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Legal Memorandum: Applicability of the "Known-loss" Doctrine

Issue: What must an insurer prove in order to establish that its insured was aware to a substantial certainty of the existence of actual liability?

Area of Law: Insurance Law
Keywords: Known-loss rule; Insurance
Jurisdiction: Vermont
Cited Cases: 179 Vt. 288
Cited Statutes: None
Date: 05/01/2007

Although the known-loss doctrine has been noted, briefly, by the Vermont Supreme Court recently, no case was found in which the court ever approved actual application of the defense.  See Anderson v. Co-op Ins. Cos., 2006 VT 1, 179 Vt. 288, 895 A.2d 155, 161 (2006) (discussing the defense but noting that “this case is more properly viewed as not implicating the known-loss rule in the first place”).  As articulated in Anderson, the “known-loss rule” states that “an insurer need not cover a loss known to the insured at the time the parties enter into an insurance contract,” subject to exceptions not relevant here.  Id., 895 A.2d at 161 (emphasis added).

When a liability policy is involved, the insurer must establish that “the insured had a legal obligation to pay damages to a third party in connection with a loss.”  Pittson Co. UltraMar Am. Ltd. v. Allianz Ins. Co., 124 F.3d 508, 518 (3d Cir. 1997); Montrose Chem. Corp. v. Admiral Ins. Co., 913 P.2d 878, 906 (Cal. 1995) (en banc).  The rule requiring the insurer to show a certain or substantially certain legal obligation is applied in various third-party liability cases.  See, e.g., Peck v. Pub. Serv. Mut. Ins. Co., 363 F. Supp. 2d 137, 146 (D. Conn. 2005) (where underlying dispute was between adjoining property owners arising out of loud music, court held that even though suit filed against defendant before policy began, extent of liability had not been established and thus […]

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