Originally published in PropertyCasualty360 (July 16, 2014)
It is axiomatic that traditional insurance policies cannot be purchased to cover losses known to exist. A classic example is the homeowner 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 by advocating for a "known loss" bar to coverage (the "Known Loss Doctrine"), asking courts to analyze whether circumstances known to the policyholder before the policy was sold portended a future loss and should have been disclosed to the insurance company. In other words, insurance companies argue, coverage should be excluded for any subsequent losses somehow arising from facts the policyholder knew about.
Policyholders can theoretically "contract around" the Known Loss Doctrine via policy language addressing situations insurance companies would otherwise argue are governed by the doctrine. The policyholder should negotiate clear prior circumstances/losses language specifying what information must be disclosed to the insurance company, and when. For example, what types of facts sufficiently indicate a potential future occurrence that they must be disclosed? What degree of conflict with a third party sufficiently portends a future claim that it must be disclosed? The clearer the language the better.
Even when the policyholder has negotiated for a policy...
