Chapter 6

JurisdictionUnited States

Chapter 6

Comprehensive General Liability Exclusions for Coverage A

§ 6.01 Overview

The preceding chapter discussed the coverage agreement—the promises, conditions, terms, and limitations for Coverage A, which is the “bodily injury” and “property damage” part of the CGL insurance policy. This chapter focuses on the exclusions applicable to Coverage A, paying particular attention to those most relevant to businesses. In discussing these Coverage A exclusions, reference is made to standard exclusions by letter and number, such as Exclusion J(1), J(2), J(6), K, etc. These are references to the exclusions used in the standard-form ISO CGL insurance policy.1

In particular, this chapter analyzes the exclusions for or related to:

1. fortuity, 2
2. contractual liability, 3
3. damage to property (Exclusions J(1), J(2), J(3), J(4), J(5), and J(6)), 4
4. “your product” (Exclusion K), 5
5. “your work” (Exclusion L), 6
6. impaired property (Exclusion M), 7
7. work or product recalls (Exclusion N), 8
8. professional services, 9 and
9. mold. 10

The pollution exclusion is discussed in a later chapter.11

§ 6.02 Fortuity Doctrine

[1]—Definition and Specific Exclusions

Rooted in the common law, the fortuity doctrine provides that insurance protects against contingent, unknown, and fortuitous events, not certainties.12 The fortuity doctrine manifests itself in at least two ways. First, most policies do not have an explicit exclusion for fortuitous losses, but courts have adopted it as an unwritten exclusion.13 It takes the form of the judicially created “known loss” and “loss-in-progress” doctrines,14 which provide, respectively, that one may not obtain insurance for a loss known to have already occurred or for a loss that is already in progress.15 Alternatively, the doctrine can arise as a contractually created “expected or intended” exclusion, derived from the requirements of an “occurrence,” which provides that coverage is not afforded for losses that are “expected or intended from the standpoint of the insured.”16


[a]—Narrow and Expansive Approaches

Courts are divided on the scope of the fortuity doctrine. The vast majority has construed various manifestations of fortuity extremely narrowly, excluding coverage only when the policyholder subjectively knows with certainty, at the time of purchasing the insurance in question, of the legal liability for which coverage is sought.17

In contrast, the minority view construes the doctrine broadly, barring coverage when the policyholder either objectively should know, or was substantially aware of, the risk of loss.18 A plurality of the Pennsylvania Supreme Court, for example, adopted the known-loss doctrine with an expansive scope holding policyholders to something akin to a negligence standard.19 Interestingly, a defense to the known-loss doctrine is that the insurance company also knew of the loss but chose to sell the policy without explicitly excluding the loss.20

[b]—Problems with Expansive Approach

If the minority view were to prevail, resulting in a wholesale adoption of the expansive interpretation of fortuity, serious problems for policyholders might surface.

One consequence in adopting a broad known-loss doctrine is that it would essentially swallow up the insurance fraud defense.21 In essence, the known-loss doctrine is a specific application of the insurance fraud defense because a known but undisclosed loss is merely one example of something already excluded by insurance fraud provisions.22 Under well-settled law, insurance fraud is a defense that requires an insurance company to prove its elements, including knowledge of wrongdoing, or a specific intent to deceive, by clear and convincing evidence.23 A broadly construed known-loss doctrine essentially lowers the standard of proof for insurance fraud from clear and convincing evidence to a preponderance of the evidence, and it lowers the requisite knowledge/intent from actual knowledge of the wrongdoing or specific intent to deceive to a negligence standard—namely, should the policyholder have been aware of the loss at the time of purchasing the insurance in question?24

More importantly, the broad interpretation of “known loss,” if universally adopted and taken to its logical conclusion, would implicitly ring the death knell for liability insurance. Even under an expansive minority approach previously adopted elsewhere, coverage is not excluded simply because the policyholder is aware of the possibility of loss, especially since the possibility of loss is the reason a person purchases insurance in the first place.25 In fact, it would be irresponsible for anyone to purchase insurance for conduct without acknowledging the possibility of loss occurring.26 However, if the approach adopted by the Pennsylvania court is universally adopted, or even if it signifies a trend, it would create a version of fortuity that seems to exclude coverage if the policyholder should have been aware of the mere potential for a loss. The expansive interpretation of fortuity, if literally applied, would seem to exclude coverage for any foreseeable loss.27

[3]—Application to Wide-Scale Problems

In coverage litigation involving wide-scale problems, such as construction and product defects, fortuity would preclude coverage if there were evidence that the policyholder actually knew of the problem before purchasing the insurance. This could happen if, for instance, the problem manifested itself before the commencement of the policy period. The question that arises is: Does the loss only become known when there is a wide-scale problem?28 To the extent coverage is available at all, there would likely be some time during which coverage was triggered and knowledge of the problem would not eliminate coverage. Under such circumstances, the policyholder should be able to recover.29

[4]—Estoppel: Loss Control as a Shield

Policyholders can, and have, used insurance company loss-control reports to estop the insurance companies from relying on the expected or intended or known-loss defenses.30 The policyholder’s position is that the insurance company had the same knowledge as the policyholder concerning the likelihood of the loss and chose to nevertheless insure the policyholder and accept premiums without taking any steps to eliminate coverage for such losses or notify the policyholder of a desire to discontinue insuring its operations without a reduction in coverage to exclude the foreseeable loss. “[T]he known-loss rule . . . states that an insurer need not cover a loss known to the insured at the time the parties enter[ed] into an insurance contract, unless the loss was also known to the insurer at the time of the formation of an insurance contract.31

The expansive language chosen by a minority of courts, that the fortuity doctrine be broadly interpreted to deny coverage when the policyholder either should know, or was substantially aware of, the risk of loss,32 if applied literally, could be used to argue for the exclusion of all products and completed operations coverage for all businesses. For instance, assume XYZ Corporation has an outstandingly low level of defects per unit manufactured, and based on prior experience, can fairly accurately estimate that it produces one defect in every fifty million units manufactured. Does the fortuity doctrine prevent insurance coverage for unknown but foreseeable losses to third parties from that one defect?

Under a literal application of this minority standard, it could be argued that XYZ Corporation should have been aware of the defect and, hence, the resultant loss. If the loss-control report correctly advised the policyholder of the potential loss for which the insurance company will invoke the known-loss doctrine (i.e., the one defect in fifty million units produced), the policyholder will be able to follow the loss-control expert’s guidance on how to minimize or avoid the loss, which will probably improve the policyholder’s operations, help avoid or minimize the number and severity of accidents or occurrences, and positively impact the policyholder’s insurance costs in the long run.

To the extent the policyholder is unsuccessful in preventing the loss and then after the insurance company denies coverage for the loss gets involved in a coverage dispute, the policyholder should be able to invoke the estoppel doctrine to prevent the insurance company’s reliance on the knowledge defenses.33 Further, even if the policyholder is unsuccessful in its attempt to advance the estoppel argument, the policyholder may have a tort claim against the insurance company for failure to provide an effective loss-prevention or loss-mitigation recommendation, if the loss is as severe as predicted by the loss-control engineer.34

On the other hand, if the loss-control report makes no mention of the potential losses that are at issue in the future litigation—i.e., the one defect in fifty million units produced—the policyholder will likely be able to defeat the expansive fortuity defense by pointing to the report’s deficiency as proof that when it purchased the policy, it could not be expected to have suspected, foreseen, or known of the losses. If an expert trained in loss-control engineering hired for the specific purpose of assessing likely areas of losses fails to foresee the loss for which the insurance company is attempting to exclude coverage under the expansive reading of the known-loss doctrine, then the policyholder—a mere layman in loss control—cannot be reasonably expected to know or foresee the loss.35 Even in the unlikely event that a policyholder is unsuccessful in its attempt to defeat the fortuity doctrine, it should nonetheless have a valid cause of action against its insurance company for negligent provision of loss control services based on the engineer’s failure to identify and warn against the particular loss.36

[5]—Punitive Damages

One interesting issue is whether punitive damages are excluded...

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