Is Seller's Failure To Disclose Known Defects to Buyers a Covered "Occurrence"?
January 2005
Should homeowners insurance coverage be available
for claims involving intentional concealment of known damage to a home? Doesn't
this constitute fraud? If so, are these actions considered "accidental" under
the policy? Not all courts agree on the answers.
by Richard
T. Valentino and Michael Resis
O'Hagan, Smith & Amundsen
In Allstate Ins. Co. v Lane, 345 Ill App 3d
547, 803 NE2d 102 (1st Dist 2003), a homeowners insurer filed a declaratory
action seeking a determination that it owed no coverage in connection with an
underlying suit against its insureds. In the underlying suit, purchasers of
the insureds' home alleged fraudulent and negligent misrepresentation and violation
of the Illinois Residential Real Property Disclosure Act, sought rescission
of the real estate contract and damages based on the insureds' failure to disclose
long-term water damage in a disclosure report signed prior to closing. The insurer
refused to defend the homeowners, and the trial court granted the insurer summary
judgment in the declaratory action, finding that the underlying suit did not
allege "property damage" caused by an "occurrence" as defined in the policy.
The insureds appealed.
The appellate court affirmed. The homeowners policy defined "occurrence"
as an accident, including continuous or repeated exposure to substantially the
same general harmful conditions during the policy period, resulting in "bodily
injury" or "property damage." The court rejected the homeowners' argument that
the "negligent representation" claim alleged an "occurrence" resulting in "property
damage" under the policy. The underlying complaint alleged not merely that the
insureds had entertained doubts as to whether the report that they signed was
true or that they suspected that it was "probably false." Instead, the purchasers
had alleged that the insureds knew of the defects to such an extent that they
had discussed the matter with their realtor and followed his advice to conceal
leaking and water damage. Even if the insureds did not realize the full extent
of the water damage, the purchasers alleged that the insureds knew of and concealed
the damage by making repairs before the sale.
In reaching its decision, the Illinois Appellate Court examined several cases
from other jurisdictions which were presented by the parties. The homeowners
relied on Wood v Safeco Ins. Co of America, 980
SW2d 43 (Mo App 1998), and a similar case from Maryland, Sheets v Brethren Mutual Insurance Co., 342 Md
634 (1996). In both of these cases, the courts concluded that an underlying
complaint which included an allegation of a "negligent misrepresentation" in
the course of the sale of real estate by the insured was sufficient to allege
an "occurrence" and trigger the insurer's duty to defend.
Negligent versus Intentional Representations
In Wood, the insured sold riverfront property
and represented to the buyers that it was "flood-proof." The property flooded
after the sale and the purchaser sued. The court found it was "conceivable"
that the insured had never experienced flooding in the property and, therefore,
had made a negligent, rather than an intentional, misrepresentation. A similar
result was reached in Sheets, with respect to
problems in a septic system which were discovered by the purchaser following
sale. The Lane court distinguished both of these
cases on the basis that the underlying complaint before it expressly alleged
that the insureds took affirmative steps to conceal the water damage prior to
sale.
The Lane court found the decision of the Ohio
Supreme Court in Cincinnati Insurance Co. v Anders,
99 Ohio St 3d 156 (2003), to be more persuasive authority. Anders involved a policy and underlying complaint
similar to those before the Lane court. In Anders, the insured homeowners failed to disclose
structural, electrical, and plumbing defects in their home when they sold it.
Later, the purchasers of the home sued the insureds to recover damages for these
defects. The insureds tendered the complaint to their insurer, which filed a
complaint for declaratory judgment, seeking a determination that it had no obligations
under its policy (which included umbrella endorsement) to defend the insureds
against the defect-based claims. The insureds filed a counterclaim, seeking
a declaration that they were entitled to a defense against the underlying claim
of negligent misrepresentation and also sought damages for the insurer's alleged
"bad faith."
The Ohio Supreme Court affirmed the finding of the trial court and the Ohio
Court of Appeals, finding that neither the basic homeowners policy nor the liability
umbrella endorsement required the insurer to defend the insured against the
underlying claims. The Anders court characterized
the alleged negligent nondisclosure of the structural damage as "accidental,"
but giving rise to economic damages rather than "property damage." The actual
"property damage" was caused by the defective construction, a separate and noncovered
"accident." Thus, the claim fell outside of the coverage of the basic homeowners
policy and umbrella.
Conclusion
These cases illustrate the different approaches taken by courts of various
jurisdictions when confronted with questions of homeowners' coverage for claims
arising from the sale of homes with latent defects. In the author's opinion,
Lane reaches an obviously correct result—intentional concealment of known damage
to a home constitutes fraud and, therefore cannot be "accidental." Thus, insurance
coverage should not be available for such a claim.
However, plaintiffs are motivated to find coverage and will often couch pleadings
in terms of negligent, rather than intentional, misconduct. The approach of
the Ohio Supreme Court in Anders should be considered
by counsel for insurers when confronting a negligence-based claim. Of course,
some courts may not accept the approach of Anders,
to the effect that the alleged negligence of the insured caused merely economic
damage, rather than the complained-of physical "property damage" to the structure.
For the policyholder's counsel, Wood and Sheets are cases supporting a finding of coverage
in those underlying cases alleging purely "negligent" misrepresentations.
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