The United States Court of Appeals for the First Circuit in Employers Reinsurance Corporation v. Globe Newspaper Company, No. 08-1733 (1st Cir. March 19, 2009) reversed a trial court’s application of the known loss doctrine, finding that the doctrine is applicable only when the insured’s liability has already been established or is substantially certain before coverage is obtained.
Employers Reinsurance Corporation (“Employers”) insured the Globe Newspaper Company and the Boston Globe (collectively “the Globe”) under a contract for communications liability and personal injury liability insurance. The Globe applied for the policy on October 12, 1995, and the policy became effective on October 20, 1995. The policy contained an endorsement that afforded coverage for prior acts, but only so long as the Globe did not have notice of them at the time it obtained the insurance.
In November 1994, before the policy became effective, a doctor at the Dana-Farber Cancer Institute in Boston mistakenly gave two breast cancer patients a chemotherapy dose four times greater than the required dosage, causing one patient to die of heart failure and causing the other patient to suffer extensive heart damage.
Beginning on March 23, 1995, the Globe published a series of articles regarding the incident. In the March article, the Globe identified Dr. Lois Ayash as the doctor who countersigned the mistaken overdose orders. Dr. Ayash contacted the Globe and complained that she never countersigned the overdose orders and sought appropriate damages for the Globe’s mistaken publication.
An attorney for the Globe investigated Dr. Ayash’s complaints and discovered that Dr. Ayash had indeed not countersigned the overdose order. The Globe then published an article retracting its earlier story that Dr. Ayash had signed the overdose order. Even after the retraction, Dr. Ayash did not abandon her claim for damages against the Globe but did not file a legal action for any alleged injuries arising from the March 1995 article.
On October 31, 1995, and after the Employers policy was in place, the Globe published an article that again identified Dr. Ayash as the doctor in charge of the treatment protocol for the overdose incident and asserted that Dr. Ayash was under investigation by the state medical licensing board for the incident. After the article’s publication, Dr. Ayash sued the Globe for libel and invasion of privacy, resulting in a judgment against the Globe for $1.68 million in economic damages and emotional distress. Employers paid the judgment pursuant to a reservation of rights and filed a declaratory judgment action in the Massachusetts federal court.
The Court’s Ruling
The federal district court granted Employers’ motion for summary judgment, finding that the known loss doctrine barred coverage. The district court found that the known loss doctrine precluded coverage for claims when the insured seeks recovery for a loss already known by the insured to have occurred before the policy was obtained or to be “substantially probable” at that time. The district court found that while the October 31, 1995, article formed the basis of Dr. Ayash’s lawsuit, the material contained in this article was republished from the March 1995 article published before Employers issued the Globe its policy. Specifically, the district court found that since the Globe knew that Dr. Ayash sought damages related to the March 1995 article, to allow insurance coverage for the republication of such material would subvert the purpose of the known loss doctrine.
The First Circuit disagreed, finding that the known loss doctrine did not bar coverage for Dr. Ayash’s lawsuit. Like the district court, the First Circuit noted that the known loss doctrine bars coverage for claims when the insured has already suffered a loss or such a loss was substantially certain when the insurance was procured. First, the court of appeals noted that the Globe had not suffered a loss before obtaining insurance coverage from Employers since there was no prior finding of liability regarding the March 1995 article. Second, the court of appeals found that any liability for the March 1995 article was not substantially certain. In reaching this conclusion the court noted that while Dr. Ayash requested damages for the March 1995 article, she had not filed a suit specifically seeking damages stemming from the publication of this article. Further, the court concluded that even if Dr. Ayash had filed a lawsuit, the Globe’s liability was questionable since Dr. Ayash was a limited public figure, heightening the legal standard for liability.
Considering the general uncertainty of liability for the March 1995 article, the First Circuit concluded that the known loss doctrine did not bar coverage for Dr. Ayash’s lawsuit.
Globe Newspapers illustrates the high standard for application of the known loss doctrine when the insured has not actually suffered a loss before obtaining insurance coverage. The Globe Newspapers court found that a potential claimant’s request for monetary damages was insufficient to establish that a loss was “substantially certain.” Further, the Globe Newspapers court’s actual analysis of the merits of a claimant’s possible lawsuit illustrates that courts are free to examine the facts of a lawsuit before determining if liability is “substantially certain.” The court’s reasoning suggests, therefore, that even pending litigation may not be sufficient to trigger application of the known loss doctrine. Rather, the merits of the claim should be examined to determine the extent and possibility for coverage.