Employers Reinsurance Corporation v. GLOBE NEWSPAPER COMPANY, INC. and RICHARD A. KNOX

Of the Sixth Circuit, sitting by designation. *
United States Court of Appeals
For the First Circuit
No. 08-1733
EMPLOYERS REINSURANCE CORPORATION,
Plaintiff, Appellee,
v.
GLOBE NEWSPAPER COMPANY, INC. and RICHARD A. KNOX,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
Before
Boudin, Siler and Howard, *
Circuit Judges.
Jonathan M. Albano with whom Robert A. Buhlman, Carol E. Head,
Bingham McCutchen LLP, and George Freeman, The New York Times
Company, were on brief for appellants.
Richard E. Quinby with whom Daniel C. Reiser, Lauren J.
Coppola and Craig and Macauley Professional Corporation were on
brief for appellee.
March 19, 2009

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BOUDIN, Circuit Judge. This case involves a dispute over
whether insurance coverage is barred by the "known loss" doctrine
under Massachusetts law. The appellants are Globe Newspaper
Company which owns the Boston Globe (we refer to both as "the
Globe") and Richard Knox, a former Globe columnist; plaintiff-
appellee is the insurer, Employers Reinsurance Corporation
("Employers"). A condensed description of the events and
litigation will set the scene.
In November 1994, a doctor at the Dana-Farber Cancer
Institute in Boston mistakenly gave two breast cancer patients a
chemotherapy dose four times greater than that specified in the
experimental treatment protocol. One of the patients, Betsy
Lehman, then a Globe columnist, died of heart failure on December
3, 1994. The other patient survived but suffered debilitating
heart damage.
After the cause of the deaths was uncovered in February 1995,
the Globe published a series of articles beginning on March 23,
1995. This first article, by columnist Richard Knox, identified
Dr. Lois Ayash, who was the protocol chair and chief investigator
for the treatment, as the "leader of the team" and said that she
had countersigned the mistaken overdose order. In fact, Dr. Ayash
had become Lehman's attending physician on December 1, 1994, after
the overdose had been administered, and had not countersigned the
order.

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There followed Globe articles in March which criticized Dana-
Farber in scorching terms; they did not mention Dr. Ayash, but she
was the only person the Globe had previously named. On March 31,
1995, Joan Lukey, a highly experienced litigator with a large
Boston law firm, contacted the Globe's outside counsel, Jonathan
Albano, about the March 23 article. After checking into these
complaints, Albano concluded that Ayash had not countersigned the
order but that she could properly be characterized as the "leader"
of the team.
After further conversations by Lukey with Albano and Knox,
Knox published an article on May 2, 1995, saying: "Ayash did not
sign the erroneous drug order, as the Globe reported on March 23,
Lukey said." Lukey wrote a week later, complaining that the Globe
had not admitted its factual error but merely described Lukey's
position, and stating that it "would also appear to be an
appropriate time to discuss how the Globe will recompense Dr.
Ayash's damages."
Follow up discussions led to a Globe correction published on
June 4, 1995, which admitted that Dr. Ayash had been incorrectly
identified as countersigning the order in question. Over the
summer, Lukey had further discussions with Knox about forthcoming
stories about the incident and related matters but apparently did
not contact Albano again until late October. Albano had made clear

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that the Globe was not planning to pay damages; but Lukey had not
withdrawn the request for damages included in her May letter.
On October 12, 1995, the Globe applied for an insurance policy
with Employers. In its application, the Globe listed actual past
and present litigation but did not list Lukey's demand, noting only
that it received many threats from people seeking to have the Globe
print more favorable information about them and that it was
difficult to separate the inconsequential threats from the serious
ones.
Employers opted to provide coverage for various torts
including libel, and to provide defense costs for covered law
suits; the coverage began on October 20, 1995. The policy also
contained a prior acts endorsement, which covered liability
stemming from pre-policy acts as long as the Globe did not have
notice of them and no other insurer provided coverage.
On October 31, 1995, despite an objection by Lukey, the Globe
ran a new article referring to Ayash as the "doctor in charge of
the treatment protocol"; noted that she had been formally
reprimanded by Dana-Farber; and asserted that she was under
investigation by the state medical licensing board--information
Lukey claimed to be confidential. Thereafter, in February 1996,
Dr. Ayash sued the Globe and others including Knox in state court;
the claims against the Globe and its columnist included libel and
invasion of privacy.

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During the state court proceedings, the Globe suffered a
sanctions order (for refusing to disclose Knox's confidential
sources for certain material) and ultimately a default judgment as
to liability. Ayash v. Dana-Farber Cancer Inst., No. 96-565-E,
2001 WL 360054 (Mass. Super. Apr. 4, 2001). A jury awarded Ayash
$420,000 against Knox and $1.68 million against the Globe for
economic damages and emotional distress. The judgment was upheld,
Ayash v. Dana-Farber Cancer Inst., 822 N.E.2d 667 (Mass.), cert.
denied, 546 U.S. 927 (2005), and Employers later paid the judgment
and defense costs, with a reservation of rights.
The present case arises from a federal-court declaratory
judgment suit begun earlier by Employers against the Globe to
determine coverage; it was reactivated in the summer of 2005 when
state court proceedings ended. In the district court, Employers'
complaint denied coverage under the policy and advanced various
claims against the Globe; the Globe countered with a breach of
contract claim among others. Both sides moved for summary
judgment.
On June 20, 2006, the district court granted partial summary
judgment to Employers, holding that the policy did not cover the
Ayash state-court action either as to the damage judgment that the
Globe had suffered or the defense costs it had incurred. Employers
Reins. Corp. v. Globe Newspaper Co., Inc., No. 03-10388-RWZ, 2006
WL 1738342 (D. Mass. 2006). The court relied on the known loss

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doctrine under Massachusetts law, which prevents the insured from
recovering for a loss already known by the insured to have occurred
when the policy was obtained or to be "substantially probable" at
that time. SCA Servs., Inc. v. Transp. Ins. Co., 646 N.E.2d 394,
397 (Mass. 1995).
The district court recognized that the October 31, 2005,
article, which was part of Ayash's suit, occurred after the policy
had been purchased. But it held that the article republished
material from the earlier March 2005 article for which Lukey had
sought compensation and that to allow recovery for republication
would "pervert the purpose of the known loss doctrine . . . ."
Employers Reins. Corp., 2006 WL 1738342, at *5. Coverage for the
earlier articles also failed, seemingly for this reason and under
the "notice" provision of the prior acts endorsement.
The court also granted summary judgment for Employers as to
mirror claims by the Globe requesting a declaration that it had
coverage; but it denied Employers' request for summary judgment
ordering repayment of amounts advanced to or for the Globe, saying
that the request had not yet been justified. However, the court
granted the parties' joint request that its decision be certified
for interlocutory appeal. 28 U.S.C. § 1292(b) (2006). This appeal
followed.
Our review on a grant of summary judgment is de novo. Pineda
v. Toomey, 533 F.3d 50, 53 (1st Cir. 2008) (citation omitted). We

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conclude that the known loss doctrine does not apply in this case,
although coverage may well be barred or limited on other grounds.
Admittedly, SCA Services uses broad language: the SJC there
explained that "the basic purpose of insurance is to protect
against fortuitous events and not against known certainties" and
that "an insurable risk is eliminated in the instance where an
insured knows, when it purchases a policy, that there is a
substantial probability that it will suffer or has already suffered
a loss." SCA Servs., 646 N.E.2d at 397.
Loss in this context surely refers to the loss visited by a
judgment (or settlement)--not the loss suffered by the plaintiff.
Allmerica Fin. Corp. v. Certain Underwriters at Lloyd's, London,
871 N.E.2d 418, 431 (Mass. 2007) (noting that "Allmerica had
knowledge of possible and actual claims . . . but not probable or
actual losses"). Liability insurance for the Globe is designed to
compensate its loss once the Globe's liability is established.
Consonantly, coverage for past acts that have not resulted in
liability is permissible if the policy so provides.
A refusal to allow recovery for known loss makes sense where
the insured, but not the insurer, already knows before the policy
is procured that a loss has occurred or is certain. In SCA
Services the policy was obtained after a court had already ordered
the town waste disposal site to be closed as a nuisance because the
site had contaminated the groundwater and polluted the environment.

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646 N.E.2d at 396. The follow-on damage suit had to establish
damages but liability was virtually certain based on the nuisance
finding. Id. at 397-98.
Accordingly, this court read SCA Services as requiring
that the insured know "that a specific loss has already happened or
is substantially certain to happen." U.S. Liab. Ins. Co. v.
Selman, 70 F.3d 684, 690 (1st Cir. 1995) (emphasis added). And the
SJC thereafter cited Selman's clarifying construction with approval
in Allmerica, 871 N.E.2d at 431. There, the SJC allowed insurance
coverage for law suits involving vanishing premium claims even
though the insured
knew when it purchased the excess policy that it faced
multiple individual 'vanishing premium' claims, and as
part of its policy application disclosed both the
specific claims against it and the fact that 'vanishing
premium claims' were being litigated against others in
the industry.
Id.
This reading makes good sense. It is hard to see why as a
matter of policy the Globe should not be able to obtain insurance
for past acts that might lead to liability determinations in due
course. This is especially so where the insurance is for a class
of contingent risks that are part of newspaper's ongoing business.
Whether the Globe made adequate disclosure under the endorsement is
a different issue to which we will return.
Many but not all states follow some variant of the known loss
doctrine, using one of several labels, but the standard formulation

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is that "the doctrine usually is applicable only when the insured
actually knows [prior to securing the policy] . . . either that the
loss has occurred or that one is substantially certain to occur."
43 Am. Jur. 2d Insurance § 479 (2008). The loss here may have been
likely, but it was not substantially certain or known by the Globe
to be so when the policy was obtained.
Thus the early 1995 articles had been published when the
insurance was procured, but no law suit had been filed, let alone
actually adjudicated (and the October article had not even been
published). Nor, even if a suit were brought, was liability
certain. Here, the SJC found that Ayash was a limited purpose
public figure in relation to the overdose, Ayash, 822 N.E.2d at
683, which would have required her to make the heightened actual
malice showing to recover. New York Times v. Sullivan, 376 U.S.
254, 279-80 (1964).
The known loss doctrine aside, the Globe may well not enjoy
coverage for Ayash's law suit. Although seven articles are cited
in the Ayash state court complaint, the central inaccuracy appears
to be the original March 23 statement that Dr. Ayash countersigned
the order and the further arguable inaccuracy--the Globe does not
concede this--that its "leader" references may have conveyed the
false impression that Dr. Ayash had central clinical responsibility
when the overdose was delivered.

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The prior acts endorsement has two different coverage
conditions that Employers asserts were not met. One is that the
Globe not have had, prior to the new policy, "notice or knowledge"
of the claim in question or of "circumstances which would give rise
to such claim." The second, which Employers also says that the
Globe fails to meet, requires lack of "other valid and collectible
insurance applicable to such claim." Alternatively, Employers
objects to coverage on public policy grounds because the Ayash
judgment allegedly resulted from "purposeful disobedience" of a
court order.
Employers invites us to affirm the existing judgment on all or
any of these grounds, and the Globe invites us to reject them. But
the district court did not pass upon them; the district court
briefly invoked the endorsement's notice condition but not in
detail; nor does the notice condition appear to govern directly the
post-policy October article. We do not propose to decide questions
that have not been squarely resolved by the district court or fully
briefed on this appeal.
The reason why this is so may be of some interest to the
parties in deciding whether to pause now and consider whether a
settlement is possible. As to articles published before October,
Employers' reliance on the first condition of the endorsement is
promising; the condition bars insurance not for a known loss but
merely where there is notice on the insured's part, not conveyed to

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the insurer, of "circumstances which would give rise to such
claim." It is not clear just what answer the Globe has to this
condition.
Still, the October 31 article occurred after the policy went
into effect and its relationship to the earlier articles is
complicated. Part of the October article connects to earlier
allegations but part was the basis for a separate invasion of
privacy count in Ayash's state court complaint. While the Superior
Court dismissed that count prior to the sanctions order, Ayash v.
Dana-Farber Cancer Inst., No. Civ. A. 96-0565-E, 1997 WL 438769
(Mass. Super. July 9, 1997), conceivably it generated some
coverage, at least as to defense costs.
On top of these primary concerns, Employers has other coverage
objections, one of which (the second condition) may raise factual
and legal issues, while the Globe offers alternative arguments
based on policy language which, whether or not promising, further
complicate analysis. Finally, Massachusetts has case law directed
to the situation in which damage awards may encompass both covered
and uncovered claims. Liquor Liab. Joint Underwriting Ass'n of
Mass. v. Hermitage Ins. Co., 644 N.E.2d 964, 969 (Mass. 1995).
So each side faces some risks and the outcome of litigation
might not be an all-or-nothing victory. The Globe has to face some
uncomfortable facts; the insurer, Massachusetts law that often
favors the insured. With able law firms on both sides, the costs

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of more litigation, including future appeals and even future
remands, will doubtless be weighed by clients. This case is not
about principle but about money. We need not say more.
The judgment of the district court, denying coverage based on
the known loss doctrine, is vacated and the matter remanded for
further proceedings not inconsistent with this decision. Each side
will bear its own costs on this appeal.
It is so ordered.

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