CHAPTER 8 FORTUITY

• Jurisdiction: United States

A. Fortuity

Insurance involves the transfer from the policyholder to the insurer of the risk of possible losses. Insurance, by definition, cannot be available for losses that the policyholder knows of, plans on, intends to cause, or is aware are substantially certain to occur. That a loss must be fortuitous to be covered under a policy of insurance arises from the basic concept that insurance covers risks. The Restatement of Contracts, § 291, cmt. a (1932) states:

[A] fortuitous event is an event which, so far as the parties to the contract are aware, is dependent on chance. It may be beyond the power of any human being to bring to pass; it may be within the control of third persons, provided that the fact is unknown to the parties. The thrust of the definition is that the occurrence be unplanned and unintentional in nature. [Emphasis added.]

If the insured knows when he or she purchases a policy that there is a substantial probability that he or she will suffer or has already suffered a loss, the risk ceases to be contingent and becomes a probable or known loss (which is ordinarily uninsurable). Therefore, the fortuity doctrine holds that insurance is not available for losses that the policyholder knows of, plans on, intends to cause, or is aware are substantially certain to occur. Barry R. Ostrager & Thomas R. Newman, Deskbook on Insurance Coverage Disputes § 8.02, at 248 (5th ed. 1991).

In National Union Fire Ins. Co. v. Stroh Co., Inc., 265 F.3d 97 (2d Cir. 2001), the Second Circuit was asked to deal with a trial court's grant of summary judgment in favor of the defendants in the plaintiff's declaratory judgment action. The plaintiff insurer sought a declaration that it is not required to pay an insurance claim filed by The Stroh Companies, Inc. (Stroh) relating to a product recall. National Union alleged that Stroh and Heileman knew or should have known of the contamination problem and the need for a recall before Heileman was added to the Policy, and that coverage is therefore barred both by the express terms of the Policy and by the insurance-law principles of "fortuity" and "known loss."

Count I of National Union's amended complaint seeks a declaration that the Policy does not cover Stroh's claim because Stroh "knew or could have reasonably been expected to know that a Loss had occurred or was likely to occur on or before July 1, 1996," the effective date of Heileman's inclusion under the Policy. The alleged cause of action is based on paragraph I of the Policy, which requires National Union to reimburse Stroh for its Loss caused by or resulting from any of the following Insured Events, discovered during the Policy Period provided that the Insured as of the inception date of the policy did not know nor could have reasonably been expected to know that such Loss had occurred or might likely occur.

"Broadly stated, the fortuity doctrine holds that insurance is not available for losses that the policyholder knows of, planned, intended, or is aware are substantially certain to occur. Failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party." N.Y. Ins. Law § 1101(a) (1)B(2). Barry R. Ostrager & Thomas R. Newman, Deskbook on Insurance Coverage Disputes § 8.02, at 248 (5th ed. 1991).

The court wrote:

National Union has disclaimed any allegation that the defendants fraudulently concealed or withheld material information.

National Union's notion is that the known loss doctrine bars coverage not merely for losses that the insured knows have already occurred at the time insurance is purchased, but also for losses that have not occurred but the prospective insured knows inevitably will occur. A homeowner, therefore, could not insure his house against flood damage when the rising waters were already in his front yard.

On the May 1, 1996 renewal application that led to the extension of the Policy in Endorsement No. 4, National Union did ask whether Stroh knew of "any actual or suspected accidental contaminations involving any of [Stroh's] products during the last twenty four . . . months," and Stroh denied any such knowledge. But Stroh's statements were indisputably truthful when made.

In Koppers Co., Inc. v. Aetna Cas. & Sur. Co., 98 F.3d 1440 (3d Cir. 1996), the Third Circuit was faced with a claim of lack of fortuity.

Koppers Company, Inc. ("Koppers"), asserts breach of contract and declaratory judgment claims against its liability insurers, based on their denial of coverage for various environmental property damage claims.

These policies are triggered if either, one, the cause of the property damage or, two, the property damage itself took place during the policy period for each site. The London Insurers argued that their policies could be triggered only by a causative event taking place during the policy period, not by the resulting property damage alone if the causative event occurred pre-policy.

We need not predict how the Supreme Court of Pennsylvania would interpret these particular insurance contracts, however. Koppers introduced uncontroverted evidence that the property damage (mostly groundwater contamination through leaching) was continuous, progressive, and indivisible throughout the relevant policy periods.

The rationale supporting the generally accepted rule against indemnity for non-fortuitous losses is succinctly explained in Robert E. Keeton & Alan I. Widiss, Insurance Law § 5.3(a), at 476-77 (student ed. 1988):

[The concept of fortuity], which expresses the concern that insurance arrangements should be limited to the transfer of economic detriments that are fortuitous, is generally regarded as a principle that is central to the basic determination of what risks may or should be transferred by an insurance arrangement. In most circumstances, it is contrary to public policy to permit the enforcement of an insurance contract if it would provide indemnification for losses that are not fortuitous. . . . The [rule requiring fortuity] embodies a fundamental and significant public policy interest that in some contexts is sufficiently important to preclude coverage claims even when there are explicit agreements to the contrary, but in any case is a very compelling public interest in regard to coverage questions when there is no applicable provision in the insurance agreement.

The court predicted that it is the public policy of Pennsylvania not to enforce an insurance coverage contract providing coverage for a non-fortuitous loss. As with exclusions stated in an insurance policy itself, when an insurer relies on public policy to deny coverage of a claim, the insurer must bear the burden. In particular, if an insurer has issued a policy that on its face covers the loss at issue and seeks to deny coverage on the basis that enforcing the policy as written would offend the public policy against indemnification of non-fortuitous losses, the court predicted that the Pennsylvania Supreme Court would place on the insurer the burden of proving that the circumstances of the loss were such that coverage would be inconsistent with that public policy.

We therefore conclude that the district court did not erroneously allocate the burden of proof as to whether Koppers' losses were expected and intended.

Because we cannot permit a double recovery, and because several insurers have already paid money to Koppers in complete settlement of Koppers' claims against them, we must either (1) reduce the judgment to account for the settling insurers' apportioned shares of liability, or (2) permit the non-settling insurers to seek contribution from the settling insurers and, in turn, permit the settling insurers to seek reimbursement from Koppers. We predict that the Pennsylvania Supreme Court would choose the former rule: reducing the judgment to account for the settling insurers' apportioned shares of liability. That is, we predict that the Supreme Court would adopt the "apportioned share set-off rule."

Taking all of the rules together, the court predicted that the Pennsylvania Supreme Court would hold that the non-settling excess insurers are jointly and severally liable for the full amount of the loss in excess of: the sum of (1) the policy limits of the directly underlying, "exhausted" primary policies, and (2) the combined pro rata shares of other settling (primary and excess) insurers. The beneficent consequences of this formula are that the insured bears the risk of settling too low while the non-settling insurers bear the risk of being unable to redistribute equitably among themselves the burden of paying the balance (if, for example, some of their number are insolvent).

It may be that, under the applicable law, the apportioned share of a settling excess insurer—and, accordingly, the extent of the London Insurers' liability—cannot be determined without identifying all policies that are triggered and cover the indivisible loss, whether they were in force during or outside the litigation period.

The court reversed the trial court and remanded for the sole purpose of allowing the district court to mold the verdict to take account of the settling insurers' apportioned shares of liability.

B. Child Molestation

Child molestation is a special type of intentional tort when considering the applicability of an insurance policy. Consider State Farm Ins. Co. v. Gerrity, 968 P.2d 270 (Kan. App. 1998), where the Kansas Court of Appeals was asked to resolve a dispute raised by a declaratory judgment action brought by State Farm Insurance Companies (State Farm). State Farm sought a determination that a homeowner's policy of insurance and a personal liability umbrella policy issued to its insured, James Gerrity, furnished no coverage for claims made by R.W. against Gerrity. Both State Farm and R.W. moved for summary judgment. The trial court granted State Farm's motion.

Gerrity and R.W., a minor, were driving from St.

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