Written by David O’Neill, JD, Director of Investigations, PolicyFind
The Indiana Court of Appeals opinion in General Housewares Corp. v. National Sur. Corp. 741 N.E.2d 408, 413 (Ind. Ct. App. 2000) established the adoption of the common law known loss doctrine under Indiana insurance law. In that opinion, the Court stated that:
“Simply put, “the known loss doctrine” states that one may not obtain insurance for a loss that has already taken place.”
In General Housewares Corp., the Court of Appeals declared that the doctrine applied where an insured had “actual knowledge that a loss has occurred, is occurring, or is substantially certain to occur on or before the effective date of the policy.” Since that decision, the Court has taken cases on appeal that require it to further define what the term “loss” actually means in the context of what needs to be known to preclude insurance coverage under this doctrine. Its rulings in two of these cases appear at odds and call for some clarification regarding the application of the doctrine to environmental claims in Indiana.
Thomson, Inc. v. XL Insurance America, Inc.
In the Thomson, Inc. v. XL Insurance America, Inc., a case, which came before the Indiana Court of Appeals in December, 2014, the Court had an occasion to reflect on its General Housewares ruling. It recollected that in that case, it had been “careful to distinguish between the ‘substantial certainty test’ it had adopted and the ‘substantial probability test’ that a minority of other jurisdictions uses.” It recalled that in General Housewares, the rule was: “When determining ‘loss,’…..a loss for purposes of the known loss doctrine is not the underlying injury, but instead, the liability for that underlying injury.” It was not when the environmental damage became known that the loss became known, but when the liability for the environmental damage became known that was the determining event in the Courts analysis.
The facts in the Thomson, Inc. case were these: environmental pollution at two Thomson, Inc. sites (in Taiwan and Ohio) became evident to it when it bought the contaminated property. At neither location was environmental agency authority exercised at the time of purchase that legally required Thomson, Inc. to engage in environmental remediation of the land. In Taiwan there was no retroactive liability statute in place at the time of purchase. In Ohio, Thomson had been cooperating with the state environmental authorities in the remediation of adjacent property but not the parcel of land in question.
At both locations, government environmental agencies later issued remedial orders relating to the contaminated properties years after Thomson acquired them. When Thomson cooperated in the remediation at these sites, it filed claims with its insurers. When its insurers denied coverage for Thomson’s claims at both sites, Thomson filed suit and moved for summary judgment that its insurers owed it defense and indemnity under the general liability policies it purchased. The trial court held that the known loss doctrine precluded coverage and Thomson appealed.
The Court of Appeals reversed the judgment, finding that the trial court had “confused the environmental contamination of the Taiwan plant with the legal liability to remediate it.” It explained in its opinion that since the legal liability to remediate the property did not exist until the Taiwanese remedial statute was passed by its legislature, Thomson could not have “actual knowledge” of such liability or known that it was substantially certain to occur. Similarly in Ohio, Thomson could not have known in advance that the OEPA would issue an order relating to land not part of its original Consent Order and therefore its “actual knowledge” about this liability had not been established.
KLR v. Netherlands Ins. Co.
The Indiana Court of Appeals issued another opinion on April 8, 2015 in a case involving the known loss doctrine. In the case styled 5200 Keystone Limited Realty LLC v. Netherlands Ins. Co., it affirmed a lower court’s judgment that an insurer had no duty to defend or indemnify a policyholder who had purchased land it had reason to know was polluted before being directed by governmental environmental authorities to clean it up. In doing so, it seems that it failed to implement the analysis it employed in the Thomson, Inc. case as to the circumstances needed to trigger the known loss doctrine in Indiana. This inconformity in its opinions will likely require additional litigation to provide guidance going forward regarding the implementation of this doctrine.
The facts in the Keystone Limited Realty (“KLR”) case were these: a film development business operated at an Indianapolis site until its property was foreclosed upon by its mortgage company. After the foreclosure, an environmental engineering company detected soil and water contamination on the premises at elevated levels. The mortgage company sued the former owner seeking to recover environmental cleanup costs. KLR then purchased the site from the mortgage company with environmental disclosures and took its place in the cost recovery suit. Over the next several years, KLR purchased general liability insurance policies covering the site. Several years later, the Indiana Department of Environmental Management (“IDEM”) learned about the contamination and sent out responsible party notices, directing all concerned to take action to address the contamination. When KLR’s insurers were tendered the notice, they refused to defend KLR against the IDEM action in part because the contamination had been a “known loss.”
The Court of Appeals’ analysis was that when KLR purchased the mortgage company’s property and was informed concerning soil contamination at “above actionable levels” that it was put on notice that remediation would definitely be required. This was enough, it determined, to trigger the “known loss doctrine.” The “lack of an existing IDEM enforcement action at the time KLR bought the property and obtained insurance was ‘essentially irrelevant’.”
This opinion markedly differs from the Court’s opinion in the Thomson, Inc. case. Rather than separating the policyholder’s knowledge of contamination from its knowledge of liability for the contamination, it conflates the two. It attributes to the buyer of contaminated property knowledge of liability based on its receipt of an environmental engineering report stating that contamination is at levels which typically elicit state action. The KLR court finds that the policyholder should have determined from an environmental engineering report showing “actionable levels” of pollution that liability was “substantially certain to occur” at the time the property was acquired. This would give the environmental engineering report a certain gravitas that heretofore it has not been given at court and it provides a “should have known” gloss on the “substantial certainty test” that may have profound consequences when insurers argue that PRP notice letters that are based on just such environmental engineering reports do not constitute the “coercive” threat of liability required to trigger the insurer’s duty to defend under its policy.