“Known Loss” Not Covered By Policy, Even If Insurer’s Error In Producing Copy Of Policy Was Treated As Modifying Endorsement’s Effective Date:

Alert Category: Federal (Seventh Circuit)

In a case successfully presented to the United States Court of Appeals for the 7th Circuit by Bullaro & Carton, P.C. on behalf of Erie Insurance Exchange, the 7th Circuit upheld the rule that an insurance policy does not provide coverage for “known losses” unless the parties intend otherwise, despite an unusual set of circumstances involved in the case. In Grey Direct, Inc., v. Erie Insurance Exchange, 2006 WL 2391293 (7th Cir 2006), the insured had been sued for breach of contract in connection with an error in printing travel certificates. The plaintiff, who had been assigned the insured’s rights, filed suit against the insurer, arguing that the error was covered under the insured’s business owners’ policy.

Although the original policy did not cover printing errors at the time of the incident, the insured, in response to the costly mistake, had an endorsement providing such coverage added to the policy about a month after the printing error occurred. The effective date on the amended declaration page issued to the insured reflected that coverage was added after the insured’s printing error. However, the insurer’s practice was to only keep electronically stored copies of its policies. When the insurer’s processor later created a paper copy, it mistakenly indicated that the printing errors endorsement had existed from the beginning of the policy’s coverage period. The plaintiff argued that the mistakenly generated policy was controlling and provided coverage for the insured’s printing error. The 7th Circuit rejected the argument that the processor’s error changed the terms of the contract and found that there was no indication that parties had intended the endorsement to be retroactive in effect.

Interestingly, the 7th Circuit went on to state that even if the erroneously created copy of the policy was treated as “somehow modifying the policy,” coverage for the particular printing error at issue in the case was precluded as a “known loss.” As the Court stated in applying Illinois law, “an insurer has no duty to defend or indemnify the insured with respect to a known loss ab initio, unless the parties intended the known loss to be covered.” The Court explained that “even if we thought that [the processor’s] error had the effect of adding the Printers Errors and Omissions clause to the policy effective [on the date the original policy was issued], it would cover only other unknown events meeting that description, not the [printing error at issue in the case], unless there is evidence that the parties intended also to cover the known loss.”