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.
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.
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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