Known Loss Rule

What is the Known Loss Rule?

The Known Loss Rule states that an insurance policy does not cover losses that the insured is already aware of at the time the policy is issued. If the loss was known to the insured prior to purchasing an insurance policy, they can not receive coverage for that loss. 

For example, a homeowner can not file for insurance after a fire has damaged their property, and try to receive insurance cover for the damages brought about by that fire. If that homeowner did so, knowing about the losses that the fire caused, they would be violating the known loss rule. Similarly, a patient could not receive health insurance for an injury that was known prior to their filing for a policy

The known loss rule serves to prevent individuals from buying insurance to cover something already damaged or lost, or something that they otherwise are in need of. If this was allowed, it could be suggested that many people would do this repeatedly. That would take away from insurance companies, who would not be able to agree to terms of coverage that the insured was aware of beforehand. This would be an example of the insured, not the insurer, acting in bad faith.