Daily Development for
Friday, February 20, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

Thanks to Howard Lax of the Michigan bar for informing us of this case. The discussion and comments are the editor's.

INSURANCE; LIABILITY; MISREPRESENTATION LIABILITY: Homeowner's insurance policy does not cover liability for homeowner insured's alleged negligent misrepresentation of condition of residentail property in connection with its sale.

Michigan Educational Employees Mutual Insurance Company v. Aho, Lc No. 96-032216 Ck (Mich. App. 2/13/98).

Insurer brought suit to determine its duty to defend insureds in a lawsuit brought by buyers of insured's residentail property. Buyer's lawsuit alleged that sellers were negligent in failing to disclose certain defects in the premises when buyers negotiated for, and subsequently purchased the premises. The insurance policy covered "property damage caused by an occurrence" - presumably the policy also stated that the damage was due to the homeowner's negligence. Of course, there might have been liability based upon breach of implied or express warranty, but such claims, apparently did not fall within the insurance coverage language. Here, the plaintiff buyers were attempting to fit their complaint within a pigeonhole that warranted policy coverage.

The trial court had held that there was no duty to insure because there had been no "occurrence" within the meaning of the policy. Insured sellers had argued that the "occurrence" in the present case was "their alleged negligent failure to reasonably inspect and make disclosures regarding the condition of the house and that, as a result, buyers experienced problems with the house as alleged in their complaint."

On appeal: held: Affirmed, but on different grounds. The Michigan Court of Appeals held that the specific element of damage - the defects in the property - were not caused by the negligence of the homeowners, but rather predated the nondisclosure.

The insured and the plaintiffs in the underlying case pointed to Western Casualty & Surety Group v Coloma Twp, 140 Mich App 516; 364 NW2d 367 (1985), where the court had found similar "occurrence" language in a municipal liability policy carried by the Township covered negligent inspection of a home by a Township inspector. In that case, the court reasoned that, under state law, the Township had the right and duty to issue a permit for home construction only if the plans and specifications complied with state law and other applicable laws and ordinances, to periodically inspect construction to insure compliance with those laws and ordinances, to stop construction if any violation occurred, and to issue a certification of occupancy only if the work covered had been performed in accordance with the permit, laws, and ordinances.

Thus, there was a "causal nexus" between the alleged improper inspection process and the property damage because, had the inspection been properly performed, the work on the house would have been prevented from continuing to the next phase of construction until corrections had been made.

The insured had a point, based upon Western Casualty, that there was an "occurrence," if indeed, the sellers had and breached a duty of care in making the representations.

In the instant case, however, the court pointed out that the buyers could not allege that property damages would have been avoided if the sellers had properly inspected the home. The property damages were already there. The injury sufferred by the buyers in purchasing the house without knowledge of the problems did not constitute "damage to the property" within the meaning of the policy. Summary judgment for insurer upheld.

Comment 1: Obviously one of the more intriguing issues here is the notion that there might be liability on the part of a seller for negligent failure to disclose. This suggests that there is a duty to inspect with care prior to making disclosures in connection with a home sale. The court didn't have to reach the question of whether such a duty exists. If it does, it would only be because of the "new breed" of disclosure statutes pushed through by the NAR in many states, which, in an attempt to protect brokers from extended liability, have created a number of potential liabilities for sellers. In some cases, the editor would agree, sellers of residential real property ought to have more disclosure responsibility that traditionally existed. In some cases, also, brokers deserved some protection from expanding liability theories. But there are circumstances in which the statutory "fix" has overreached, especially where sellers' liability is concerned.

Comment 2: The case seems to be correct as outcome. The liability in question seems to relate more to the contract dealings of the seller, rather than to any negligent injury to property. The editor is not sufficiently steeped in insurance lore to comment on the different approaches taken by the trial court and the appeals court.

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