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American Family Insurance Group v. Robnik

August 11, 2010



The opinion of the court was delivered by: Zinter, Justice.


[¶1.] American Family Insurance initiated this declaratory action to determine whether its homeowner's policy covered damages awarded against its insured in an underlying tort action for negligent misrepresentation. The circuit court in the underlying action found that the damages were caused by negligent acts. Notwithstanding those findings, the circuit court in the declaratory action concluded there was no coverage because the misrepresentations were intentional and because there were no causally related damages for which there was coverage under the policy. We affirm the judgment because there was no dispute of fact that allegedly negligent acts caused expected damages; the expected damage issue was not and could not have been tried in the underlying tort action; and, under Robnik's own line of authorities, negligent misrepresentation resulting in expected damages is not an accident/occurrence for which there is coverage under the policy.

Facts and Procedural History

[¶2.] Shirley Hunter owned a home in Rapid City. In connection with her sale of the home, Hunter completed a property disclosure statement as required by SDCL ch 43-4. In the disclosure statement, Hunter answered "No" to the following question: "Are you aware of any problems with the sewer blockage or backup, past or present?" Hunter also indicated that the "plumbing and fixtures" were "working," and that the "sewer system/drains" were "working." After reviewing the disclosure statement, Heather Robnik purchased the home.

[¶3.] Approximately two years prior to the sale, Hunter had hired a plumbing contractor to repair a sewer blockage in the home. The contractor discovered defects in the sewer line. Rather than fixing the problem, Hunter had the shower drain in the basement capped. She also had the toilet drain capped. This information was not disclosed to Robnik, and it conflicted with the representations in the disclosure statement.

[¶4.] After purchasing the home, Robnik uncapped the shower and toilet drains and began using those facilities. Less than a year after closing, Robnik experienced sewage back up, including standing water. In a second incident, Robnik experienced a basement sink full of sewage and feces.

[¶5.] Robnik subsequently initiated the underlying action against Hunter for personal injury and property damage. Robnik's action was initially premised on alternative theories of negligence and deceit. Hunter did not appear, and American Family intervened to provide a defense. At the conclusion of a trial to the court, Robnik dismissed her claim for deceit and all allegations of intentional misconduct. Circuit Judge Trimble entered findings of fact that: Hunter negligently completed the disclosure statement; her negligence proximately caused Robnik property damage and emotional distress accompanied by bodily injury; and, Hunter committed the tort of negligent misrepresentation.

[¶6.] Hunter's homeowner's insurance policy provided liability coverage for bodily injury and property damage caused by an "occurrence." An occurrence was defined as: "an accident, including exposure to conditions, which, results during the policy period, in: a. bodily injury; or b. property damage." The term "accident" was not defined in the policy. The policy also contained an intentional acts exclusion, which provided:

Intentional Injury. We will not cover bodily injury or property damage caused intentionally by or at the direction of any insured even if the actual bodily injury or property damage is different than that which was expected or intended from the standpoint of any insured.*fn1

[¶7.] After entry of the judgment in the underlying action, American Family and Robnik filed cross motions for summary judgment in the already pending declaratory action. Judge Delaney denied Robnik's motion for summary judgment and granted American Family's motion. Notwithstanding Judge Trimble's findings that Hunter's misrepresentations were negligent, Judge Delaney found that the acts were intentional and there was no coverage under the intentional acts exclusion.*fn2

[¶8.] On appeal, Robnik contends that in light of American Family's participation in the underlying action, res judicata prevented the declaratory court from recasting Hunter's acts as intentional rather than negligent. Robnik also contends that Hunter's negligent misrepresentation was an accident/occurrence triggering coverage under the policy.*fn3



[¶9.] To be a covered "occurrence," Hunter's misrepresentations had to have been an "accident" within the meaning of the policy. This issue has been considered by numerous courts, resulting in a split of authority. One author has summarized the issue and the two most often stated views:

Standard language in many policies of liability insurance provides coverage for bodily injury or property damage caused by an "occurrence." "Occurrence" is usually defined as an "accident," but the term "accident" is itself rarely defined. Courts have differed over whether negligent misrepresentation can constitute an "accident" or "occurrence" under a policy of liability insurance so as to give rise to an insurer's duty to defend or indemnify an insured. In Sheets v. Brethren Mut. Ins. Co. (1996) 342 Md 634, 679 A2d 540, 58 ALR5th 883, for example, the court held that negligent misrepresentation would be treated like other forms of negligence that are covered as "accidents" if the insured does not expect or foresee the resulting damage. Other courts have held that negligent misrepresentation is not an "accident" under a policy, because the insured intends to induce reliance on the statement*fn4 or because the nature of negligent misrepresentation is that of an intentional act.

H. Brent Brennenstuhl, Annotation, Negligent Misrepresentation as "Accident" or "Occurrence" Warranting Insurance Coverage, 58 ALR5th 483, 483 (1998). We have not had occasion to consider the issue.

[¶10.] Robnik relies on Sheets v. Brethren Mut. Ins. Co., 342 Md 634, 657, 679 A2d 540, 551 (1996). Sheets concluded that notwithstanding the intent to induce reliance element, negligent misrepresentation is an accident/occurrence if "the resulting damage is an event that takes place without one's foresight or expectation."*fn5 See also Aetna Cas. & Surety Co. v. Metro. Baptist Church, 967 FSupp 217, 223 (SDTex 1996) (concluding that under Texas law, negligent misrepresentation may be an accident if the resulting injury is unexpected or unintended).*fn6 The dissent relies on City of Carter Lake v. Aetna Cas. & Sur. Co., 604 F2d 1052, 1058 (8th Cir 1979), a harmonious decision applying the same definition as Sheets; i.e. "whether a result is 'expected' as a matter of probability." See id.

In fact, Sheets "agrees with the reasoning of the Eighth Circuit in Carter Lake."

Sheets, 342 Md at 653. Ultimately, as explained below, we do not decide which view or specific definition to adopt because Robnik cannot establish an accident/occurrence as a matter of law under Sheets's or Carter Lake's definition of the unexpected damage rule. ...

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