Loss in Progress Rule Bars Coverage Where, At Time of Policy's Inception, Insured Knew About Damage That Could Lead to a Third Party's Claim Against It
August, 2006
In American & Foreign Ins. Co., Inc. v. Sequatchie Concrete Services, Inc., 441 F.3d 341 (6th Cir. 2006), the United States Court of Appeals for the Sixth Circuit, applying Tennessee law, found that the loss in progress rule bars coverage where the insured knew about a potential claim against it .
Facts
In 1995, the insured concrete supplier entered into an agreement to provide concrete for a Gatlinburg, Tennessee hotel. The new hotel was to sport “split face” concrete block covering for at least a portion of its exterior. The hotel contracted for such blocks, and orally requested the blocks have extra waterproof additive. Upon installation, it was discovered the concrete had no special waterproof properties. In September 1996, the concrete supplier was placed on notice of a potential claim against it by the hotel’s owner and architect, who were upset by the water damage to the rest of the hotel. The September 1996 letter was followed by another in November of that year. The supplier informed its corporate counsel, who denied liability based upon the fact that extra waterproofing was not mentioned on the purchase order.
On January 1, 1997, the supplier obtained a CGL policy from American & Foreign Insurance Company. The blocks continued leaking throughout 1997 and 1998, prompting the hotel to sue the supplier. The supplier tendered its defense to the carrier. The trial court granted summary judgment to the carrier finding no duty to defend or indemnify on the basis of the loss in progress rule, which precludes coverage where the insured is aware of a threat of loss so immediate that it might fairly be said that the loss was in progress and that the insured knew it at the time the policy was issued or applied for.
Analysis
On appeal, the supplier argued that the loss in progress rule only bars coverage when the insured knows of wrongdoing or actual legal liability, and not merely a claim or potential claim against it, prior to coverage taking effect. This position is bolstered by California law as articulated in Montrose Chemical Corp. v. Admiral Ins., 42 Cal.Rptr.2d 324 (Cal. 1995). Montrose decided that, at least with respect to a continuing injury, the known loss or loss in progress rule would not defeat coverage for a claimed loss where either liability or damages had yet to be established at the time the insurer entered into the contract of insurance with a policyholder. Thus, for all practical purposes, the loss is still contingent, and therefore insurable, if either liability or damages are in dispute prior to the insurance contract being formed.
Here, lacking any direct guidance from Tennessee courts, the Sixth Circuit relied upon its own reasoning in Inland Waters Pollution Control v. Nat’l Union Fire Ins. Co., 997 F.2d 172 (6th Cir. 1993), for a workable definition of the loss in progress rule. There, the court announced its own formulation as follows:
The lesson of these cases defining and applying the “loss in progress” doctrine is that the doctrine operates only where the insured is aware of a threat of loss so immediate that it might fairly be said that the loss was in progress and that the insured knew it at the time the policy was issued or applied for. (citations omitted)
Relying upon Inland Waters, the Sixth Circuit affirmed summary judgment for the insurer. The court reasoned that the loss in progress rule “may apply where the insured has subjective knowledge of the damages that could underlie a legal claim against it.” Here, not only did the concrete supplier have detailed knowledge of the damages which it was alleged to have caused, it also had knowledge that a claim was going to be made against it for such damage, and even reported such an eventuality to corporate counsel.
Learning Point:
Under rules articulated for use in the Sixth Circuit, knowledge of damages which may form the basis of a claim are sufficient to block coverage under the loss in progress doctrine. However, Tennessee state courts have yet to examine this application of the doctrine. We will continue to monitor this area and update our readers as new developments occur. •
Back to CM Report of Recent Decisions (2006v2) 2006 Volume 2 Table of Contents
