March 18, 2020

By Kent Bevan

An insurance case, American Family Mutual Insurance Company v. Robert M. Sharon, examines the definition of “occurrence” and various policy exclusions raised by American Family.

The plaintiff and homeowner, Robert Sharon, sued the sellers, Schwenzers, on several theories, including negligent misrepresentation and unlawful merchandising practices, in connection with Sharon’s purchase of the Schwenzers’ home. After the sale closed, Sharon experienced significant water leaks and damage in the basement of the house. Sharon’s petition alleges that while the Schwenzers agreed to disclose all material defects, conditions and facts known to them that would affect the value of the property, the Schwenzers knew or should have known their representations were false, as the sellers had previously experienced water leaks and water damage to the basement.

Sharon then appealed a judgment in favor of American Family, which declared that there was no duty to defend or indemnify the Schwenzers against Sharon’s underlying claims for negligent misrepresentation and violation of the Missouri Merchandising Practices Act (MMPA).

Sharon raised five points on appeal, including that Sharon’s claim constitutes a covered “occurrence” and that the court erred in concluding that Sharon’s claims were subject to the owned property exclusion, the expected or intended exclusion, the contractual liability exclusion and the punitive damage exclusion.

The policy defines “occurrence” as an accident that results in property damage during the policy period. Sharon alleged the Schwenzers falsely represented that there had not been any water leakage or damage in the basement, as the Schwenzers knew or should have known they were false; that the Schwenzers failed to exercise reasonable care in making the representations; that Sharon reasonably relied on them; and that as a result of the Schwenzers’ misrepresentations, Sharon incurred and will continue to incur damages in the form of repair costs and diminished value of the property.

Missouri law holds that an alleged negligent misrepresentation can be an accident for purposes of determining whether there is coverage under an “occurrence” provision of a policy. But even if the alleged negligent misrepresentation and unlawful merchandising practices are an accident, to be covered under the policy, they must have resulted in property damage. The appellate court agreed that undiscovered defects that exist at the time of sale are not caused by misrepresentation. The issue becomes whether the claimed property damage caused by water after the sale is properly referred to as property damage caused by an alleged misrepresentation. Missouri courts have found that alleged water damage following a sale could meet the definition of property damage. The court determined that Sharon’s claim may be a covered “occurrence” under the policy.

The court then directed its attention to the claimed exclusions. As to the “owned property” exclusion, the court reasoned that the insurance company’s position ignores the fact that Sharon’s negligent misrepresentation claim is broad enough to include a claim for water damages caused by the misrepresentations resulting after the property was no longer owned by the insureds. Since the property was not owned by the insureds when the post-sale water damage was alleged to have occurred, the trial court erred in concluding that the owned property exclusion barred coverage as to any such claim in the petition.

As to the “expected or intended” exclusion, the court determined that a claim for negligent misrepresentation, unlike a claim for fraud, does not involve a question of intent. Rather, such a claim is based on the theory that the declarant believed the information supplied was correct but was negligent in so believing. When, as here, the policy defines “occurrence” as meaning an “accident,” Missouri courts have considered this to mean injury caused by the negligence of the insured. The appellate court was unable to say that the Schwenzers’ acts or omissions were expected or intended if the Schwenzers believed their prior repairs were sufficient to prevent future water damage. Therefore, the “expected or intended” exclusion did not prevent coverage of Sharon’s negligent misrepresentation claim.

As to the “contract-liability” exclusion, the court noted that negligent misrepresentation does not require the existence of a contract as an element of the claim. Sharon did not base his claim for negligent misrepresentation on the existence of a contract; even so, the policy’s “contract-liability” exclusion does not apply to written contracts directly relating to the ownership of the insured premises. Therefore, the court found that the “contract-liability” exclusion did not apply to Sharon’s negligent misrepresentation claim.

As to the punitive damage exclusion, the court noted that the policy excludes personal liability coverage for punitive or exemplary damages, but this exclusion does not act as a complete bar to coverage since Sharon also seeks compensatory damages for the alleged negligent misrepresentation. The fact that Sharon claimed both covered damages and excluded damages in the form of punitive damages does not mean that both are excluded. The punitive damages exclusion does not apply to Sharon’s negligent misrepresentation claim to the extent he seeks other types of damages besides punitive.

The Missouri Court of Appeals Western District concluded that plaintiff’s claim may constitute an “occurrence” under the policy and that the cited exclusions were not applicable to the claim other than to the extent plaintiff seeks punitive damages. Therefore, the appellate court concluded that American Family has a duty to provide the Schwenzers with a legal defense in Sharon’s underlying suit, and the case was reversed and remanded for further proceedings.