Illinois Court Requires Insurance Carrier to Defend a Construction Defect Based on Negligent Misrepresentation Claim
A recent Illinois case determined that negligent misrepresentation claims qualify as an “occurrence” for the purpose of triggering general liability insurance coverage. Other states remain split on this issue.
The insurance coverage claim at issue in USAA Casualty Insurance Co. v. McInerney, 2011 WL 5301619 (Ill. App. Ct. 2011), arose out of the purchase and sale of residential property. At the time of purchase, the policyholder/sellers informed the buyers that they were aware of flooding and leakage in the basement, but described the seepage as “slight.” The new home owners experienced significant water infiltration and flooding, as well as mold-related illnesses that ultimately led them to evacuate the house. The purchasers sued the policyholder/sellers, and included a claim for negligent misrepresentation.
The negligent misrepresentation claim alleged that the sellers were careless in their failure to disclose the gravity of the leakage problem, and that this caused damage to the property as well as personal injury. The policyholder/defendants sought defense against the claim under a liability policy that provided coverage in suits for “damages because of bodily injury or property damage caused by an occurrence.” The insurer refused to defend.
On appeal of a trial court judgment in favor of the policyholder, the insurer argued that negligent disclosure is not an “occurrence” within the meaning of a liability policy, and that the insured’s conduct was intentional. The court analyzed the claim by looking to Illinois case law where other kinds of negligence claims (including negligent installation of asbestos-containing insulation, negligent hiring, and negligent termite inspections) were held to fall within coverage under a general liability policy. The court concluded that there was no reason to treat negligent misrepresentation claims differently from other negligence claims. Accordingly, it held that negligent misrepresentation claims are not necessarily excluded from coverage as long as the insured did not expect or intend the injury.
Since the underlying claim alleged damages proximately caused by negligent misrepresentations – and did not allege that the insured expected or intended the injury – the claim was held to constitute an “occurrence.” And, the court’s conclusion was not altered by the fact that the complaint included other claims that did allege intentional conduct. The court held that these claims were appropriately plead as alternative theories of recovery. Finally, the court found that there was no indication that the claim for negligent misrepresentation was a “transparent attempt to trigger insurance coverage.” Rather, it was conceivable that the policyholder defendants genuinely were unaware of the defects in the home.
Triggering insurance coverage for construction defect claims is often problematic. This case is important because it indicates that the duty to defend can sometimes be triggered in a construction defect case by claims that are separate from the construction defect claims themselves. Also, it is generally true under Illinois law that triggering the duty to defend for even one claim requires the insurance carrier to provide a complete defense to all claims.