The Connecticut Appellate Court recently ruled that claims of negligent misrepresentation against the seller of a home arising from the sale of house with water drainage problems which were not disclosed to the purchasers were not covered under the seller's homeowner liability policy because the claimed economic damages were not "property damage."
In New London County Mutual Insurance Co. v. Sielski, 159 Conn.App. 650 (2015) , the defendant sold a home to a married couple. Before closing on the property, the seller provided a home disclosure report in which he represented that he had no knowledge of any problems concerning water seepage, rot and water damage, or drainage problems. After they purchased the property, the purchasers experienced drainage problems around the house, water coming onto their property and they discovered rotted and moldy beams in the basement of the house. The purchasers filed suit against the seller, alleging various claims arising from the seller's alleged misrepresentations in connection with the sale of the property. After the seller notified his homeowner's insurer of the claim, the insurer denied coverage. The insurer contended it had no duty to defend or indemnify the seller because the theory of negligent misrepresentation and the purchasers' alleged economic damages did not meet the definition of property damage under the policy: "physical injury to, destruction of, or loss of use of tangible property."
The Connecticut Appellate Court addressed the issue of whether economic damages caused by a negligent misrepresentation may be considered property damage under a liability policy and under what circumstances a negligent misrepresentation constitutes an occurrence under such a policy. The court noted certain trends of courts throughout the country that have considered whether negligent misrepresentation claims are covered under a homeowner or commercial general liability policy. First, the court noted that many courts conclude that damages resulting from negligent misrepresentation are economic or contractual damages that do not give rise to physical injury to, destruction of, or loss of use of tangible property and, therefore do not meet the definition of "property damages" under liability policies. The court found that other courts conclude that a misrepresentation, even if negligent, is a volitional act and, therefore, does not constitute an accident giving rise to an occurrence. Finally, the court noted that a claimed negligent misrepresentations generally is not the actual or proximate cause of the physical injury to or loss of use of tangible property covered under a liability policy. Instead, damages caused by a negligent misrepresentation are generally economic in nature – the difference between the value received and the purchase price and the pecuniary loss suffered as a result of reliance upon the misrepresentation. Any physical damage to the property generally predates the alleged misrepresentations and, therefore, can not be caused by the misrepresentations.
After analyzing the various approaches taken by courts throughout the country, the court ruled that the insurer did not have to defend or indemnify its insured because the alleged damages caused by the insured's negligent misrepresentation were economic and pecuniary damages that did not constitute physical injury to or loss of use of tangible property and, therefore, were not "property damage" as defined in the policy. Additionally, the liability policy, like most policies, only covered property damage caused by an "occurrence." The court held that the physical damage to the property at issue, i.e. the water damage and rot, was not caused by the seller's alleged misrepresentations, but predated the alleged nondisclosures. Because the claimed loss did not fall within the terms of the policy's insuring agreement, the insurer had no duty to defend or indemnify the insured. You may read the decision here.
The Sielski case serves as a reminder that although liability policies are intended to insure against the risk of accidental losses and a claim arising from a negligent nondisclosure may constitute an occurrence, the claim may not qualify as an insured loss if the occurrence is not the legal cause of damage covered by the policy. A petition for certification was filed with the Connecticut Supreme Court and we await notice whether the Supreme Court intends to weigh in on this issue.