Fortuity Doctrine In Insurance

Dallas insurance lawyers need to know how the “fortuity doctrine” works in insurance law. The 2001, Dallas Court of Appeals case styled, Scottsdale Insurance Company v. Travis, is a good case to read.
In this case, Scottsdale appealed a summary judgment granted in favor of South Texas Building Services, Inc. (“South Texas”) and Richard R. Robinson, ordering that Scottsdale owed South Texas and Robinson a duty to defend them in a lawsuit filed by William Barrett Travis, Maintenance, Inc., Maintenance of Houston, Inc. (“Maintenance Houston”), and Maintenance of Corpus Christi, Inc. (collectively referred to as “Maintenance”). Scottsdale contends the trial court erred in determining it had a duty to defend South Texas and Robinson because the allegations in the underlying petition arose out of a scheme that predated the inception of Scottsdale’s insurance policy and the original petition did not present claims triggering Scottsdale’s coverage. This court concluded the terms of the policy and the fortuity doctrine excluded coverage and reversed the trial court’s judgment.
Here is some factual background.
Robinson began working as manager of Maintenance Houston, a janitorial service company, in the mid-1980s. Some time after resigning on July 8, 1993, Robinson formed South Texas, a new janitorial service company. Robinson filed the articles of incorporation for South Texas on July 23, 1993. South Texas purchased primary and excess insurance coverage from Scottsdale. The effective date of both policies was August 9, 1993.
On October 6, 1993, Maintenance filed suit against Robinson, alleging causes of action including tortious interference with contracts, misappropriation of trade secrets, breach of fiduciary duty, and conversion, all arising from Robinson’s conduct in leaving Maintenance and starting South Texas. In later amended petitions, Maintenance added other defendants, including South Texas. The petition alleged in part that, while still employed by Maintenance, Robinson recruited Maintenance’s employees and customers, made false accusations and began spreading ill-will among Maintenance’s customers, and used his knowledge of Maintenance’s customer lists and secrets to steal business for himself and his new company.
South Texas and Robinson, as a principal of South Texas, demanded a defense from Scottsdale in the lawsuit filed by Maintenance. Instead of tendering a defense, Scottsdale sued South Texas and Robinson for declaratory judgment, asserting it did not owe a duty to defend under the policy.
Scottsdale contends the trial court erred in holding it had a duty to defend because the alleged offenses occurred before the inception of the coverage and are, therefore, excluded as a matter of law by both the policy and the fortuity doctrine.
Because the purpose of insurance is to protect insureds against unknown, or fortuitous, risks, fortuity is an inherent requirement of all risk insurance policies. The fortuity doctrine precludes coverage for both a “known loss” or a “loss in progress.” A “known loss” is a loss the insured knew had occurred prior to making the insurance contract. A “loss in progress” occurs when the insured is, or should be, aware of an ongoing progressive loss at the time the policy is purchased. Insurance coverage is precluded where the insured is or should be aware of an ongoing progressive or known loss at the time the policy is purchased. The doctrine has its roots in the prevention of fraud; because insurance policies are designed to insure against fortuities, fraud occurs when a policy is misused to insure a certainty.
In this case, Scottsdale contends both the terms of the policy and the fortuity doctrine preclude any duty to defend because the language in the petition alleges facts excluding coverage. Specifically, Scottsdale points to a provision in the policy providing that coverage is triggered “only if the offense was committed … during the policy period.” Additionally, the fortuity doctrine precludes coverage for an offense that was committed before the policy period, as either a loss in progress or a known loss. Scottsdale contends the underlying petition alleges facts showing the offense began before the effective date of the policies, thereby alleging facts that exclude coverage. this court agreed.
In this case, Maintenance’s petition alleged that Robinson, along with other co-defendants, planned and began executing their scheme before August 9, 1993, the inception of Scottsdale’s coverage. The specific provisions of the petition allege that “[p]rior to Robinson resigning he already had planned his new company, determined the customers he would take away from Maintenance Houston, and decided the means and methods of doing so.” Specifically, according to the petition, before Robinson resigned, he and his co-conspirators:
undermined existing contracts Maintenance Houston had with employees and customers;
began directly competing with Maintenance Houston for its customers;
undermined the goodwill, name, and reputation of the company;
began implementing his plan with other defendants, resulting in the misappropriation of trade secrets, the lockout of Maintenance Houston from its office, and the stealing of Maintenance Houston’s business.

The petition states that “all these actions were started while Robinson was employed in a fiduciary capacity as president of the company and a member of its board of directors.” According to the petition, upon Robinson’s resignation, he and his co-conspirators refused to return documents, contracts, records, and other items that were the property of Maintenance Houston, locked Maintenance Houston out of its office, and began to use the executed written contracts Maintenance Houston had with its customers.
All of these allegations pertain to Robinson’s conduct before the inception of the insurance policy, and even before the named insured was formed as a corporation. The purpose behind the fortuity doctrine applies with full force in a case such as this, where a party attempts to purchase insurance against the consequences of his own ongoing wrongful conduct.