Panel Considers Negligent Misrepresentation
December 07, 2011
In a case of first impression, the 2nd District Illinois Appellate Court recently held that a homeowner's insurer had a duty to defend its insureds based on an allegation of negligent misrepresentation made by the insureds in connection with the sale of their home. USAA Casualty Insurance Co. v. McInerney, 2011 WL 5301619 (2d Dist. Oct. 31, 2011).
Mark W. Monroe of Wheaton represented the insurer, USAA. Massucci, Blomquist, Brown & Hedrick of Arlington Heights represented the insureds, the McInerneys.
Background
The McInerneys sold their house in Lake Bluff to the Cyrs in 2006. As part of the sale, they signed a residential real property disclosure report indicating that they were aware of flooding or leakage problems in the basement, but also indicating that seepage occurred during heavy rains, new landscaping and drains provided a remedy and on "rare occasions" they still experienced "slight seepage."
In 2007 the Cyrs filed a complaint seeking rescission of the sale or compensatory damages for breach of contract, fraud, negligent misrepresentation and other theories. They contended that after taking possession, they experienced continuous water infiltration in the basement well in excess of "slight seepage" and that in heavy rains the basement flooded. They contended they experienced mold damage and had to evacuate the house until they could remediate it.
The McInerneys tendered the defense of the case to USAA, which had issued a family liability insurance policy that provided coverage for, among other things, damages because of property damage caused by an occurrence. In 2009, USAA brought this declaratory action contending that it had no duty to defend because the complaint did not allege an occurrence and because coverage was barred by the intentional acts exclusion, the contract exclusion and the loss-in-progress doctrine.
The McInerneys counterclaimed seeking, among other relief, sanctions for vexatious and unreasonable conduct under 215 ILCS 5/155. USAA moved for judgment on the pleadings and the McInerneys for summary judgment. The trial court denied both motions and conducted a bench trial, following which the court found that USAA had a duty to defend based on the negligent misrepresentation count and awarded the McInerneys defense costs in the underlying case of $177,000. USAA took this appeal.
Doubts Resolved For Coverage
In an opinion by Justice Mary Seminara Schostok, the 2nd District affirmed. She began by observing that no Illinois court has directly addressed whether a negligent misrepresentation can be an "occurrence" and that courts from other states are split on the subject. Nevertheless, said Seminara Schostok, no Illinois authority stood for the proposition that negligent misrepresentations cannot fall within coverage of a general liability policy. And given the fact that doubts about coverage are usually resolved in favor of the insured, she found that such claims are not necessarily excluded.
Seminara Schostok found support for her position in Posing v. Merit Insurance Co., 258 Ill. App. 3d 827, 629 N.E.2d 1179 (1994), in which the court held that a faulty termite inspection could give rise to coverage based on an "occurrence."
Occurrence
As for what constituted the "occurrence" in this case, Seminara Schostok said it made no difference whether it was viewed as post-sale flooding as a result of the negligent misrepresentations or the negligent misrepresentations as a result of post-sale flooding. Either way, the complaint alleged property damage and bodily injury as a result of an "occurrence," so there was potential coverage.
USAA relied on Allstate Insurance Co. v. Lane, 345 Ill. App. 3d 547, 803 N.E.2d 102 (2003), in which purchasers of a home discovered leaks, water damage and sewer odors and alleged, among other things, a negligent misrepresentation by the sellers. Although the court there found no coverage because of a lack of an occurrence, Seminara Schostok found the case distinguishable.
Unlike in the present case, the property damage in Lane occurred before the sale and Seminara Schostok said that such damage would not be covered. Further, the court in Lane found that the underlying complaint's allegations, although alleging negligence, could not be construed as such, whereas the Cyrs' complaint here did properly allege negligence by the McInerneys. Negligence was properly alleged as an alternative theory and, in addition, despite the fact that the negligence count incorporated all the preceding paragraphs, including those based on intentional conduct.
Loss-In-Progress
With respect to USAA's reliance on the loss-in-progress theory, Seminara Schostok said it was inapplicable because the negligent count was not based on knowing conduct and the loss-in-progress or "known loss" doctrine assumes that the insured knows or has reason to know of the loss.
Contract Exclusion
Seminara Schostok also rejected USAA's reliance on the policy's contract exclusion. While USAA argued that the disclosure report containing the allegedly negligently made misrepresentation would not have existed but for the real estate contract, the disclosure report itself was not a contract. Rather, it was a creature of statute and negligence in completing the report did not arise under contract.
The court, therefore, affirmed the trial court decision finding in favor of a duty to defend.
Key Point
A negligent misrepresentation made by a seller in the context of the sale of real estate may constitute an "occurrence" for purposes of liability coverage if property damage or bodily injury results.
