February 18, 2005
MEMORANDUM AND RECOMMENDATION
THIS MATTER is before the court upon plaintiff's Motion for Summary Judgment. Having carefully considered plaintiff's Motion for Summary Judgment and reviewed the pleadings, including defendants' response, the court enters the following findings, conclusions, and Recommendation that plaintiff's Motion for Summary Judgment be allowed and that the declaratory relief sought be granted.
FINDINGS AND CONCLUSIONS
On or about May 2, 2003, defendants James P. Edwards and Kathryn L. Edwards (hereinafter "the Edwards") filed a Complaint in the North Carolina General Court of Justice, District Court Division, Transylvania County, against defendants Anthony J. Asalone and Helen Asalone (hereinafter "the Asalones"). In that Complaint, the Edwards asserted claims against the Asalones stemming from a sale of a dwelling house owned by the Asalones to the Edwards. In the Complaint, the Edwards contend that the Asalones falsified a "Residential Property Disclosure Statement," therein allegedly stating, among other things, that they had no actual knowledge of any problems or defects with the foundation of the dwelling house.
North Carolina's "Residential Property Disclosure Act" requires as follows:
(a) With regard to transfers described in G.S. 47E-1, the owner of the real property shall furnish to a purchaser a residential property disclosure statement. The disclosure statement shall:
(1) Disclose those items which are required to be disclosed relative to the characteristics and condition of the property and of which the owner has actual knowledge; or
(2) State that the owner makes no representations as to the characteristics and condition of the real property or any improvements to the real property except as otherwise provided in the real estate contract.
(b) * * *
The disclosure statement shall . . . include at least the following characteristics and conditions of the property:
(1) The water supply and sanitary sewage disposal system;
(2) The roof, chimneys, floors, foundation, basement, and other structural components and any modifications of these structural components;
* * *
N.C. Gen. Stat. § 47E-4.
Upon closing and taking possession of the home, the Edwards contend that they had trouble with a sliding door and contacted a builder to review the problem. Have determined that the floor of the house was supposedly sloping and separating from the house, the Edwards next contacted a professional engineer to inspect the structural elements of the home. Complaint, at ¶ 8. The engineer purportedly informed the Edwards that they had serious problems with the foundation and that he had been previously employed by the Asalones to assess the same problems. Complaint, at ¶ 10. The Edwards contend in their state-court complaint that the engineer provided the Asalones with a report of his assessment in 2001 and advised them that "these cracks in the walls may be of concern to a potential buyer." Complaint, at ¶ 10. After the Edwards took possession of the home, the structure was condemned by Transylvania County Inspections Department. Complaint, at ¶ 12.
According to the Edwards, the "Residential Property Disclosure Statement" was supposedly signed by the Asalones on March 1, 2002. Edwards Complaint, at ¶ 3. The Edwards have alleged claims for breach of contract, misrepresentation, constructive fraud, and actual fraud by the Asalones. The Asalones have denied the allegations of the state-court complaint.
In this action, plaintiff seeks a declaratory judgment declaring that the plaintiff has no duty to defend the Asalones or to provide any liability insurance coverage. Plaintiff contends that the contract of insurance between the plaintiff and the Asalones provides no coverage for the commonlaw claims asserted by the Edwards against the Asalones.
Plaintiff filed this action in accordance with Rule 57, Federal Rules of Civil Procedure, and 28, United States Code, Section 2201. Plaintiff is an Illinois corporation with its principal place of business in Illinois. The Asalones reside in the Commonwealth of Virginia, while the Edwards reside in North Carolina. Inasmuch as the amount in controversy exceeds $75,000.00 exclusive of interests and costs, it appears that plaintiff has properly invoked the diversity jurisdiction of this court in accordance with 28, United States Code, Section 1332.
III. Procedural History
The underlying state-court action was filed on or about May 2, 2003. That complaint was amended on June 16, 2003. On February 11, 2004, plaintiff filed this action seeking declaratory relief. After the court entered an Order providing for expedited pretrial proceedings, plaintiff filed its Motion for Summary Judgment and supporting memorandum on November 5, 2004. The Asalones filed their responsive memorandum of law on November 24, 2004, and plaintiff properly filed its notice of no reply on December 6, 2004. Just as they did in response to the pretrial conference, the Edwards have apparently elected not to respond. It appearing that all issues have been fully briefed, plaintiff's Motion for Summary Judgment is ripe for consideration.
A. Summary Judgment Standard
On a motion for summary judgment, the moving party has the burden of production to show that there are no genuine issues for trial. Upon the moving party's meeting that burden, the non-moving party has the burden of persuasion to establish that there is a genuine issue for trial.
When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. In the language of the Rule, the nonmoving [sic] party must come forward with "specific facts showing that there is a genuine issue for trial." Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no "genuine issue for trial."Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) (citations omitted; emphasis in the original) (quoting Fed.R.Civ.P. 56). There must be more than just a factual dispute; the fact in question must be material and readily identifiable by the substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986).
By reviewing substantive law, the court may determine what matters constitute material facts. Anderson, supra. "Only disputes over facts that might affect the outcome of the suit under governing law will properly preclude the entry of summary judgment." Id., at 248. A dispute about a material fact is "genuine" only if the evidence is such that "a reasonable jury could return a verdict for the nonmoving party." Id. When resolution of issues of fact depends upon a determination of credibility, summary judgment is improper. Davis v. Zahradnick, 600 F.2d 458 (4th Cir. 1979).
B. Applicable Law
This action for declaratory relief is brought under 28, United States Code, Section 2201, and is procedurally governed by Rule 57, Federal Rules of Civil Procedure. It is undisputed that North Carolina law governs the contract of insurance and the substantive issues inasmuch as the contract of insurance at issue involves real property and other interests located in North Carolina. N.C. Gen. Stat. § 58-3-1. In interpreting contracts of insurance, the North Carolina Court of Appeals held in DeMent v. Nationwide Mut. Ins. Co., 142 N.C.App. 598 (2001), as follows:
Our courts have established several rules pertaining to the construction of insurance policies, the most rudimentary being that the language of the policy controls its interpretation. Nationwide Mutual Ins. Co. v. Mabe, 115 N.C.App. 193, 198, 444 S.E.2d 664, 667 (1994), affirmed, 342 N.C. 482, 467 S.E.2d 34 (1996). "The various terms of an insurance policy are to be harmoniously construed, and if possible, every word and every provision is to be given effect." Cone Mills Corp. v. Allstate Ins. Co., 114 N.C.App. 684, 690, 443 S.E.2d 357, 361 (1994), disc. review improvidently allowed, 340 N.C. 353, 457 S.E.2d 300 (1995). Furthermore, "Where the language of a contract is plain and unambiguous, construction of the agreement is a matter of law; and the court may not ignore or delete any of its provisions, nor insert words into it, but must construe the contract as written, in light of the undisputed evidence as to the custom, usage and meaning of its terms." Id. ( quoting First Citizens Bank Trust Co. v. McLamb, 112 N.C.App. 645, 649-50, 439 S.E.2d 166, 169 (1993)).Id., at 601-02.
In determining when a policy of insurance requires an insurer to defend, the North Carolina courts have developed a number of well-settled principles. In construing the policy of insurance, all doubts and ambiguities must be resolved in favor of the insured. Stockton v. N.C. Farm Bureau Mut. Ins. Co., 139 N.C.App. 196, 199, disc. review denied, 352 N.C. 683 (2000). The duty of the insurer to defend is broader than its duty to indemnify. Bruce-Terminix Co. v. Zurich Ins. Co., 130 N.C.App. 729, 735 (1998). The insurer must defend when the pleadings of the underlying claim allege facts that demonstrate that the injury which has been alleged is covered by the policy.Pennsylvania Nat. Mut. Cas. Ins. Co. v. Associated Scaffolders and Equipment Co., Inc., 157 N.C.App. 555 (2003). A mere possibility that the insured is liable, coupled with the possibility that the potential liability is covered, may be enough to impose a duty to defend. Waste Management of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 691 (1986).See Hobbs Realty Construction Co. v. Scottsdale Ins. Co., 163 N.C.App. 285 (2004).
Accordingly, the issue of whether an insurance company has a duty to defend an insured against a particular claim is a question of law that can be properly resolved through summary judgment. Waste Management of the Carolinas, supra. On a motion for summary judgment, the insured has the burden of establishing that a loss comes within the scope of the policy's coverage, while the insurer has the burden to prove that an exclusion bars coverage. Nationwide Mut. Ins. Co. v. McAbee, 268 N.C.App. 326, 328 (1966).
C. Claims Asserted by the Edwards in the State Court Action
Plaintiff has attached a copy of the Edwards' state-court Complaint and Amendment to Complaint as Exhibit A to its supporting memorandum. The Complaint contains the following captioned causes of action: (1) Breach of Contract; (2) Misrepresentation; (3) Actual Fraud; and (4) Constructive Fraud.
D. Scope of the Coverage
Plaintiff issued a homeowners policy of insurance to the Asalones, number RC145264, with effective dates of coverage from June 6, 2002, through June 6, 2003. As a supplement to the Asalones' automobile policy, plaintiff issued a "Personal Catastrophe Liability Endorsement-North Carolina." It is undisputed that after the contract for purchase of the home was completed on July 12, 2002, through the execution, delivery, and recording of a warranty deed, the policies of insurance were cancelled on July 26, 2002.
Both policies provide coverage for bodily injury, personal injury, and "property damage." The homeowner's policy contains a further requirement that any claim against the insured must constitute an "occurrence." It is undisputed that neither the Complaint nor the Amendment to the Complaint contain any claim for bodily or personal injury; therefore, to be covered by the policy the claim must be for "property damage" and arise from an "occurrence." The policies are attached as Exhibit B to plaintiff's Motion for Summary Judgment.
1. Property Damage Under the Homeowners Policy and PCL Endorsement
The homeowners policy defines "property damage" as physical injury to, destruction of, or "loss of use of tangible property," while the PCL endorsement provides that property damage is "physical injury to tangible property." Property damage also includes the "loss of use of injured property." Each policy requires that the defined damage must arise during the policy period. See Plaintiff's Exhibit B. In order for property damage to be covered by the policy or endorsement, there must be physical injury to the property or a loss of use by the owner.
Reading all of the allegations of the state-court complaint and amendment, it appears that all of the Edwards' claims stem from a central allegation of the Asalone's purported "failure to disclose" a known structural defect of the dwelling house. Review of reported cases reveals that no North Carolina court has addressed the issue of whether a homeowners insurance carrier owes a duty to defend a homeowner who, as seller, allegedly failed to disclose known structural defects of a dwelling house to a buyer. In addition to applying North Carolina contract and insurance principles discussed above, the undersigned believes that a North Carolina court, faced with what appears to be an issue of first impression, would also look to the decisions of other state and federal courts.
As plaintiff points out in its brief, the Ohio Supreme Court addressed nearly an identical issue in Cincinnati Ins. Co. v. Anders, 789 N.E.2d 1094 (Ohio 2003). As in this case, the insurer in Anders sought a declaratory judgment, asking the court to find that it had no duty to defend its insured for claims that the insured negligently failed to disclose structural defects of a dwelling house to a buyer. In Anders, the term "property damage" was defined just as it is in the Asalones' homeowners policy. The Court in Anders determined that there was no "property damage" alleged in the complaint and that the alleged
negligent non-disclosure of structural damage was not an accident that resulted in property damages but, rather, an accident that allegedly caused economic damages. The actual accident was the faulty installation of the insulation, leading to the structural deterioration of the home.Id., at 1098. The Court further held that the underlying claims emanated from non-disclosure of damage, not from the actual damage itself, making the claims outside the scope of the policy. Id. The Anders Court further held that no duty was triggered under the umbrella endorsement for the same reason, and that the insurer had no duty to defend the lawsuit under either policy. Id., ay 1098-99.
The undersigned has also considered the decision of the United States District Court for the Southern District of Mississippi inShelter Mut. Ins. Co. v. Brown, ___ F.Supp.2d ___, 2004 WL 2651249 (S.D. Miss. June 21, 2004), in which the district court considered analogous facts and applied nearly identical state law principles. In Brown, the insurer sought a declaration that it had no duty to defend its insured where it was alleged that the homeowners either intentionally or negligently failed to disclose the defective condition of the foundation to the buyer.
Similar to North Carolina, the duty to defend of an insurer in Mississippi is determined through a two-step process where first the language of the policy is considered and then the allegations of the complaint are analyzed. Then "[o]nly if the pleadings state facts which bring the injury within the coverage of the policy is the insured required to defend." Id., 2004 WL, at 3 (citation omitted).
Comparable to the case before this court, the seller in Brown contended that the insurer had a duty to defend because the underlying complaint not only asserted willful conduct, it also asserted negligent non-disclosure of material facts. The Brown court determined that
the damages claimed by the plaintiff in the underlying lawsuit were caused by a failed foundation and . . . are purely economic in nature. . . . Roberts allegedly attributes his economic detriment to Brown's misrepresentations. Thus, this court finds that his alleged damages are pecuniary in nature and are not property damage with the meaning of the . . . policy. Inasmuch as there is no property damage alleged in the underlying complaint, Shelter Mutual has no duty to defend the underlying lawsuit.Id. (citation omitted).
As in the Anders and Brown cases, the Edwards have made no claims of physical injury against the Asalones. Instead, the Edwards allege that the Asalones failed to disclose the existence of known damage and fraudulently prepared and presented to the Edwards a false residential property disclosure statement. As inBrown, the damages alleged in the Edwards' underlying complaint are not "property damage" within the meaning of the policy, but are economic in nature in that they may be measured by the value of the home as allegedly represented and the actual value of the home.
When the Edwards' complaint and amendment are read in conjunction with the language of the policy and the PCL endorsement, plaintiff has no duty to provide a defense to the Asalones because no "property damage" is alleged.
Not only must there be an allegation of covered property damage, there is an additional requirement that such damage be caused by an "occurrence" in order to trigger the insurers duty to defend. The policy defines an occurrence as an "accident, including continuous or repeated exposure to the same general harmful conditions, which result, during the policy period in . . . property damage." What constitutes an accident is not defined by the policy, but is well defined at common law in North Carolina:
Our Supreme Court has held that when the term `accident' is not defined in an insurance policy, `accident' includes `injury resulting from an intentional act, if the injury is not intentional or substantially certain to be the result of the intentional act.'" Russ v. Great American Ins. Companies, 121 N.C.App. 185, 188, 464 S.E.2d 723, 725 (1995) (emphasis in the original) (quoting Stox [North Carolina Farm Bureau Mut. Ins. Co. v. Stox, 330 N.C. 697 (1992)], 330 N.C. at 709, 412 S.E.2d at 325). "[A]n injury that is intentional or substantially certain to be the result of an intentional act is not an `accident.'" Id. (emphasis in the original) (citing Stox, 330 N.C. at 709, 412 S.E.2d at 325). "[I]f an intentional act is either intended to cause injury or substantially certain to result in injury, it is not an occurrence under the policy definitions . . . and no coverage is provided." Henderson v. U.S. Fidelity Guar. Co., 124 N.C.App. 103, 110, 476 S.E.2d 459, 464 (1996).American Mfrs. Mut. Ins. Co. v. Morgan, 147 N.C.App. 438, 441 (2001).
In the two cases cited which have addressed the issue of coverage for non-disclosure of information in the setting of the sale of a dwelling house, both courts have determined that even negligent non-disclosure is not an "accident." The Court inAnders determined that negligent non-disclosure of property damage is not an accident and, therefore, not an "occurrence."Id., at 1098. Likewise in Brown, the court found that the requirement of an "occurrence" was not satisfied where Brown failed to reveal known foundation problems, because that fact was "not the type of undesigned, sudden, and unexpected event which would give rise to an occurrence or accident. . . ." Id., 2004 WL, at 4.
In this case, the alleged injury to the Edwards was not an "accident" under North Carolina law. The non-disclosure of foundation problems known by a seller is the type of act which is either "intentional or substantially certain to be the result of an intentional act. . . ." Stox, supra, at 709. As alleged in the complaint and amendment, the injury which the Edwards have purportedly suffered could not be the result of an "accident," and without such no "occurrence" triggers a duty to defend on behalf of the plaintiff.
Where a plaintiff's injuries are expected or intended by the insured, there is no coverage because there is no occurrence.Henderson v. U.S.F. G., 346 N.C. 741 (1997). Likewise, the failure of a seller to disclose known structural problems with a foundation is the type of act which is "substantially certain" to result in damage to a buyer, which is no accident. Where there is no accident there can be no occurrence, placing the alleged conduct outside the scope of the policy. Finding no evidence or allegations of an accident that gives rise to an occurrence, plaintiff has no duty to defend the Asalones in the state-court proceedings.
3. Loss of Use
Reading the complaint and the amendment in a light most favorable to the insured, it appears that the Edwards are claiming that the alleged action or inaction on the part of the Asalones resulted in a "loss of use" of the home when the county condemned the property in late 2002. It is undisputed that the loss of use allegedly occurred well after the Edwards bought the property and the Asalones' policy of insurance and endorsement were cancelled. This court can find no duty to defend under North Carolina law where the loss of use purportedly occurred after cancellation of the policy and the endorsement.
The undersigned has carefully reviewed both the state court complaint and the amendment and compared such language with the policy and the PCL endorsement. The insured bears the burden of establishing that a loss or a potential loss comes within the scope of coverage of the insurance policy. McAbee, supra. For the reasons discussed above, the undersigned finds that no genuine issues of material fact exist and that the alleged conduct on the part of the Asalones is outside the scope of coverage of the policy. The undersigned will recommend that plaintiff's Motion for Summary Judgment be granted and that the requested declaratory relief be allowed.
As discussed above, the Asalones have not met their burden of establishing that there is coverage for the alleged loss. In order to provide reviewing courts with a more complete analysis, the undersigned will assume arguendo that the Asalones met that burden. The burden would then shift to the insurer to establish that an exclusion is applicable. McAbee, supra. In this case, the insurer has asserted two exclusions: (1) the property owned by the insured exclusion; and (2) intentional loss.
1. Property Owned By the Insured
The insurer asserts that even if coverage was available under either the policy or the PCL endorsement, it still would have no duty to defend under the "Property Owned By the Insured" exclusion. The insurer contends that if there was an "occurrence," it was the alleged misrepresentation made by the Asalones when they still owned the house.
Again, the district court's decision in Brown is instructive because it dealt with an identical exclusion under analogous circumstances:
Moreover, even if the allegations of the underlying complaint satisfied the definition of "property damage" caused by an "occurrence," the policy excludes coverage for property damage to property owned by the insured. This court has located only a paucity of case law, reported or otherwise, which applies an "owned property" exclusion of coverage to property which an insured has attempted to sell under factual circumstances similar to the case sub judice.
* * *
Learned treatises in the field of insurance explain that "`[o]wned property' exclusions assure that the policy covers only liability to third parties, as it is intended to do, and that it excludes coverage for risks that the insured may be in the best position to prevent." See Ostrager and Newman, Handbook on Insurance Coverage Disputes § 10.03[b] at 441 (8th ed. 1995), cited in King County v. Travelers Insurance Company, 1996 WL 257135, (W.D.Wash.); and Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (N.J. 1979) (explaining that the function of business risk exclusions in liability policies is to restrict and shape the coverage afforded). Clearly, the "owned property" personal liability exclusion in the instant case is designed to protect the insured from liability for injuries to third parties, not damage to the insured own property.Id., 2004 WL, at 5. It is undisputed that the Asalones were the owners of the home at the time of the alleged misrepresentations; therefore, the "Property Owned By the Insured" exclusion would preclude a duty on the part of the insurer to defend.
2. Intentional Loss
Both the policy and the endorsement exclude coverage for "intentional loss." To be effective, this exclusion requires that the intent to cause the injury must be intentional. North Carolina courts are clear that an intent to injure may be inferred as a matter of law from the intent to act. Russ v. Great American Ins. Companies, supra. In this case, the allegations of the complaint and the amendment are that the Asalones knew of the foundation problems and misrepresented such facts in the North Carolina Residential Property Disclosure Statement. In Henderson, supra, the insured intentionally misrepresented information concerning flooding, and the Court held that such purposeful and intentional acts were so substantially certain to cause injury and damage as to infer an intent to injure as a matter of law. The acts alleged in the underlying complaint and amendment are comparable to those inHenderson. As alleged, the acts are intentional and the intentional loss exclusion would operate to relieve the insurer of its duty to defend.
Finding that no genuine issues of material fact exist, the undersigned will recommend that plaintiff's Motion for Summary Judgment be granted, that the declaratory judgment sought in accordance with 28, United States Code, Section 2201, be allowed, and that judgment be entered in favor of plaintiff and against the Asalones and Edwards declaring that the American Motorist Insurance Company has no duty to defend the Asalones on the underlying claims and that there is no liability insurance coverage for the claims against the Asalones under the insurance policy between American Motorists and the Asalones.
IT IS, THEREFORE, RESPECTFULLY RECOMMENDED that plaintiff's Motion for Summary Judgment be GRANTED and that
(1) the declaratory judgment sought in accordance with 28, United States Code, Section 2201, be allowed,
(2) judgment be entered in favor of plaintiff and against the Asalones and Edwards declaring that the American Motorist Insurance Company has no duty to defend the Asalones on the underlying claims now pending in state court; and
(3) there is no liability insurance coverage for the claims against the Asalones under the insurance policy between American Motorists and the Asalones.
The parties are hereby advised that, pursuant to 28, United States Code, Section 636(b)(1)(C), written objections to the findings of fact, conclusions of law, and recommendation contained herein must be filed within ten (10) days of service of same. Failure to file objections to this Memorandum and Recommendation with the district court will preclude the parties from raising such objections on appeal. Thomas v. Arn, 474 U.S. 140 (1985), reh'g denied, 474 U.S. 1111 (1986);United States v. Schronce, 727 F.2d 91 (4th Cir.), cert. denied, 467 U.S. 1208 (1984).