The concept of risk is central to insurance. Insurance coverage is premised on the exchange of risk and the possibility that an unintended or unexpected event will occur. Accordingly, it seems only logical that insurance carriers are not keen on providing coverage for a loss that is very likely to occur or has already occurred when an insured purchases a liability policy. To that end, courts have developed two common law defenses, often used interchangeably, known as the “fortuity” and “known loss” doctrines. Under the former, insurance is not available for losses the policyholder “knows of, planned, intended, or is aware are substantially certain to occur,” and under the latter, an insured “may not obtain insurance to cover a loss that is known before the policy takes effect.” Mayor and City Council of Baltimore v. Utica Mutual Ins. Co., 145 Md. App. 256, 306 n.49 (2002).
In addition to the recognition that insurance covers risks as opposed to certainties, the principle underlying the known loss doctrine is that insureds should not be permitted to benefit from wrongfully withholding material information from insurers in order to obtain insurance for a loss. Most courts hold that for an insurance company to use the known loss defense, the insured must have actual knowledge of the loss. General Housewares Corp. v. National Sur. Corp., 741 N.E.2d 408, 413 (Ind. Ct. App. 2000). Some courts require a “reason to know,” “evidence of probable loss,” or whether a “reasonably prudent” insured would know that the loss is highly likely to occur. Id. Maryland, however, does not appear to be such a jurisdiction.
Moral of the story? Don’t risk waiting until your basement is a swimming pool to call your insurance agent to obtain flood insurance or your laptop is stolen out of your car to get homeowners or renters insurance!