What Makes a Loss ‘Fortuitous’?
One of the fundamental tenets of insurance is that insurance policies provide coverage against fortuitous losses, but what makes a loss fortuitous?
The dictionary definition of fortuitous is”happening by chance.” Chance, in turn, is defined as “something that happens unpredictably”.
Numerous legal cases have provided their own definition of a fortuitous loss. In New York State Electric & Gas Corp v. Lexington Ins. (1st Dec 1995), the US courts indicated that it is a loss that must be beyond the control of the insured.
It follows that a fortuitous loss is a loss that occurs at a time and in such a way that an insured cannot be held to have anticipated. The logic that US courts have used to underpin this requirement is that it is against public policy to insure a certainty as opposed to a risk. A fortuity requirement ensures that you cannot insure against an event that is certain to take place.
One particular US case arose when insurers were able to demonstrate that an insured had been aware of elevated gas levels in a transformer for a considerable period prior to a loss, and continued to run it with no change in operation. The insured ignored industry standards, failed to increase testing frequency, did not appoint any additional expertise to monitor or opine on the risks, and did not schedule any additional maintenance or outage. Even when gas levels spiked, which would indicate a serious technical issue such as an overheating winding or failure of insulation, the insured carried on running the transformer. Unsurprisingly, a loss followed soon after. While insurers appointed an engineering expert who stated, quite rightly, that a loss was inevitable, the fact that the exact type of loss at the time the loss it occurred could not be fully anticipated meant the insured succeeded in demonstrating that the loss was fortuitous.
Another case arose from cracking of turbine blades. The insured was aware of historic blade damage issues on the machine in question, where repairs had been carried out every five years since the unit had been commissioned to rectify similar cracking. In this case, repairs had been carried out five years prior to the active policy period. When the loss occurred, insurers stated that, based on this repeating pattern, it was not fortuitous. Again, the argument failed because it was impossible to be certain that a loss of that type would occur during the policy period.
From the viewpoint of insurers, whether a loss is fortuitous or not revolves less around whether it was a physical certainty than whether the insured was aware that it would occur. The requirements for insurers to demonstrate such awareness are extremely high. Various cases have demonstrated that insurers need to be able to demonstrate recklessness on the part of the insured, with a clear pattern of conduct indicating that the insured was wholly or substantially indifferent to a known peril because they believed that any ensuing loss would be recoverable from insurers.
Accidents will occur, however without the benefit of foresight one cannot be certain when or in what form they will occur. Unless an insurer can predict with a fair degree of certainty that a loss of a certain type will occur during the active policy period then they should be unable to sustain an argument of fortuity.