeming the time when certain on-going bodily injury or property damage takes place.
Pursuant to Section 1.b(3) of the CGL form, if the insured knew, prior to the policy period, that bodily injury or property damage had occurred, in whole or in part, coverage is precluded. This very clear language should achieve ISO's goal that, under no circumstance does insurance respond to injury or damage that is known by the insured prior to the policy period. In addition, Section 1.b.(3) provides that, if the insured knew, prior to the policy period, that any bodily injury or property damage had occurred, then any continuation, change or resumption of such bodily injury or property damage, during or after the policy period, will be deemed to have been known prior to the policy period. Thus, in a continuous injury situation – as is common with environmental property damage and toxic tort bodily injury claims— the date of the insured's first knowledge of bodily injury or property damage is deemed to be the first date of the insured's knowledge of all subsequent related bodily injury or property damage.
Section 1.c. of the known loss provision is the other side of the Section 1.b.(3) coin. It addresses the situation in which bodily injury or property damage was not known prior to the policy period, and, thus, not precluded from coverage under Section 1.b.(3). Nonetheless, under Section 1.c., bodily injury or property damage, which occurs during the policy period and was not, prior to the policy period, known to have occurred, includes any continuation, change or resumption of that bodily injury or property damage after the end of the policy period. Here too, the date of the insured's first knowledge of bodily injury or property damage is deemed to be the first date of the insured's knowledge of all subsequent related property damage. Thus, even in a situation in which coverage is available, a limitation may also exist.
It is easy to see what ISO is trying to do here: the policy on the risk at the time that the insured first obtains knowledge of bodily injury or property damage is the last policy that can be triggered. For purposes of the policy on the risk at such time, and subsequent policies, the time that any continuation of bodily injury or property damage takes place will be deemed to be the date that the insured first obtained knowledge of such injury or damage.
The provisions contained in Section 1.d of the CGL form may also have important coverage implications, which are discussed below.
A review of Montrose, and other known loss cases, reveals that it is uncertainty surrounding the imposition of liability upon the insured that is of most concern to courts. The known loss provision contained in the CGL form, on the other hand, is triggered solely by the insured's knowledge of bodily injury or property damage prior to the policy period, without regard to liability for such bodily injury or property damage.
Policyholders are likely to approach the known loss provision with a suspicious eye after learning what case the provision was specifically intended to address. As a result of such cynicism, their initial reaction is likely to be that a shift in the known loss triggering event, from the insured's liability for bodily injury or property damage, to the insured's knowledge alone of bodily injury or property damage, without regard to its potential for liability, represents a decrease in coverage. ISO, for its part, contends that the known loss provision in the CGL form represents neither a broadening nor a restriction in coverage from the policy's original intent, but that it may result in a shift in coverage between various policies. Despite what ISO says, and what policyholders may initially suspect, the known loss provision may in fact result, in certain situations, in a broadening of coverage.
As noted above, a discussion of whether the known loss provision contained in the [2001] CGL form alters coverage is best accomplished by comparing the coverage implications of a hypothetical claim before and after the change. Consider the following claim.
An insured is a chemical manufacturer. In 2000, an employee of one of its customers is diagnosed with an illness allegedly caused by exposure to the insured's chemical. In 2001, the injured employee's attorney sends a demand letter to the insured, seeking damages for his client's bodily injury. The insured rejects the demand, without informing its insurer. In 2002, the injured employee, facing an expiring two-year statute of limitations, sues the insured for bodily injury, asserting the usual panoply of negligence and strict liability causes of action. The insured places its 2002 insurer on notice of the suit, which promptly disclaims coverage. It is ultimately established that the employee was unknowingly suffering bodily injury since 1990—the time of his first exposure to the insured's chemical.
For purposes of this illustration, assume the following: The claim arises in a state that has adopted a continuous trigger and does not enforce the absolute pollution exclusion in a situation involving so-called non-traditional environmental pollution. All events take place on July 1 of the relevant year and all policies issued to the insured incept on January 1. The policy that incepted on January 1, 2000 and January 1, 2001 was endorsed with ISO form CG 00 57 09 99 (amending the insuring agreement of the CGL form then in use to reflect what later became the current CGL form). The policies that incepted on January 1, 2002 and January 1, 2003 were issued with the current CGL form. To anyone that handles toxic tort or hazardous waste claims, some variation of this hypothetical—with the exception of the convenient tidiness of the various dates—is likely a daily occurrence.
On the basis that there are no applicable CGL policy exclusions, it is likely that the focus of this claim will quickly turn to a determination of which of the insured's policies are triggered, followed by an attempt by all triggered insurers to reach a cost sharing arrangement.
From 1990 to 2000, bodily injury was taking place that was not known to the insured. Hence, for purposes of these policies, there do not appear to be any known loss issues, either common law or under the CGL form. It is likely that, in all continuous trigger states, regardless of their position on the known loss doctrine and what they may ultimately conclude about the CGL form, all policies on the risk from 1990 to 2000 will be triggered.
However, with respect to whether the policies issued from January 1, 2001 to January 1, 2003 are potentially triggered, the situation is less clear, and will likely vary from state to state. Moreover, the answer may also depend upon whether the issue is examined under the known loss doctrine or the CGL form.
The insured's policy that incepted on January 1, 2001 appears to be in the same category as those on the risk from January 1, 1990 to January 1, 2000. While bodily injury was taking place, it was not known to the insured, thereby precluding application of the known loss doctrine and section 1.b.(3) of the New CGL Form. Hence, this policy should also be triggered and contribute in the cost sharing arrangement. Maybe.
There appears to be a convention that has developed among latent injury and damage claims adjusters that any policy that incepts after the date of diagnosis of bodily injury or discovery of property damage is not obligated to participate in cost sharing, even if the insured did not know about the injury or damage at the inception of the policy. This convention is not written down anywhere, and may not apply in the litigation context, but adjusters that handle these types of claims would likely agree that, in the context of informal cost sharing among insurers, it exists. The convention is a recognition of the historic principle that, once injury or damage takes place, it ceases to be fortuitous, and, therefore, is no longer an appropriate subject of insurance. Thus, until now, in many instances, the policy that incepted on January 1, 2001 would not likely participate in cost sharing, because it incepted after the July 1, 2000 date of diagnosis, notwithstanding that the insured was unaware of such diagnosis at the time of the policy's inception.
Now consider the current CGL form, where the rules are written down, in the form of the known loss provision. In this situation, the insurers on the risk from 1990 to 2000 may be less likely to allow the insurer whose policy incepted on January 1, 2001 to skate. After all, such policy contains language that specifically states that it is obligated to provide coverage for just this situation: bodily injury taking place during the policy period, which was not known to the insured at the inception of the policy.
Of course, insurers may choose not to adopt this interpretation amongst themselves. But they also may not have complete control over the matter. If the insured is participating in the cost sharing arrangement—because the state's allocation law calls for pro-rata sharing and there are uninsured periods in the coverage block —the insured is likely to argue that the 2001 policy is obligated to respond. By doing so, it would serve to reduce all other participants" shares, including its own.
Thus, so far in the hypothetical claim, the known loss provision in the CGL form has not hindered the insured, and, in fact, may be working in its favor.
It seems clear that, under the known loss provision in the current CGL form, the policy that incepted on January 1, 2002 would not be obligated to respond. Coverage would likely be precluded pursuant to section 1.b.(3), as the insured had knowledge, prior to the policy period, that "bodily injury" had occurred – with such knowledge coming from the July 1, 2001 demand letter sent by the injured employee's attorney.
Turning to the common law, the insured would likely argue that, under the known loss doctrine, its receipt of a July 1, 2001 demand letter is not sufficient to preclude coverage under the policy that incepted on January 1, 2002, as the demand letter did not create a substantial enough probability of liability. Therefore, this appears to represent a situation in which the insured would argue that the shift in the known loss triggering event, from the insured's liability for bodily injury to the insured's knowledge alone of bodily injury, without regard to its potential for liability, represents a decrease in coverage.
While it may be true that, in this situation, the known loss provision in the CGL form has resulted in the non-liability of a policy that may have been impacted under common law, the actual impact of this is likely to be relatively insignificant.
First, even if the known loss doctrine does not preclude coverage under the 2002 policy, because the demand letter did not create a substantial enough probability of the insured's liability, coverage may still be in doubt. In this situation, coverage may be precluded on the basis that the insured did not adequately disclose the existence of the potential liability at the time of its application. Even the Montrose court acknowledged the inequity in the insurance wager if an insurer must provide coverage for environmental property damage to a policyholder that is already in receipt of a PRP letter. The court addressed this in its conclusion, stating the following: An insured must make all required disclosures at the time it applies for coverage; the fact that the loss-in-progress rule does not defeat coverage does not itself obviate the possibility of a finding of fraudulent concealment. We do not express any view concerning what, if anything, ought to have been disclosed by Montrose to Admiral at the time of purchase of the initial policy, and thereafter upon each renewal[.]xxiii
Second, in an allocation situation in which the insured has no liability for any share of the damages, loss of coverage under the 2002 policy is not likely to be prejudicial. Rather, any consequences are likely to fall to the other participating insurers, who may now have one fewer policy to include in their cost sharing equation.
The most likely detriment to policyholders of the known loss provision is as follows. If the insured is required to participate in cost sharing, it will lose the benefit that having one additional policy in the cost sharing formula would have had on reducing its own share. While the loss of coverage under the 2002 policy would also result in a reduction in the amount of insurance available to the insured to satisfy its underlying liability, losses that are significant enough to exhaust the limits of liability of all triggered insurance, in a continuous injury situation, are infrequent.xxiv
The situation involving the policy that incepted on January 1, 2003 is likely to be similar to the 2002 scenario. The primary difference is that, in light of the filing of suit on July 1, 2002, for the 2003 policy to even potentially be obligated to respond to the claim, would likely require that the relevant state's law follows Montrose with respect to known loss. In a state with a less stringent known loss standard, the 2003 policy is unlikely to be triggered, whether the claim is governed by the known loss provision in the CGL form or common law.
As the above example illustrates, in a claim involving a continuous trigger, the potential consequences of the known loss provision in the CGL form are likely to vary from minimal to a broadening of coverage. What about a claim that triggers only a single policy year?
For example, in the above hypothetical, instead of the injured employee sending a demand letter for chemical exposure, change it to the insured's defective product caused injury in 2000, but not of a continuous nature, such as a burn. Again, upon receiving the July 1, 2001 demand letter, the insured does not place its current CGL insurer on notice, but, instead, waits until it is sued in 2002, and places its then-current insurer on notice. The 2002 insurer is likely to point to section 1.b.(3) of the insuring agreement and take the position that its policy is not triggered, because the insured knew, prior to the policy period, that bodily injury had occurred.
Upon receiving this news, the insured now places its 2000 and 2001 insurers on notice of the suit. The 2000 insurer may assert that the claim is barred by late notice, given that notice is being provided a year after the insured became aware of the occurrence. Of course, given that most states require an insurer to prove that it has been prejudiced by its insured's provision of untimely notice; late notice is often an uphill battle for insurers. Nonetheless, and understandably, the late notice risk may cause some insureds to err on the side of caution, and place their current insurer on notice of anything that comes to their attention that even remotely looks, feels sounds or smells like bodily injury or property damage.
Granted, in the latent injury example, there was nothing stopping the 2000 insurer from asserting late notice. However, in that situation, even if the 2000 insurer were successful in asserting such defense, the insured still had the benefit of potential coverage under policies on the risk from 1990 to 1999. These insurers would likely have a more difficult time establishing late notice, as the insured would likely assert that, at the time that it first learned of the claim, it was unaware that such earlier policies were obligated to respond. The insured would likely argue that, it did not learn until later that the injured employee was unknowingly suffering bodily injury since the time of his first exposure to the insured's chemical.
The 2001 insurer may also assert late notice. More likely, however, it will assert that, because the bodily injury was diagnosed in 2000, and such injury is not of a continuous nature, its policy is not triggered.
The known loss provision in the CGL form was likely drafted to address continuous injury and damage claims. Montrose was a continuous injury case and ISO notes that its Montrose concerns are particularly relevant in "those cases involving continuous or progressively deteriorating injury or damage."xxv However, policyholders will likely be quick to point out that there is nothing in the language of the known loss provision in the current CGL form stating that its applicability is exclusive to claims involving continuous or progressively deteriorating injury or damage. Rather, the policy provides coverage for bodily injury or property damage taking place during the policy period that was not known by the insured prior to the policy period. As a result, policyholders – and maybe even insurers looking for other insurers with whom they would like to share costs – may argue that, even injury and damage that is generally not considered continuous, was in fact still taking place, and was not known by the insured prior to the policy period. Ask the burn victim if he was still suffering injury in 2001, from a burn that took place in 2000.xxvi
It will be interesting to see if an argument is made that the language of the known loss provision in the CGL form affords coverage under policies on the risk prior to the insured becoming aware of the diagnosis, even for injuries that are generally not considered continuous.xxvii If so, the known loss provision in the CGL form may result in more claims being handled in a continuous trigger fashion, which would be a substantial broadening of coverage (and surely lead to increases in underlying plaintiffs" settlement demands). This, in turn, would likely result in those issues and disputes that are generally unique to the world of continuous trigger claims—such as allocation – turning up in new contexts.
A shift in the known loss triggering event, from the insured's liability for bodily injury or property damage, to the insured's knowledge alone of bodily injury or property damage, may have a greater impact in the context of claims involving non-continuous injury or damage. Here, on one hand, the insured risks losing all coverage if the 2000 and 2001 insurers can successfully assert late notice and the 2002 insurer – now relieved of the burden of Montrose – can avoid coverage solely on the basis that the injury was known by the insured prior to the policy period, without regard to the insured's potential for liability. On the other hand, if late notice can be overcome, the known loss provision in the CGL form could also expand coverage for the insured, from that which is available under common law, by turning traditional single-point trigger claims into continuous trigger claims. This could result in twice the amount of available coverage. In a traditional continuous trigger claim, the impact of one extra policy being obligated to respond is not likely to be nearly as significant.
The purpose of the above hypotheticals was to illustrate the general concept of the known loss provision contained in the current CGL form. To accomplish this, and in as clear a manner as possible, any discussion of just who must have notice of bodily injury or property damage, and when, was intentionally omitted. However, these are important nuances of the known loss provision, are likely to generate disputes and cannot be ignored.
On the question of who it is that must have knowledge of bodily injury or property damage, for purposes of determining the potential applicability of the known loss provision, the policy language looks clear on its face, but is not without the potential for disputes. The known loss provision states that knowledge of bodily injury or property damage counts when it is in the hands of any insured listed under Paragraph 1. of Section II—Who is An Insured and any employee authorized by a named insured to give or receive notice of an occurrence or claim.
Paragraph 1. of Section II – Who is An Insured provides as follows:
1. If you are designated in the Declarations as:
a. An individual, you and your spouse are insureds, but only with respect to the conduct of a business of which you are the sole owner.
b. A partnership or joint venture, you are an insured. Your members, your partners, and their spouses are also insureds, but only with respect to the conduct of your business.
c. A limited liability company, you are an insured. Your members are also insureds, but only with respect to the conduct of your business. Your managers are insureds, but only with respect to their duties as your managers.
d. An organization other than a partnership, joint venture or limited liability company, you are an insured. Your "executive officers" and directors are insureds, but only with respect to their duties as your officers or directors. Your stockholders are also insureds, but only with respect to their liability as stockholders.
e. A trust, you are an insured. Your trustees are also insureds, but only with respect to their duties as trustees.
It is likely that most CGL policies are issued to corporations. As a corporation is an organization other than a partnership, joint venture or limited liability company, those in the corporation with knowledge of bodily injury or property damage that will determine the potential applicability of the known loss provision are its executive officers, directors and stockholders. For a public company, that could be a lot of people, especially the part about shareholders. As for what is meant by an employee authorized by a named insured to give or receive notice of an occurrence or claim, this is likely to generate debate, and potentially litigation, to determine if an employee's job responsibilities, either implicitly or explicitly, includes the provision of notice of insurance claims.
On the question of when an appropriate person must have knowledge of bodily injury or property damage, for purposes of determining the potential applicability of the known loss provision, the policy language is also seemingly clear, but with potential disputes that are easily imagined. The known loss provision specifically states in Section 1.d. that
…"bodily injury or property damage will be deemed to have been known to have occurred at the earliest time that an appropriate person:
(1) Reports all, or any part, of the bodily injury or property damage to the insurer or any other insurer;
(2) Receives a written or verbal demand or claim for damages because of the bodily injury or property damage; or
(3) Becomes aware by any other means that bodily injury or property damage has occurred or has begun to occur.
The broad catch-all in section 1.d.(3) concerning knowledge "by any other means" is likely to generate some interesting disputes. Some commentators have already asked if awareness by any other means includes rumors, premonitions and Ouija boards.xxviii
So far, there has not been much chatter detected about the known loss provision in the CGL form. But since claims, and especially court decisions about claims, are what generate interest in insurance policy forms, it is likely still too early to expect a lot of noise. In time, however, the gestation period for the Montrose endorsement will end.
As a front and center policy provision, now capable of being easily cited in coverage determination letters, known loss is likely to receive significantly more attention from claims representatives than it ever received as a common law doctrine. This increased insurer focus will likely be met with policyholder skepticism that the known loss provision does not alter the policy's intent. After all, how can that many new words in an insurance policy – and especially in the insuring agreement – possibly represent "neither a broadening or restriction in coverage."? It would not be surprising if, as a result of a bright white light examination of the known loss provision in the CGL form, policyholders and courts reconsider some traditional views of liability coverage.
i The "known loss" provision in ISO Form CG 00 01 10 01 and AAIS Form GL 0950 12 99 (Known Injury or Damage Amendments) do not contain identical language. However, it appears that their intent is the same. For simplicity sake, this article will use ISO Form CG 00 01 10 01 for purposes of analyzing The Montrose Endorsement.
iii One such court decision in another jurisdiction that ISO had in mind was Pittston Company Ultramar America Limited v. Allianz Insurance Company, 124 F. 3d 508 (3rd Cir. 1997). See "Introduction of Various New and Revised Commercial General Liability Endorsements," ISO Commercial General Liability Forms Filing GL-99-O99FO, at 3.
iv "Various New and Revised General Liability Endorsements are Filed," ISO Circular LI-GL-1999-002, at 1. This ISO Circular describes "known loss" amendatory endorsements to various CGL coverage forms, prior to the incorporation of the substance of the amendment into the New CGL Form. For purposes of the Commercial General Liability Coverage Part – Occurrence Version, the "known loss" amendatory endorsement to the Insuring Agreement was accomplished through form CG 00 57 09 99.
xxiii Montrose at 907. The Montrose court noted that, under the California Insurance Code, "Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance." Additionally, "An intentional and fraudulent omission, on the part of one insured, to communicate information of matters proving or tending to prove the falsity of a warranty, entitles the insurer to rescind."
xxvi In Stonehenge Engineering Corp. v. Employers Insurance of Wausau, 201 F. 3d 296, 304 (4th Cir. 2000), the Fourth Circuit dismissed the notion that "the trigger period for coverage under a commercial general liability policy ends upon discovery of the property damage rather than continuing as long as the progressive damage continues to occur."
xxvii Of course, even in this situation, the known loss provision in the New CGL Form would then prevent those policies on the risk after the insured becomes aware of such injury or damage from being triggered for any injury or damage that remains on-going. The number of potential policies on the risk from the time of injury diagnosis, to when the insured becomes aware of such diagnosis, will likely be influenced by the relevant statute of limitations governing the underlying claim.