Known Loss Defense Fails

Failure to Seek Appropriate Jury Instruction Defeats Insurer’s Defense

The North Dakota Supreme Court was faced with a jury verdict against an insurer and its agent for damages resulting from, what appeared to be, a known loss since the insured reported its additional values while the fire was burning. What should have been an absolute defense failed because of the failure of defense counsel to properly present the facts and law to the jury.

In Bjorneby v. Nodak Mut. Ins. Co., Supreme Court of North Dakota, — N.W.2d —-, 2016 ND 142, 2016 WL 3632915 (July 7, 2016) Nodak Mutual Insurance Company (“Nodak Mutual”) and Bryan Hurst (together referred to as “Nodak”) appealed from the district court’s denial of their motion for judgment as a matter of law and their alternative motion for a new trial.


The Bjornebys are farmers. They insured their farming operation with a Nodak Mutual insurance policy. Hurst was their insurance agent. During potato harvest, a fire started in the break room of the Bjornebys’ potato washing facility. The fire spread and caused substantial damage. The Bjornebys filed an insurance claim, and Nodak Mutual covered a number of losses. Nodak Mutual, however, refused to cover certain potatoes because the Bjornebys, who were insured under a reporting form requiring reports of values at risk, reported the potatoes after they became aware of the fire. The Bjornebys sued alleging Nodak Mutual breached their insurance contract and Hurst was negligent. A jury returned a general verdict in the Bjornebys’ favor; the verdict did not allocate liability between Nodak Mutual and Hurst. Nodak Mutual and Hurst moved for judgment as a matter of law or, in the alternative, a new trial.

Hurst had been the Bjornebys’ insurance agent for about four years prior to the fire. He testified he met with the Bjornebys every year and gave them advice on insuring their farming operation. Bjorneby claimed he instructed Hurst to insure all of their harvested potatoes at all times. At the time of the fire, and prior to it, the Bjornebys were insuring their potatoes by periodically reporting the harvested potato count to Hurst. As potatoes were harvested and placed in storage, Chris Bjorneby would call Hurst and update him on the potato count. Hurst would then report the new count to Nodak Mutual. In mid-September 2011, Chris Bjorneby called Hurst and reported the potato count. The fire started on October 7, 2011.

Chris Bjorneby testified that when he first saw the break room fire, he did not think it would result in damage to the potatoes. Nonetheless, he quickly called Hurst and reported additional potatoes had been stored since their last call.

Soon after they hung up, the local fire department decided to ventilate the fire; it then became uncontrollable. The washing facility, where the fire started, was in a building separate from the potato storehouse. However, the two buildings were connected by underground water flumes used to move the potatoes from one building to another. The flumes had seals, and the Bjornebys believed they were sealed while the fire was occurring. The fire was ultimately brought under control, but subsequent flare-ups occurred days after it had started. The additional potatoes Chris Bjorneby had reported on the date of the fire were ruined by smoke.


Nodak argues the additional potatoes were uninsurable as a matter of law because Chris Bjorneby was aware of the fire when he reported the potatoes to Hurst. Thus, Nodak contends the district court erred when it denied their motion for judgment as a matter of law because the known loss doctrine precluded coverage of the potatoes. The jury was instructed on the known loss doctrine:

The Supreme Court acknowledged the general rule that insurance cannot be issued for a known loss. Once the loss has occurred, there is no longer any “risk.” Thus, if an insured has actual knowledge that a loss has occurred or is occurring, or that the loss is substantially certain to occur, there can be no insurance coverage.

Nodak argued that N.D.C.C. § 26.1–29–11 codifies the known loss doctrine and “expressly bars the purchase of insurance coverage when a ‘known event’ has occurred or is occurring when the insurance is requested.” Section 26.1–29–11, N.D.C.C., states: “Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest or create a liability against the person may be insured against, subject to this title….”

Neither Nodak Mutual nor Hurst objected to the district court’s known loss instruction.

Although Chris Bjorneby knew a fire was occurring, the trial judge determined the jury had heard evidence from which it had to be determined whether damage to the potatoes was “substantially certain to occur.” The court found: “In terms of the known event, the situation, there’s no question that their fire was in existence at the time of the call. … The Jury, I don’t know, they could have determined that because of the separate location of the potatoes, separate building that’s supposedly sealed building, the circumstances I have just gone through that it was not—that it was a fortuitous situation. That it wasn’t a known loss or event to use that term now.”

Nodak’s argument that Hurst was not negligent as a matter of law is without merit. Nodak argues the evidence presented at trial leaves no factual dispute concerning whether Hurst was negligent; it contends he did not breach his duty of care, as a matter of law, because he acted in good faith and followed the Bjornebys’ instructions. Insurance agents have a duty to “exercise the skill and care which a reasonably prudent person engaged in the insurance business would use under similar circumstances.

With the unobjected-to general verdict, it is impossible to determine on which basis the jury assigned liability – the negligence of the agent or the wrongful denial by Nodak. Because it cannot be held that neither basis would support the jury’s verdict, the district court’s decision not to grant judgment as a matter of law was correct.

Again, it is not clear which theory of liability the jury based its decision on because the jury was issued a general verdict form.

The jury may have concluded Nodak breached a contract to insure the potatoes. Or it may have decided Hurst was negligent by not ensuring the potatoes in storage were insured. In any case, conflicting evidence concerning both theories of liability was presented.


There is no question that you cannot insure against a known loss. The failure here was a failure of proof and the poor choice of a jury verdict form. Allowing the jury to place the appellate courts in the position of trying to make a decision from a jury verdict form that allowed more than one theory of liability. As a result of that failure the know loss was payable because the jury could have found it was a fortuitous loss or that the loss was due to the negligence of the agent.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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