Insurers Lose First Challenge to "Known Loss" Exclusion in CGL Policies

Transportation Ins. Co. v. The Regency Roofing Cos., Inc., 2007 U.S. Dist. LEXIS 74364 (S.D. Fla. Oct. 2, 2007)

This is the first test case of the so-called "known loss" exclusion that has been written into most standard commercial general liability  (CGL) policies for about five years.  This exclusion bars coverage for any "bodily injury" or "property damage" that any insured knew had occurred or begun to occur before the inception of the insurance policy.  As the court put it, "In other words, to be covered, the Insured must have been unaware of any property damage prior to the Policy period, and must have first learned of such damage during the term of the Policy."

The rationale behind this exclusion is simple and reasonable: you can't wait until your house burns down to go out and buy fire insurance.  Courts have always refused as a matter of public policy to allow insurance coverage for a "known loss."  However, over the last decade or so, the insurance industry has pressed this doctrine aggressively, as the facts of this case illustrate. 

Regency Roofing was hired in 1999 to re-roof a large residence that included 11 flat roofs.  Over the course of the the following two years or so, Regency was called back several times to fix leaks around skylights and flashing.  On at least one occasion, the contractor reported rust in an air conditioning duct.  In January 2002, the homeowners sued Regency for alleged property damage, including mold damage, arising from faulty repairs.  Regency submitted the claim to its CGL insurer, who challenged coverage under the "known loss" exclusion.  The insurer argued that Regency had sufficient awareness of the roof leaks prior to the inception date of the CGL policies (Transportation issued several consecutive policies) to trigger the exclusion.  The court disagreed.

The court held that even if some of the damage is excluded, either because Regency knew about it before the policy period or because of other exclusions, the homeowners did not complain of mold damage until after the first CGL policy began.  Accordingly, the court denied the insurer's motion for summary judgment. 

The "known loss" exclusion is a potential trap particularly for building contractors who make several attempts to cure a problem hoping to satisfy the customer and so do not report the complaint to their insurer until the customer's patience wears thin and a lawsuit is filed.  By then, the "known loss" exclusion may bar coverage.  An illustration of this dilemma is Blanton v. Vesta Lloyds Ins. Co., 2006 Tex. App. LEXIS 1823 (Tex. App.---Dallas, March 9, 2006), in which a commercial landlord, insured under a standard CGL, leased an older structure to a retail tenant, who experienced problems with the roof.  The Tenant said the roof leaked whenever it rained and complained more than 80 times over a 2 and half year period before filing lawsuit.  Landlord attempted to fix the roof after each complaint.  Suit was filed October 24, 2000, and Landlord submitted the petition on December 6, 2000. 

The insurer in the Blanton case sought to avoid coverage under a late-notice theory rather than known loss, but the problem is similar.  Policyholders usually do not submit claims until there is a lawsuit against them.  In fact, the CGL insurer arguably has no legal duty to take any action until suit has been filed (policies vary on this).  But waiting until the lawsuit is filed may put coverage at risk because of late-notice or known-loss defenses. 

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