Beware Of "Loss In Progress" Exclusions To Insurance Coverage
A “loss in progress” exclusion in a CGL policy excludes coverage for injury or damage known by the insured to have occurred before the policy period and which continues into the policy period. It has been used by some insurers to avoid coverage where the insured is aware of claims of defective products prior to the beginning of the policy period to include coverage for similar claims made thereafter for other similarly defective products. The effect of its application can be draconian.
The “loss in progress” exclusion is similar to what has been known for years as the “known loss rule.” The “known loss rule” evolved in the context of property insurance as distinguished from liability insurance. The rule provided, reasonably, that an insured cannot procure property coverage for property damage the insured knows has already occurred. The essence of insurance is to cover future risk in the face of uncertainty. The “known loss rule” prohibits coverage for previously known property damage. This concept, however, has migrated to liability policies, in the form, among others, of the “loss in progress” exclusion.
A recent case in Ohio demonstrates the importance of this exclusion. In Ohio Casualty Insurance Company v. Mansfield Plumbing Products, LLC, an Ohio appellate court held that a “loss in progress” exclusion precluded coverage for losses arising from defective resin used as part of a toilet component where some claims relating to this resin arose before the beginning of the policy period, but others, and damages paid, came afterwards. The breadth of this reading of the policy language is significant. The Court did not simply find no coverage for the claims submitted prior to the policy period, but also for similar claims, by other claimants for other allegedly defective toilets, which were submitted afterwards. This ruling could be interpreted to mean that a supplier of building components, who had placed many of a particular product into commerce, would, upon receiving any claims that the product was defective, find itself without insurance against the risk of future claims based on a “loss in progress” exclusion, even though those later claims were unknown at the time the insurance took effect.
The Court, more specifically, held that the supplier’s knowledge that “its toilets malfunctioned” prior to the policy period, fit the policy exclusion of “property damage that is a continuation of . . . any property damage known, prior to the beginning of the policy period, to have occurred.” This is an odd fit in that property damage on one toilet, or even many, would not appear to be a continuation of property damage on other ones, even if the general cause was the same. Nonetheless, the Court held that the exclusion precluded coverage for the later arising claims and the supplier lost $781,675.00 in coverage.
In sum, be aware of the potential effect of such an exclusion.
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