By Robert L. Sallander, Jr.
The fortuity requirement should not be confused with the policy requirement of an occurrence or the exclusion for damage expected or intended by the insured. These are all separate issues, though in a particular case some of the same facts may bear on all three.
One of the first questions to answer when evaluating coverage for a particular loss or claim is whether it is insurable. While the concept of insurability shifts depending on the kind of insurance involved, no loss, risk or claim is insurable if it does not satisfy the fortuity doctrine. The concept of fortuity is fundamental and common to all insurance.
Insurance is not intended to apply to losses that a policyholder knows of, planned, intended, or is aware is substantially certain to occur. See Ostrager, Insurance Coverage Disputes § 8.02. Compagnie Des Bauxites de Guiness v. Insurance Co. of N. Am., 554 F.Supp. 1080 (W.D. Pa. 1983). Indeed, in California, the fortuity requirement is part of the very definition of insurance.
Under California Insurance Code § 22, insurance is defined as "a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event." The term "contingent or unknown event" serves to define when a loss is fortuitous.
In the liability insurance context, the California Supreme Court has construed this concept quite narrowly. Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal.4th 645, 692 (1995). Coverage is barred only where the insured subjectively knew of both the certainty of liability and the extent of liability prior to purchasing the insurance. Where there was uncertainty over either whether liability would be imposed or the amount of damages that would be awarded, a claim satisfies California's fortuity requirement. The following quotation is instructive:
[W]hen a loss is "known or apparent" before a policy of insurance is issued, there is no coverage. . . . But all that is required is that there be some contingency and, however inevitable an event might be, an "inevitable" event is still a contingency or risk. Montrose, supra, 10 Cal.4th at . (Emphasis in original.)
Under the Montrose rule, practically every liability claim that has not gone to judgment will be treated as a fortuity. Query whether a judgment that is not final is also a fortuity?
Courts outside California have taken a broader view of the fortuity requirement, finding that no fortuity exists where the insured had reason to know of the substantial probability of the loss when it purchased the policy. See e.g. Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1210 (1992); Missouri Pacific R.R. Co. v. American Home Assurance Co., 675 N.E.2d 1378, 1381 (Ill.App. 1997). The court in Outboard Marine stated:
The known loss doctrine may be invoked if the insurers demonstrate that [the insured] knew or had reason to know, at the time it purchased the CGL policy, that there was a substantial probability that loss or liability would ensue due to the …contamination for which it is seeking coverage. The question is not whether [the insured] knew it was discharging a pollutant into the environment…. Rather, the relevant question is whether [the insured] knew or had reason to know that a probable loss or liability would occur due to the …contamination alleged in the underlying complaints. Outboard Marine, supra, 607 N.E.2d at 1212.