Auto Insurance Glossary – K Definitions

Known Loss Provision

A provision within some insurance policies which stipulates that a loss is only insured if the policyholder notifies the loss to the insurer during the policy period in which the insured first became aware of the loss, and not during any subsequent policy period. In other words (and in policies which contain this provision), if a policyholder became aware of a loss in a certain policy period, did not notify the insurer of the loss during that period but claimed for the loss during a subsequent policy period, then the loss would not be covered under the policy. The known loss provision has been the subject of a number of lawsuits in recent years as insurers have attempted to extend its reach beyond the limits for which the provision was originally established.

Known Loss Rule

A rule deriving from a first principle of insurance, namely that one may not obtain insurance coverage for a loss which has already occurred and which is known to the insured. The known loss rule has been tested by a series of court cases over the past decade as insurers have sought to avoid claims on the basis of known events as opposed to known losses. For example, in the case of Montrose Chemical Company versus Admiral Insurance Company (1995), the California Supreme Court ruled in favor of the policyholder, and in so doing applied straightforward reasoning. It ruled that one must draw a distinction between an event which may or may not result in a loss, and the loss itself. The court held that, where an event had occurred which may cause a loss, but the loss had not actually occurred, then an insurer may not invoke the known loss rule as a defense if no loss had actually materialized at the point at which the insured sought insurance coverage.