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No Duty to Defend for Seller’s Failure to Disclose Defects During Sale of Home
Insurance Law Update
July 2009
Seventh Circuit Court of Appeals
In Goderstad v. American Family Mut. Ins. Co., ___ F.3d ___, 2009 U.S. App. Lexis 13912 (7th Cir. (Wis.) June 29, 2009), the Seventh Circuit Court of Appeals affirmed the district court’s summary judgment, holding that American Family Mutual Insurance Company had no duty to defend or indemnify a seller for negligent misrepresentation when the seller failed to disclose numerous defects in the sale of his home.
The Ebertses sued the Goderstads for negligent misrepresentation and other related causes of action alleging that the Goderstads failed to disclose numerous defects prior to the sale of their home, including water leaks and moisture trapped between the home’s interior and exterior walls. The Goderstads tendered their defense and indemnity to American Family Mutual under several policies, and American Family appointed counsel under a reservation of rights.
Thereafter, American Family obtained summary judgment on the issue of coverage, and the Seventh Circuit affirmed. The American Family policies provided coverage for “property damage” caused by an “occurrence,” which was defined as an “accident.” The Seventh Circuit rejected the Goderstads’ argument that because the Ebertses’ complaint alleged various nondisclosures, the alleged negligent misrepresentation was an “inadvertent, nonvolitional failure to act” rather than a false statement of fact, and thus was an “accident” for purposes of coverage. The court noted that, under Wisconsin case law, (1) the term “accident” is defined as “an unexpected, undesirable event or an unforeseen incident which is characterized by a lack of intention,” and (2) a claim for misrepresentation involves a false statement and requires a degree of volition inconsistent with the term “accident.” The court further observed that Wisconsin law does not recognize negligent misrepresentation claims based on nondisclosures or omissions, but requires an affirmative false statement. The court also concluded that even if a misrepresentation claim by nondisclosure were recognized under Wisconsin law, the claim would still fail because the American Family policies limited coverage to “property damage,” and the misrepresentations alleged did not cause “property damage.”
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