Opinion ID: 2973419
Heading Depth: 2
Heading Rank: 1

Heading: Loss-in-Progress Doctrine

Text: The district court granted summary judgment in favor of AFIC and denied KCSI’s summary judgment motion based on the application of the “loss-in-progress doctrine.” Generally, that doctrine embodies “the principle that losses which exist at the time of the insuring agreement, or which are so probable or imminent that there is insufficient ‘risk’ being transferred between the insured and the insurer, are not proper subjects of insurance.” 7 Couch on Insurance § 102.8. This case is governed by Tennessee insurance law. See Vencor, Inc. v. Standard Life & Accident Ins. Co., 317 F.3d 629, 634 (6th Cir. 2003). No Tennessee case has expressly spoken on the “loss-in-progress doctrine.” However, this Court has provided a formulation of the doctrine, in Inland Waters. In that case, this Court found that the Michigan Supreme Court “would recognize the ‘loss in progress’ doctrine as we have defined it in an appropriate case. The doctrine has been described as a fundamental principle of insurance law . . . .” 997 F.2d at 178. The Court continued, “[w]e are unaware of any case in which a court has rejected the doctrine as internally fallacious or inconsistent with the general principles of insurance law . . . .” Id. at 179. This Court today likewise concludes that the Tennessee Supreme Court would adopt its definition of the loss-in-progress doctrine, if the case was before it. Cf. Gassaway v. Travelers Ins. Co., 439 S.W.2d 605, 608 (Tenn. 1969) (defining the term “accident” “as used in liability insurance policies as an event not reasonably to be foreseen, unexpected and fortuitous”); Trinity Universal Ins. Co. v. Turner Funeral Home, Inc., Nos. 1:02-CV-231, 1:02-CV-298, 1:02-CV-083, 2003 WL 23218046, at  (E.D. Tenn., Dec. 12, 2003) (applying the doctrine as delineated in Inland Waters to a policy governed by Tennessee law); Northfield Ins. Co. v. Isles of June Consulting Ltd., No. 99-CV-1186, 2001 WL 34076047, at  (M.D. Tenn. Sept. 26, 2001) (same). KCSI argues that in a case like this, the loss-in-progress doctrine only bars coverage when the insured knows of wrongdoing or actual legal liability, not merely of a claim or potential claim against it, prior to the coverage taking effect. However, this Court’s formulation of the loss-inprogress doctrine is not so narrow. In Inland Waters, the insured, a disposal company in Michigan, was employed to remove and dispose of several hundred drums containing waste paint material. 997 F.2d at 173. The insured began crushing the drums on the customer’s property, “discovering in the process that some of the drums contained liquids which, when released, soaked into the soil.” Id. Over six years later, hydrogeological investigations of the property revealed that solvent had significantly contaminated both the soil and groundwater. Id. The disposal company was sued, and its insurer sought a declaratory judgment that the policy provided no coverage for the pollution. Id. at 174. The district court granted summary judgment in favor of the insurer on the basis of the loss-in-progress doctrine, and the insured appealed. Id. In its Inland Waters opinion, this Court first conducted a survey of the application of the loss-in-progress doctrine across several jurisdictions. Id. at 176-78. Some courts had held the doctrine applied where the insured merely knew of the threat of a loss when coverage began. See, e.g., Summers v. Harris, 573 F.2d 869 (5th Cir. 1978) (applying the doctrine to bar coverage under flood insurance that the insured bought after traversing his front yard in a rowboat, because when the coverage took effect, the flood waters posed an immediate threat to his house). On the other hand, some cases required that the insured know of the loss with certainty. See, e.g., Montrose Chem. Corp. of Cal. v. Admiral Ins. Co., 35 Cal. App. 4th 335 (1992) (refusing to apply the doctrine where, before the commencement of coverage, the EPA had told the insured that it was potentially responsible for the costs of a cleanup at one of its manufacturing sites, because no lawsuit had been filed and the insured was not legally obligated to pay). This Court observed that, for the doctrine to apply, the other courts had invariably required “either (1) an awareness of a loss on the part of the insured or (2) an immediate threat of loss tantamount to foreknowledge in order for the doctrine to No. 04-6524 Am. & Foreign Ins. Co. v. Sequatchie Concrete Servs., et al. Page 5 defeat coverage.” Inland Waters, 997 F.2d at 176. Ultimately, the Court announced its own formulation of the loss-in-progress doctrine, holding that: The lesson of these cases defining and applying the “loss in progress” doctrine is that the doctrine operates only where the insured is aware of a threat of loss so immediate that it might fairly be said that the loss was in progress and that the insured knew it at the time the policy was issued or applied for. Id. at 178. Based on its holding, the Court reversed the district court’s decision applying the loss-inprogress doctrine in favor of the insured, because it had failed to require, as an essential element, the insured’s foreknowledge of the eventual loss for which the insured was seeking coverage. Id. The Court remanded the case for further proceedings: “Because the ‘loss in progress’ doctrine also requires foreknowledge of loss or an awareness of an immediate threat of loss on the part of the insured, the district court erred in granting summary judgment when the material issue of the scope of Inland Waters’ foreknowledge of the eventual loss remained unresolved.” Id. Specifically, the district court, on remand, was “directed to determine issues of fact; viz., whether Inland Waters knew or should have known at the time it obtained insurance coverage with National Union that the spill would result in damage to the groundwater or that the spill posed an immediate threat of damage to the groundwater.” Id. at 179. The set of facts this Court found could trigger the application of the doctrine in Inland Waters, i.e., the insured’s knowledge that the spill would damage the groundwater at its former customer’s site, or posed an immediate threat of damage to the groundwater, indicates that, under this Court’s formulation, in a third-party insurance case such as the one before us, the loss-inprogress doctrine does not apply only where the insured knows that a lawsuit has been filed against it or that it has incurred actual legal liability. Rather, the doctrine may apply where the insured has subjective knowledge of the damages that could underlie a legal claim against it. This conclusion accords with this Circuit’s district courts’ construction of Inland Waters. See Aetna Cas. & Sur. Co. v. Dow Chem. Co., 10 F. Supp. 2d 771, 788 (E.D. Mich. 1998) (holding that in the third-party insurance context, Inland Waters “identifies the alleged property damage that the insured is later held responsible for as the relevant loss; not the insured’s legal liability arising therefrom”); Turner Funeral Home, 2003 WL 23218046, at  (applying the doctrine to bar coverage where, at the policy’s inception, the insured knew of claims against it for another entity’s failure to cremate human remains); Isles of June, 2001 WL 34076047, at  (holding that the doctrine may apply where the insured “had knowledge of circumstances likely to result in or give rise to a ‘claim’ or could have reasonably foreseen a ‘claim’ might be made”). This case differs from Inland Waters in that here it is undisputed that the insured was well aware of the damages underlying the injured party’s claim against it. Frizzell and Gatlinburg told KCSI in late 1996 that the split face block was leaking, in contravention of KCSI’s promises that it would be waterproof, and that they considered KCSI liable to them for all damages to the hotel that the leaking block caused. KCSI knew legal liability was a possibility: it referred the matter to its corporate counsel. On January 1, 1997, when the AFIC policy took effect, KCSI was therefore “aware of a threat of loss so immediate that it might fairly be said that the loss was in progress.” Under such circumstances, the loss-in-progress doctrine barred coverage under the AFIC policy. Moreover, because Inland Waters itself presents a situation involving a third-party liability insurance policy, any claim by KCSI that the loss-in-progress doctrine does not apply to such policies is untenable. The district court did not err in granting summary judgment in favor of AFIC and in denying KCSI’s motion for partial summary judgment. No. 04-6524 Am. & Foreign Ins. Co. v. Sequatchie Concrete Servs., et al. Page 6