Let your home insurer battle lawsuits


March 26, 2000

When an unhappy buyer sues the former homeowners, claiming that the sellers negligently misrepresented the condition of the home, or failed to disclose defects in the home, the sellers may have the right to require the company that issued their homeowners' insurance on the property to defend the buyers' lawsuit.

Here are the facts of a case that Maryland's highest court decided several years ago:

The buyers purchased a farmhouse in Frederick County from the sellers. According to the buyers, three weeks after they moved into the home with their nine children, the septic system failed, causing sewage to flood the surrounding surface area and walks. The Frederick County Health Department condemned the septic system, and the buyers had to spend more than $12,000 to replace the system.

The buyers sued the sellers, claiming -- among other things -- that the sellers misrepresented that the septic system was in good working order and were negligent and careless in failing to reveal necessary information about the property. The buyers alleged they relied on the sellers' misrepresentations, and, had it not been for those false statements, the buyers would not have moved into the house and would not have used the septic system.

The sellers demanded that their homeowners' insurance carrier defend the suit. The sellers relied on language commonly found in many homeowners' policies. Under the policy, the insurer agreed to cover damages for "property damage" and had the right and the duty to defend any lawsuit claiming those damages.

"Property damage" was covered only if caused by an "occurrence." The policy defined "occurrence" as "an accident," but did not define "accident."

The insurance company refused to defend the sellers or provide coverage for the claims in the buyers' lawsuit. The insurer said its policy did not cover misrepresentations about the condition of the home. The court disagreed, and ruled that the insurance carrier had to defend the action.

The court's reasoning involved two steps:

First, for purposes of deciding whether the insurance company has a duty to defend a suit brought against its insured, all of the allegations are assumed to be true. In defending the suit, the insurer, of course, may dispute the plaintiff's claims. But, in deciding whether the insurer had to pay for lawyers to defend the sellers, the court assumed that the sellers asserted the septic system was in good working order, and that the sellers carelessly failed to reveal necessary information about the condition of the home.

Next, the court said that an "accident" occurred, because it was possible that the sellers did not foresee or expect the damage resulting from their alleged negligent and careless assertion that the septic system was "in good working order."

The ultimate test for an "accident," under the insurance policy in question, is whether the resulting damage is "an event that takes place without one's foresight or expectation."

Since it was possible that the sellers did not expect or foresee damage resulting from their alleged misrepresentations about the septic system, the resulting damage fit within the definition of "accident."

Since the claim for negligent misrepresentation was at least potentially covered under the insurance policy as an "occurrence," the sellers' insurance company owed the sellers a duty to defend the suit.

The moral of this story: If you're ever sued for anything having to do with your home, promptly notify the company that insured your home at the time of the events, and ask the insurance company to defend the case.

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