Alabama Federal Court Finds No Duty to Defend Lawsuit Alleging Concealment of Defects in Sale of Home

In Nationwide Mutual Fire Insurance Co. v. Carmichael, the U.S. District Court for the Northern District of Alabama, applying Alabama law, entered summary judgment ruling that Nationwide Fire Insurance Co. had no duty to defend a home seller under a homeowners policy for an underlying lawsuit alleging that the seller failed to disclose defects in his home when selling it.

The underlying lawsuit was filed by the purchasers of the home. The purchasers asserted a claim for suppression against the seller. They alleged that the seller knew or should have known the house “suffered from moisture, termites, conditions suitable for termites, structural issues or concerns, and/or concerns or issues affecting health or safety” and “failed to disclose any such defect.” The purchasers sought to recover damages for emotional distress and property damage.

The seller sought a defense from Nationwide under his homeowners insurance policy that was in effect when he sold his home. Nationwide provided a defense but then filed a declaratory judgment lawsuit seeking a declaration that it had no duty to defend.

The policy stated that Nationwide would provide a defense for a lawsuit “against an ‘insured’ for damages due to an ‘occurrence’ resulting from negligent personal acts or negligence arising out of the ownership, maintenance or use of real or personal property.” The policy defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results, during the policy period, in” either “bodily injury” or “property damage.”

The court ruled that the underlying lawsuit did not allege any “bodily injury,” which the policy defined as “bodily harm, sickness or disease, including required care, loss of services and death that results” but not “emotional distress, mental anguish, humiliation, mental distress or injury, or any similar injury unless the direct result of bodily harm.” Because the underlying lawsuit alleged only emotional distress, not any physical injury to the purchasers, the court ruled that the underlying lawsuit did not allege “bodily injury.”

The court also ruled that the underlying lawsuit did not allege any “property damage” that would trigger a duty to defend. The policy defined “property damage” as “physical injury to, destruction of, or loss of use of tangible property.” The parties did not dispute that the underlying lawsuit alleged “property damage” within the scope of this definition. However, the court ruled that any alleged “property damage” needed to be “due to” an “occurrence” to trigger coverage. The court ruled that the property damage in the underlying lawsuit was not “due to” the seller’s alleged misrepresentations and, therefore, did not trigger the duty to defend.

Notwithstanding the lack of allegations of “bodily injury” or “property damage” needed to trigger the duty to defend, the seller argued that the court could not make a determination of Nationwide’s duty to defend because “the facts that determine liability here are still to be determined” in the underlying lawsuit. The court rejected this argument, indicating that, under Alabama law, in determining the duty to defend, it could look beyond the allegations in the underlying complaint and consider facts that may be proved by admissible evidence. However, the court noted that the seller had pointed to no admissible evidence that would trigger the duty to defend. Accordingly, the court determined there was no duty to defend and entered summary judgment in favor of Nationwide.