Employers Reinsurance Corp. v. Globe Newspaper Co., #08-1733 (1st Cir. March 19, 2009), see Globe Decision.
"Known loss" or "fortuity" is a cornerstone principle of insurance. The starkest example: a homeowner may not run out and buy fire insurance after the house burns down, or while it is still burning. Public policy forbids insuring a loss that the insured knows has occurred or is in progress. However, the fortuity principle has been stretched in the last 20 years, in some instances, beyond reasonable limits. The Globe Newspaper decision may help puts the brakes on an out-of-control coverage defense. The facts are these:
Beginning in March 2005, Globe began a series of articles criticizing a cancer treatment facility and one of its doctors for a tragic overdose of two patients with a chemotherapy drug. One of the patients, a Globe columnist at the time, died. The paper stated that one of the doctors was a leader of the team administering the drug and countersigned the order for the mistaken overdose. In fact, however, that doctor had not treated the patient until after the overdose.
A few days after the Globe story, an attorney for the doctor contacted the paper and complained that the named doctor had not countersigned the order or directed treatment before the overdose. The paper investigated and confirmed the doctor's innocence. Rather than retract that portion of the story, however, the paper merely reported that a representative for the doctor said she had not been involved. In May, the attorney wrote again to complain that the correction was inadequate and suggested that it would be "an appropriate time to discuss how the Globe will compensate [the doctor's] damages.
On June 4, the paper ran a correction admitting that the doctor had been incorrectly identified as the one countersigning the order. However, the request for damages was not withdrawn. On October 12, the paper applied for insurance coverage without identifying the doctor's demand. The application identified past and pending litigation and noted that the paper received many threats from people seeking to have more favorable press, and it was difficult to separate the inconsequential threats from the serious ones. The policy issued on October 20, 2005 with coverage for libel.
The series of articles continued, some still mentioning the same doctor, who sued the paper for libel in February 2006. The insurer apparently agreed to defend the action subject to a reservation of rights to later deny coverage on a number of grounds, including that the alleged loss was in progress when the policy issued. The paper suffered a sanction order when it refused to disclose confidential sources and sustained a judgment, upheld on appeal, for over $2 million. Meanwhile, insurer had filed a coverage action seeking a declaration that it had no duty to defend or indemnify. To its credit, the insurer paid the judgment subject to its right to reimbursement if coverage did not exist. (N.B., an insurer could not do this in Texas. See my discussion, Frank's Casing Decision).
The lower court granted summary judgment in favor of the insurer based on its fortuity defense. After all, the court reasoned, the paper had received the request for damages by letter months before applying for the policy. The First Circuit Court of Appeals reversed.
Acknowledging that the Massachusetts Supreme Judicial Court had followed the majority of states in adopting the fortuity defense, the appellate court held that an insurable risk could be eliminated only "in the instance where an insured knows, when it purchases the policy, that there is a substantial probability that it will suffer or has already suffered a loss" (quoting SCA Serv. , Inc. v. Transp. Inc. Co., 646 N.E.2d 394, 397 (Mass. 1995)) Emphasis added. In the SCA case a court had already ordered the insured city's town dump to be closed as a nuisance, and residents had already made claims. Thus, the court found that the city knew actual losses had occurred and were substantially certain to continue when it bought the insurance.
The Globe, said the court, may have been aware of the request for damages, but litigation had not been filed. "The loss here may have been likely, but it was not substantially certain or known by the Globe to be so when the policy was obtained." In reversing the summary judgment, however, the appellate court observed that the insurer had other defenses, not addressed by the lower court, and victory for the paper was by no means assured.
The reasoning in the Globe decision arguably limits the known loss doctrine to situations in which the loss has been, or is being, actually adjudicated. While that may be over-reading the court's analysis, this decision should help bring some fair boundaries to the use of this doctrine. Case in point under Texas law, in RLI Ins. Co. v. Maxxon Southwest, Inc., 265 F. Supp.2d 727 (N.D. Tex. 2003), a cement manufacturer was denied coverage for litigation alleging price-discrimination under the Robinson-Patman Act (don't ask how a company gets antitrust insurance in the first place; we have to take that on trust). The threat of litigation as well as the subsequent lawsuit occurred after purchase of the policy. The insurer argued that Maxxon was aware that different prices had been charged for years. Hence, it was a continuing loss uninsurable under the fortuity doctrine.
The lower court agreed, even though it acknowledged that that the insured had no independent knowledge of the subject loss, because the company knew different cement dealers paid different prices for their cement, so "the risk of injury was or should have been, readily apparent to the defendants."
The Fifth Circuit upheld the lower court's decision holding that the critical issue was "whether the party knowingly acted in a manner in which it could possibly be found liable." Folks, companies charge different prices to different customers all the time. Robinson-Patman liability is subject to numerous exceptions and is notoriously difficult to untangle, except on hindsight. Maxxon had received no complaints, no cease and desist letter, and had no knowledge of any alleged loss.
Perhaps Globe's actual pending adjudication is too tight a standard for all circumstances, but being denied coverage for something you know you might be liable for can't be the fortuity standard. Insurers now routinely raise the fortuity defense in just about every case in commercial litigation. Often, a business may routinely receive customer complaints that are easily resolved or never amount to anything. To allow an insurer to dig into the insured's complaint file and avoid coverage because a customer later actually filed a suit, should not be the standard.
Courts should take note of the Globe decision.