Insurer Had No Duty To Defend Failure To Disclose Home Flaws

A Transylvania County couple who allegedly misrepresented the condition of their house foundation before they sold it could not call on their homeowners’ insurer to defend them when the buyers sued, a U.S. Western District magistrate judge has ruled.
The ruling is a first-impression look at whether a homeowners’ carrier must defend sellers for allegedly failing to disclose known structural defects.
The insurer argued it was not liable and filed a declaratory judgment to find out what its obligations were.
In recommending summary judgment in favor of the insurer, U.S. Magistrate Judge Dennis L. Howell ruled the homebuyer’s alleged damages were economic in nature and thus not covered under the property damage provisions of the insurance policy.
Judge Howell also ruled the alleged acts of the sellers did not constitute a covered “occurrence.” The reason: an occurrence was defined as an accident, and not the kind of intentional conduct alleged by the homebuyers.
Judge Howell’s recommended decision was affirmed on Jan. 12 by U.S. District Judge Lacy Thornburg.
The case is American Motorists Insurance Co. v. Asalone (North Carolina Lawyers Weekly No. 05-04-0144, 15 pages).
Background
According to the opinion, Anthony and Helen Asalone offered to sell their home to James and Kathryn Edwards. The purchase contract was completed in July 2002.
After the Edwards bought the house and moved in, they had trouble with a sliding door and asked a builder to check it for them.
“Having determined that the floor of the house was supposedly sloping and separating from the house, the Edwards next contacted a professional engineer to inspect the structural elements of the home,” the opinion states.
The engineer told the Edwards that “they had serious problems with the house’s foundation and that he had been previously employed by the Asalones to assess the same problems,” the Edwards’ complaint stated. The engineer allegedly prepared a report for the Asalones in 2001 and advised them that “these cracks in the walls may be of concern to a potential buyer.”
On May 2, 2003, the Edwards sued in state court for breach of contract, misrepresentation, constructive fraud and actual fraud.
In their complaint, the Edwards said the Asalones allegedly falsified a residential property disclosure statement by contending that they had no actual knowledge of any problems or defects with the house’s foundation. The residential property disclosure statement was signed on March 1, 2002, according to the opinion.
The Asalones denied the allegations.
American Motorists Insurance Company, which provided homeowners’ and personal catastrophe liability coverage to the Asalones, filed a declaratory judgment action in federal court on Feb. 11, 2004. The insurer asked the court to rule it had no duty to defend the Asalones or provide liability insurance coverage.
Ruling
The Asalones’ homeowners’ policy and the PCL endorsement both provided coverage for “property damage, and the homeowners’ policy also required that any claim against the insured constitute an “occurrence.”
“[T]herefore, to be covered by the homeowners’ policy, the claim must be for ‘property damage’ and arise from an ‘occurrence,'” the court said.
* The homeowners’ policy defined “property damage” as physical injury to, destruction of, or “loss of use of tangible property” while the endorsement defined that term as “physical injury to tangible property.”
* Each policy required that the damage arise during the policy period.
With no North Carolina precedent on point, the U.S. magistrate judge turned to the 2003 Ohio case of Cincinnati Insurance Co. v. Anders, 789 N.E.2d 1094. Anders, which involved similar facts, held that the underlying claims arose from the non-disclosure of the damage, not from the actual damage itself, making the claims outside the scope of the policy.
The court also pointed to a 2004 case of Shelter Mut. Ins. Co. v. Brown from the Southern District of Mississippi. The Brown court, ruling on similar facts, said the plaintiffs’ claim for damages against home sellers over a failed foundation were economic in nature and not property damage within the meaning of the policy.
Judge Howell followed those decisions and ruled the Asalones’ insurer had no duty to defend.
“As in the Anders and Brown cases, the Edwards have made no claims of physical injury against the Asalones,” the court said. “Instead, the Edwards allege that the Asalones failed to disclose the existence of known damage and fraudulently prepared and presented to the Edwards a false residential property disclosure statement.
“As in Brown, the damages alleged in the Edwards underlying complaint are not ‘property damage’ within the meaning of the policy but are economic in nature in that they may be measured by the value of the home as allegedly represented and the actual value of the home.”
No Occurrence
Judge Howell also ruled there was no occurrence within the meaning of the homeowners policy and endorsement.
The policy defined an occurrence as an “accident, including continuous or repeated exposure to the same general harmful conditions, which result, during the policy period in … property damage.”
The Edwards’ alleged injury was not an accident, the court said, because the non-disclosure of the structural problems was either an intentional act, or substantially certain to result in damage to the buyer.
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