Vol. 78, No. 10, October
Real Property Transactions: Are Misrepresentations Insurable
In Everson v. Lorenz, the Wisconsin Supreme Court restated
that insurance policies are not "one-size-fits-all" documents, providing
coverage for every type of damage. Everson makes clear that
misrepresentations in the sale of real property are not accidents, and
thus are not occurrences, so that misrepresentations fall outside the
scope of coverage provided by occurrence based insurance policies.
by Monte E. Weiss
he Wisconsin Supreme Court recently answered a question that has been
lingering since 1999 - are misrepresentations associated with the sale
of real property within the scope of coverage provided by occurrence
based insurance policies? In Smith v. Katz, the supreme court,
while concluding that no insurance coverage was available for the
particular loss at issue in Katz, left the window open for the
possibility that insurance coverage was available for misrepresentations
in occurrence based insurance policies.1
Recently, in Everson v. Lorenz, the court, in a 5-2 decision,
closed that window.2
Everson arose out of a classic real estate dispute. The
Eversons purchased a tract of land on which they planned to construct a
single family home. As part of the transaction, the subdivision
developer, Lorenz Land Development, provided the Eversons with a real
estate condition report. The report indicated that lots 14 to 22 were in
a flood plain as were lots 21 and 32. Lorenz claimed that the duplicate
reference to lot 21 was a typographical error and that the report
instead should have referred to lot 31, which was in the flood
The Eversons purchased lot 31 and attempted to construct their home.
The Eversons alleged that they were unable to construct their home
because the lot was in a flood plain. The Eversons sued Lorenz, alleging
the causes of action typical to the sale of property: breach of
contract, negligent misrepresentation, strict responsibility
misrepresentation, and intentional misrepresentation.
Lorenz tendered the defense of the suit to its commercial liability
carrier, Pekin Insurance Company. Pekin furnished a defense and sought a
declaration of its rights under the insurance policy. The circuit court
concluded that no coverage existed.3 On
appeal and after oral argument, the District II Court of Appeals
certified the following questions to the Wisconsin Supreme Court:
1) Does an alleged strict responsibility misrepresentation or
negligent misrepresentation in a real estate transaction constitute an
"occurrence" for the purpose of a commercial general liability insurance
policy such that the insurer's duty to defend the insured is
2) What allegations must a complaint contain to plead sufficiently
"loss of use" within the meaning of a commercial general liability
3) Under what circumstances does a negligent misrepresentation or a
strict responsibility misrepresentation cause the "loss of use" of
property such that a "causation nexus" is established?
The supreme court answered the certified questions, holding that: 1)
misrepresentations are not occurrences; 2) the Everson complaint did not
allege a loss of use as that term is defined in the policy; and 3) the
Everson complaint did not allege a causal nexus "within the terms of
Misrepresentations are Not Accidents
Monte E. Weiss ,
CWRU 1991, of Deutch & Weiss LLC, Fox Point, practices primarily in
the defense of bodily injury and property damage claims for insurance
companies and self-insured companies. He routinely represents insurance
companies on insurance contract interpretation issues and is a frequent
lecturer on insurance topics. He was counsel for Pekin Insurance Co. in
Everson v. Lorenz.
The supreme court concluded that misrepresentations are not
occurrences because misrepresentations involve some degree of volition
that is inconsistent with accidents. In essence, misrepresentations are
intended to induce reliance and therefore are not "accidental."
For coverage to exist under the Pekin policy, property damage must be
caused by an occurrence. If the act that results in "property damage"
(as defined by the policy) does not constitute an "occurrence" (as
defined by the policy), then coverage will not exist. In other words,
the complained of act and resulting alleged damage must fit within the
policy's initial grant of coverage and not otherwise be excluded from
coverage under the policy.5
In its quest for coverage, Lorenz argued that the alleged
typographical error in the property condition report was the
Accordingly, a reasonable insured would expect the accidental error
contained in the property condition report to be an occurrence. In
contrast, Pekin argued that there were, in fact, two different acts, one
of which (the typographical error) might be an accident while the other
(the representation contained in the real estate condition report)
clearly was not. It was the latter act on which the Eversons asserted
Lorenz's liability rested. The court agreed with Pekin.
According to the court, the first act might well be an accident.
However, it was the second act on which the Eversons sought recovery.
That is, the Eversons were not seeking recovery because Lorenz made a
mistake on the property condition report. Rather, the Eversons were
seeking recovery because Lorenz represented that lot 31 was not
in a flood plain when, in fact, it was. It was the tendering of the
property condition report that constituted the misrepresentation: "[t]o
be liable, Lorenz must have asserted a false statement, and such an
assertion requires a degree of volition inconsistent with the term
The distinction made by the supreme court was the same as one made by
the U.S. Court of Appeals for the Seventh Circuit:
"A volitional act does not become an accident simply because the
insured prompted the act. Injury that is caused directly by negligence
must be distinguished from injury that is caused by a deliberate and
contemplated act initiated at least in part by the actor's negligence at
some earlier point. The former injury may be an accident. ... However,
the latter injury, because it is intended and the negligence is
attenuated from the volitional act, is not an accident."8
Thus, the volitional act of misrepresenting the condition of lot 31
was not accidental and as such, was not covered under the Pekin
Loss of Use
Subject to other provisions of its policy, Pekin agreed to indemnify
its insured for the sums that its insured became legally obligated for
due to "property damage."10 Hence, for
Lorenz to receive the policy's benefits, the damages that the Eversons
sought must be those that fall within the ambit of the policy-defined
term "property damage." There was no physical injury to or destruction
of tangible property as required under the policy's first definition of
property damage. If coverage were to be found, it would have to be under
the policy's second definition - the loss of use of tangible property
that is not physically injured.
The Eversons alleged that as a result of Lorenz's alleged
misrepresentations, they sustained "damages." Lorenz argued that this
reference to damages was sufficient because the pleadings are to be
liberally construed in favor of coverage.11
The supreme court disagreed. Pekin's insurance policy did not agree to
pay for all damages for which the insured may be held liable. Rather,
Pekin agreed only to pay on behalf of its insured for "property damage"
as that term is defined in the policy.
The Everson complaint did not allege that the damages allegedly
suffered were the loss of use of tangible property that was not
physically injured. Rather, the Eversons simply alleged that they
suffered damages. The generic and undifferentiated allegation of harm
was not sufficient to place the insurance company on notice that the
damages alleged were potentially covered losses. This point is
significant because insurance policies are not written to provide
coverage for every type of damage that exists, but rather, only those
damages that are covered by the particular policy at issue.
It is also significant to note, however, that had the Everson
complaint contained different language, perhaps this hurdle to coverage
could have been overcome:12 "Just as in
Smith, however, a differently worded complaint, one that would
provide fair notice that the misrepresentation claims caused a `loss of
use' might have yielded a different result."13 After all, the court evaluated Everson
under a duty to defend analysis.14
Absence of a Causal Nexus
The final certified question concerned the existence of a causal
nexus between the alleged misrepresentation and the damage claimed.
To obtain coverage, the "property damage" must be caused by an
"occurrence." Lorenz argued that paragraph 7 of the Everson complaint
(in which the Eversons alleged that the "construction of the home which
they wished to construct on the property [was] impossible in the
location in which the Plaintiffs wished to build based on the pre-sale
representations of Lorenz") was sufficient to establish existence of the
However, the supreme court noted that because the alleged
misrepresentation was not an "occurrence" and the complaint does not
allege "property damage" as both terms are defined in the policy, a
causation nexus between the alleged misconduct and alleged damages was
not sufficiently alleged.16
Notably, the court commented that the Eversons' claimed damages were
not caused by the misrepresentation but rather by the existence of the
flood plain. In so doing, the court cited approvingly to the court of
appeals' decisions in Qualman and Benjamin,17 which, along with Katz, were the only
property damage claims cases that addressed misrepresentation coverage
Qualman concerned structural defects with a home. The
Qualman plaintiffs alleged that the presale misrepresentation
as to the home's condition (defects of which the sellers were without
knowledge) was the cause of the damages that the buyers sustained (the
cost to repair the defects and loss of the benefit of the bargain). The
court held, however, that coverage was not afforded under the sellers'
homeowner's policy because the damages alleged did not constitute
"property damage,"19 since the measure of
damages for misrepresentations is either the loss of the benefit of the
bargain or out of pocket losses.20
Benjamin involved the purchase of a condominium complex.
After the sale, the complex began to settle because it was constructed
on a landfill - a fact that the buyers contended the sellers did not
disclose. The Benjamin buyers alleged that the
misrepresentations caused their damages, which included both physical
injury to tangible property and loss of use. The court of appeals
disagreed, noting that the structural defects, not the alleged
misrepresentations, caused the damages that the buyers complained
The fact that the supreme court in Everson and the courts of
appeal in Qualman and Benjamin concluded that
something other than the misrepresentations caused the damages sustained
is not surprising because misrepresentations cannot cause property
damage as that term is defined in the typical insurance policy. The
loss of use is not caused by a misrepresentation, but rather by the
property defect, which was inaccurately, incompletely, or simply not
Because the Everson court concluded that coverage was not
available under the initial grant of coverage in the Pekin policy, the
court did not need to further parse the policy's provisions.
Nevertheless, the court commented that there were exclusions that Pekin
relied on, which were supported by "extensive arguments, citing
Wisconsin and federal court cases."22
Perhaps the court was providing a bit of a cautionary warning to
people seeking to establish a duty to defend by changing the language in
their complaints. Even if one can establish the possibility of coverage
under the initial grant, one still must contend with the exclusions.
Under Wisconsin law, the existence of an applicable exclusion can
determine the duty to defend.23 This point
reaffirms that the determination as to whether coverage exists does not
end with the initial grant of coverage but rather continues with an
analysis of the claimed loss in relation to the policy exclusions.
The Everson dissent took issue with the most substantive
question raised in the case - whether misrepresentations can be
occurrences. The main point of the dissent, authored by Justice Bradley,
was that one cannot divorce the negligence component from the
misrepresentation component and as such, the cause of action must be
taken as a whole.
That is, the typographical error that is the claimed negligent act
cannot be separated from the whole act of providing the property
condition report that contains the error. The negligent
misrepresentation necessarily is "an unintentional occurrence leading to
undesirable results."24 Once having
concluded that a negligent misrepresentation can be an occurrence, the
dissenting justices had little trouble finding that the balance of the
allegations were sufficient to trigger a duty to defend.
The Legal Requirement for Loss of Use
While perhaps not necessarily critical to its decision, the
Everson court took time to explain the legal requirement of
"loss of use" within the context of the insurance policy's second
"property damage" definition. Under a typical insurance policy, the
second of the two property damage definitions provides coverage for the
"loss of use of tangible property that is not physically injured."
In Everson, the plaintiffs alleged that they could not use
lot 31 the way that they intended. According to the Eversons, the
presence of the flood plain kept them from constructing the home that
they wanted in the location they wanted. Based on this allegation,
Lorenz argued that the Eversons alleged property damage in the form of a
loss of use of the property.
The supreme court disagreed. While the Eversons may have lost a
useof the property, they did not lose the use of the
property. The Eversons simply lost a particular use of the property (a
claimed inability to construct a single family home in the location they
wanted) as opposed to the loss of use of the entire property (such as
might be caused by contamination of land making it uninhabitable for
humans). The Eversons' alleged partial loss was not enough - complete
and total uselessness is needed to qualify for "loss of use"
Lessons from Everson
Everson most likely sounds the death knell for arguments
seeking insurance coverage for home or property misrepresentation claims
under typical liability policies, including homeowner policies. Since
misrepresentations are not accidents, they do not fit within the
definition of "occurrence" and thus, no coverage is afforded under the
initial grant of coverage. Lawyers for aggrieved buyers would be wise to
avoid suing, and lawyers for sellers should avoid tendering such
lawsuits to sellers' insurance carriers when the only policies their
clients own are "occurrence" based. Such efforts will most likely result
in additional costs without achieving a concomitant benefit of a finding
of coverage or even a duty to defend. It would seem that such lawsuits
would be summarily dismissed on motion practice.
The same probably cannot be said for professional liability policies.
Typically, these errors and omissions policies provide coverage for
"professional services" and do not predicate coverage on the existence
of an occurrence. As such, these policies generally respond in damages
for misrepresentation claims.
Further, even if somehow the Everson impact on the initial
grant of coverage could be overcome, attempts to establish coverage
still will have to overcome the effect of policy exclusions. While the
supreme court did not address the exclusions asserted by the carrier, it
did comment on their existence as, perhaps, a reminder that establishing
coverage under the initial grant is only the first of the two steps
required to establish coverage; prevailing over the exclusions is the
Finally, the supreme court explained that legally, loss of use of
tangible property requires complete and total uselessness. Some loss of
use will not be enough to meet the definition of property damage in most
In many respects, the Everson conclusion is not all that
surprising. Insurance policies are not "one-size-fits-all" documents,
providing coverage for every type of damage. Policies are written to
provide coverage for certain types of events and losses. In
Everson, the commercial lines policy at issue was not a
professional errors and omissions policy, which in all likelihood would
have provided for defense and indemnity obligations. The Pekin policy
was simply the wrong insurance vehicle to establish coverage for this
type of loss; other insurance products exist to address these types of
1Smith v. Katz, 226 Wis.
2d 798, 595 N.W.2d 345 (1999).
2Everson v. Lorenz, 2005
WI 51, 280 Wis. 2d 1, 695 N.W.2d 298 (Butler, J., concurred in three of
four parts of the opinion).
3While Everson involved
the four typical causes of action in real estate disputes - breach of
contract and all three of the misrepresentation species - only the
negligent and strict responsibility misrepresentations causes of action
were the subject of supreme court review. The breach of contract and
intentional misrepresentation causes were "excluded under the terms of
Pekin's insurance policy." Everson, 2005 WI 51, ¶ 13 n.5,
280 Wis. 2d 1.
4Everson, 2005 WI 51,
¶ 33, 280 Wis. 2d 1.
5Arnold P. Anderson, Wisconsin
§ 5.15 (State Bar CLE Books 5th ed. 2004).
6An accident is "an unexpected,
undesirable event" or "an unforeseen incident" "which is characterized
by a `lack of intention.'" Everson, 2005 WI 51, ¶ 15, 280
Wis. 2d 1 (citing Doyle v. Engelke, 219 Wis. 2d 277,
289, 580 N.W.2d 245 (1998)).
7Id. ¶ 19 (citing
Sheets v. Brethren Mut. Ins. Co., 679 A.2d 540, 552-53 (Md.
1996) (Karwacki, J. dissenting)).
8Red Ball Leasing Inc., v.
Hartford Accident & Indem. Co., 915 F.2d 306, 310 (7th Cir.
9Everson, 2005 WI 51,
¶ 20, 280 Wis. 2d 1.
10Id. ¶ 12.
11Id. ¶ 25.
12This statement presumes that
there was some intent to establish coverage by the Eversons. In light of
the damages claimed and perhaps, the likelihood of recovery, the
Eversons may not have been concerned about insurance coverage.
13Everson, 2005 WI 51,
¶ 27, 280 Wis. 2d 1.
14It is also important to note
that the supreme court decided Everson at the duty to defend
stage. The case has been subsequently remanded for discovery and trial.
Therefore, the allegations of misrepresentation are simply that,
allegations that remain to be proven.
15Everson, 2005 WI 51,
¶ 34, 280 Wis. 2d 1.
16Id. ¶ 37.
17Qualman v. Bruckmoser,
163 Wis. 2d 361, 471 N.W.2d 282 (Ct. App. 1991); Benjamin v.
Dohm, 189 Wis. 2d 352, 525 N.W.2d 371 (Ct. App. 1994).
18Although Jares v.
Ullrich, 2003 WI App 156, 266 Wis. 2d 322, 667 N.W.2d 843, was
issued before the supreme court's review of Everson, the
carrier in Jares disclaimed coverage only on two bases: 1) the
absence of an allegation of property damage in the complaint, and 2) the
absence of an alleged causal nexus between the misrepresentation and the
damage claimed. Id. ¶ 6. In contrast, in addition to the
two defenses raised in Jares, Pekin also raised the defense
that misrepresentations are not occurrences.
19Qualman, 163 Wis. 2d
20Luebke v. Miller Consulting
Eng'rs, 174 Wis. 2d 66, 70-71, 496 N.W.2d 753 (Ct. App. 1993);
Gyldenvand v. Schroeder, 90 Wis. 2d 690, 697-98, 280 N.W.2d 235
21Benjamin, 189 Wis. 2d
22Everson, 2005 WI 51,
¶ 40, 280 Wis. 2d 1.
23Production Stamping Corp.
v. Maryland Cas. Co., 199 Wis. 2d 322, 544 N.W.2d 584 (Ct. App.
1996); Bruner v. Heritage Cos., 225 Wis. 2d 728, 593 N.W.2d 814
(Ct. App. 1999).
24Everson, 2005 WI 51,
¶ 55, 280 Wis. 2d 1.
25Id. ¶ 29 (citing
Wisconsin Label Corp. v. Northbrook Prop. & Cas. Ins. Co.,
2000 WI 26, ¶ 50, 233 Wis. 2d 314, 607 N.W.2d 276; Sola Basic
Indus. Inc. v. U.S. Fid. & Guar. Co., 90 Wis. 2d 641, 654, 280
N.W.2d 211 (1979)).