Magistrate Contends Fortuity Defense can be Waived

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Homeland Insurance Company of New York (“Homeland”) sued Clinical Pathology Laboratories, Inc. (“CPL”) for a declaration that it has no duty to reimburse Defendants for defending a number of medical negligence lawsuits filed against them in Ireland Homeland Insurance Company Of New York v. Clinical Pathology Laboratories, Inc. and Sonic Healthcare USA, CIVIL No. 1-20-CV-783-RP, United States District Court, W.D. Texas, Austin Division (July 19, 2022)

BACKGROUND

Homeland alleges that it agreed to expanded coverage only after requiring Defendants to agree to certain “warranties” in a letter dated July 27, 2016, that promised there were no pending claims.

ANALYSIS

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 relieves insurers from covering certain behaviors that the insured undertook prior to purchasing the policy. The doctrine precludes coverage when the insured is or should be aware of an ongoing progressive or known loss at the time the policy is purchased. The insurer bears the burden of establishing that the fortuity doctrine bars coverage.

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. Fraud is an affirmative defense under Texas law. For these reasons, the Court concluded that the fortuity doctrine is an affirmative defense under Texas law.

Homeland Waived the Defense

Based on the specific facts of this case, the Court found that Homeland’s delay in raising the fortuity defense constitutes unfair surprise.

ZALMA OPINION

The fortuity issue is only one of many issues brought to the court and resolved by the recommendations of the Magistrate Judge. The District Judge may accept or reject the recommendations of the Magistrate Judge’s lengthy opinion. Since there is a need for fortuity as the essence of insurance and as a recognized unwritten exclusion in every policy it appears the Magistrate Judge erred when he concluded that asserting the defense late is an “unfair surprise”. Since almost every answer to a suit contains an affirmative defense of a failure to state a cause of action the fortuity defense was asserted. It is always there and can’t be hidden.

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Barry Zalma, Esq., CFE, is available at http://www.zalma.com and [email protected].

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