Loss in Progress, or Just an Accident Waiting to Happen’

While a number of significant insurance decisions, in Texas and nationwide, have commanded recent attention, there are also some lesser acclaimed opinions worthy of note. In particular, Texas courts continue to grapple with the fortuity doctrine and its application to liability insurance.

It is a basic precept of insurance law that a loss must be fortuitous to be covered: insurance covers risks, not certainties. In the context of property losses, these lines appear well drawn. An insured cannot knowingly obtain coverage for a loss that has already occurred. See Burch v. Commonwealth County Mut. Ins. Co., 450 S.W.2d 838 (Tex. 1970). In liability insurance contexts, however, the lines are blurred. Liability insurance, while frequently based on the existence of an “occurrence,” really insures against claims, not events. In some extreme circumstances, a claim may be based upon events so likely to result in damage that there simply is no occurrence. Texas courts are wrestling with this issue, and with the current split in authority between state and federal courts regarding what constitutes an “accident.”

The parameters of the fortuity doctrine are tested, however, when courts face issues of whether a loss should be considered a “known loss” or “loss in progress.” Texas has long recognized that public policy precludes coverage for a known loss or loss in progress. See, e.g., Burch, 450 S.W.2d at 841; Two Pesos v. Gulf Ins. Co., 901 S.W.2d 495 (Tex. App.—Houston [14th Dist.] 1995, no writ). But what constitutes a known loss? In Two Pesos, the insured had already been enjoined from using a competitor’s trade dress. The court concluded that repeated use of the trade dress, even after the injunction, resulted in liability that was not based upon fortuitous events, and that was not insurable as a matter of public policy. Many cases are not so clear. Two recent cases illustrate the difficulties in the application of the doctrine, and the fine lines frequently drawn by courts.

In Scottsdale Ins. Co. v. Travis, 68 S.W.3d 72 (Tex. App.—Dallas 2001, pet. denied), the court concluded there was no coverage for the insured’s alleged liability for various claims arising from unfair competition with the insured’s former employer. The underlying litigation involved claims by Maintenance Houston, a janitorial service, against Robinson, a former employee, Robinson’s newly-formed company, and other defendants. Maintenance alleged that Robinson had started a competing business and, in so doing, had tortiously interfered with Maintenance’s contracts, misappropriated trade secrets, breached a fiduciary duty, and committed conversion. In amended pleadings, Maintenance alleged that Robinson and his business, South Texas, had recruited employees and customers from Maintenance, made false accusations and spread ill will, used customer lists and secrets, and conspired to deny Maintenance access to files and records. Robinson and South Texas sought coverage under a policy of liability insurance issued by Scottsdale. Scottsdale sought declaratory relief, but lost on cross-motions for summary judgment. On appeal, Scottsdale contended that the alleged offenses occurred before inception of the policy and were excluded as a matter of law by the fortuity doctrine. Scottsdale pointed to allegations that Robinson and his co-defendants planned and began executing their scheme to create a competing business before the date of inception of Scottsdale’s policy and, in fact, before Robinson even resigned his position and before South Texas was incorporated. On appeal, the court found there was no coverage based upon principles of fortuity. The court concluded that “the purpose behind the fortuity doctrine applies with full force in a case such as this, where a party attempts to purchase insurance against the consequences of his ongoing wrongful conduct.” The insured argued there was no loss in progress, arguing that the information obtained while Robinson was employed could not have been used until the competing corporation was formed, and therefore could have occurred after policy inception. The court disagreed, reiterating that the wrongdoing began before the policy was purchased and the acts involved were intentional.

On the other hand, in Westchester Fire Ins. Co. v. Gulf Coast Rod, Reel and Gun Club, 64 S.W.3d 609 (Tex. App.—Houston [1st Dist.] 2001, no pet.), the court of appeals refused to apply the doctrine of “known loss” or “loss in progress” to allegations of liability arising from erosion. The plaintiffs alleged that the Club, through independent studies, had known for at least 20 years that its continuous dredging to maintain a “cut” on Bolivar Peninsula destabilized the coastal area and created accelerated erosion of the beaches. The petition specifically alleged that the Club knew for 20 years that it was causing erosion. It also alleged, in the alternative, that the Club was negligent in failing to ascertain the consequences of its dredging. When the Club provided notice of the lawsuit to its insurers, some defended while others denied. A suit was brought by the Club and the defending insurers against the non-defending insurers. On motion for summary judgment, the trial court ordered the non-defending insurers to provide a defense. The court of appeals affirmed. The court rejected an argument that the erosion was not an occurrence, because it was the intended or expected result of intentional conduct; instead, the court concluded that the dredging was intentional, but that the subsequent erosion was not. The court also rejected an argument that coverage was barred by the loss in progress or known loss doctrines, despite the allegation that the defendants knew they were causing erosion for at least 20 years. The court noted there were alternative allegations that the Club was negligent in failing to ascertain the consequences of dredging, and that these allegations did not clearly state a known loss and therefore triggered a duty to defend.

Based upon these cases, it seems that, where an insured engages in intentional conduct prior to policy inception, and the claims are based upon the expected or intended result of that conduct, or where the insured has already been placed on notice of the potential liability for its conduct (as in Two Pesos) the courts will not find coverage. Where liability is not clearly established and the acts are not intentional, however, courts seem to have more difficulty. The Westchester case is particularly hard to reconcile with the fortuity doctrine. Obviously, the erosion itself, while not intended, had been continuing for some time before the claims were asserted. Rather than focus on whether the occurrence or “loss” was in progress, the court seemed to focus on whether the insured’s conduct was intentional. This appears to be simply a reiteration of the “occurrence” standard rather than application of the loss in progress doctrine. Based on the principles set forth in Westchester, an insured could obtain coverage (or at least a defense) for damage it had already caused, if it was not aware that its conduct had caused the damage.

While it is hard to predict how courts will harmonize these cases, what is clear is that the fortuity doctrine, especially in the context of a known loss or loss in progress, is receiving new interest from courts and litigants, and will likely be the subject of even more litigation in the coming year.

Bradley is a partner in the Dallas office of Thompson, Coe, Cousins & Irons, L.L.P. She is a member of the Insurance Litigation and Coverage Section and leads the firm’s coverage practice. She has represented agents in disputes with policyholders and insurers and routinely represents insurers in evaluating and litigating coverage issues under general and professional liability policies, commercial auto and trucking policies, commercial property policies and homeowners policies.

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