Closely related to the fortuity doctrine, are the doctrines of known loss or loss in progress. Known loss is fairly simple and can often lead to allegations of fraud by the insured. If an insured knows of a loss and then procures insurance to cover it by concealing material information from the insurance company, the insurance company likely can raise the defense of fraud stemming from the insured’s concealment.
The loss in progress doctrine essentially stands for the premise that losses which have already commenced, but are not necessarily known, prior to the effective date of the insurance policy will not be covered under all-risk policies. While this too, is a fairly simple concept, it does raise questions about how to define a loss which has already commenced.
Take, for example, Leafland Group II v. Insurance Co. of North America, 881 P. 2d 26 (N.M. 1994). Leafland purchased an apartment complex in 1983 that had been built in the early to mid 1970’s. Of course, Leafland insured the complex with a comprehensive all-risk policy. Several years later, Leafland received a hazardous substance survey showing the existence of asbestos in the buildings. Leafland later had an appraisal report which showed that the value of the complex had diminished significantly due to the now known presence of asbestos. Subsequently, Leafland filed an insurance claim, but it was denied.
During litigation, Leafland maintained that it was entitled to coverage under the policy because such a cause of loss was not specifically excluded in the insurance policy. The court disagreed:
Leafland argues that the loss of value due to the presence of asbestos should be covered under the property coverage section of the policy because the policy was a comprehensive ‘all-risk’ policy that did not specifically exclude coverage for diminution in value caused by the installation of asbestos…Leafland can point to no event that happened during the time the policy was in effect that caused direct loss or damage to its property. Rather, Leafland is claiming coverage under the…policy due to the discovery of an undisclosed problem with the property that was present at the time of purchase and was subsequently found to have diminished the property’s value.
The court further supported its reasoning by explaning that,
All-risks” insurance coverage, such as the coverage at issue in the instant case, does not protect against losses that are certain to happen….A related principle is that “all-risks” insurance does not cover loss for events that occur prior to issuance of the policy. In this case, the underlying problem causing the diminution in property value – the use of asbestos in constructing the buildings – was present long before Leafland acquired the property. The presence of asbestos had, in effect, already diminished the value of the property before Leafland purchased the property and bought insurance…even though the presence of asbestos remained undetected for some time after Leafland bough the property. In other words, the diminution in property value was discovered, but not cause, during the time the policy was in effect. Because the claimed loss occurred prior to the time the insurance was purchased, the concept of risk that is inherent in all policies of insurance is lacking.
The Supreme Court of New Mexico clearly sided with the insurance company, reasoning that the loss caused by the presence of asbestos was a “loss in progress” at the time Leafland purchased insurance. Keep in mind that the laws in different states will vary.