Legal Definitions - known-loss doctrine

The known-loss doctrine is a fundamental principle in insurance law that prevents an individual or entity from obtaining insurance coverage for a loss that they already know has occurred, or is highly likely to occur, before the insurance policy's effective date. Essentially, insurance is designed to protect against unforeseen future events, not to cover damages for problems that are already known or inevitable.

Here are some examples to illustrate the known-loss doctrine:

• Example 1: Existing Property Damage

  Imagine a homeowner discovers their basement is completely flooded due to a burst pipe. After witnessing the extensive water damage, they immediately call an insurance agent to purchase a new homeowner's policy, hoping it will cover the repair costs for the flooded basement.

  How it illustrates the term: The known-loss doctrine would prevent coverage in this scenario because the loss (the flooded basement) had already occurred and was known to the homeowner before they attempted to purchase the new insurance policy. Insurance is meant to cover future, uncertain events, not existing damage.

• Example 2: Impending Business Liability

  A manufacturing company receives a formal legal notice from a government environmental agency, detailing years of unaddressed pollution from their factory into a local river. The notice clearly states that the company will face significant fines and be responsible for substantial cleanup costs. Before these fines are officially levied or cleanup efforts begin, the company attempts to buy a new environmental liability insurance policy.

  How it illustrates the term: In this case, the company knew that a significant financial loss was "substantially certain to happen" due to the ongoing pollution and the government's formal notice, prior to seeking new insurance coverage. The known-loss doctrine would likely prevent this new policy from covering the pre-existing environmental liabilities.

• Example 3: Post-Accident Vehicle Damage

  A driver is involved in a minor fender bender, causing noticeable damage to the rear bumper of their car. Immediately after the accident, they realize they had let their collision insurance policy lapse a week prior. They then quickly go online and purchase a new collision insurance policy, hoping it will cover the existing damage from the recent accident.

  How it illustrates the term: The known-loss doctrine would apply here because the damage to the car had already occurred and was known to the driver before the new insurance policy could take effect. The purpose of collision insurance is to protect against future accidents, not to cover damage from incidents that have already happened.