Misrepresentation Case Analysis

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This decision was not recommended for publication. Nevertheless, it is so contrary to existing precedent that, when coupled with the court of appeals’ questionable decision last month in Jares v. Ulrich, No. 02-3100 (decided June 25, 2003), which also significantly expanded insurers’ duty to defend misrepresentation cases, and which was recommended for publication, it simply cannot be ignored.

Smith, Qualman, Benjamin, and Jares all involved suits against the insurer of the homeowner, rather than the realtor, but the issue was the same in all — whether misrepresentations in the sale of real property cause property damage that is not excluded by policies using substantially the same language — and the reasoning in this case would apply equally were it the homeowner’s insurer being sued, rather than the realtor’s.

The Wisconsin Supreme Court in Smith expressly recognized the possibility that, in some cases, an insurer could have a duty to defend a misrepresentation, stating, “We are not saying that strict responsibility misrepresentations or negligent misrepresentations can never cause ‘property damage’ as defined in the policies, particularly when ‘property damage’ can include ‘loss of use of tangible property that is not physically injured.’”

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However, the court made clear that, in garden-variety misrepresentation cases, there was no coverage, adding, “But we recognize that the majority view in the cases is that misrepresentations and omissions do not produce ‘property damage’ as defined in insurance policies. They produce economic damage.”

The court continued, “Given this well established law, a complaint claiming strict responsibility misrepresentation or negligent misrepresentation must contain some statement about physical injury to tangible property, some reference to loss of use, or some demand for relief beyond money damages if the complaint is to satisfy the requirement that ‘property damage’ be alleged within the four corners of the complaint. Smith, 226 Wis.2d at 816-817.

Unlike the policies at issue in the other cases, Michelic’s policy expressly excluded “loss of use.” Thus, there must be some damages alleged other than purely economic damages that inevitably result whenever someone buys a house with an undisclosed defect.

However, the complaint alleges nothing more than, “That as a direct and proximate result of the false representations made by the defendants, the plaintiffs suffered pecuniary damages.” The paragraph just above can be searched in vain for any suggestion that this is even remotely sufficient. Under the holding in Smith, that is woefully inadequate to invoke the insurer’s duty to defend.

As noted above, this decision is not recommended for publication. Nevertheless, when considered with the Jares case last month, insurers need to know that, in District II, the court of appeals thinks that garden-variety misrepresentations are an insurable occurrence.

– David Ziemer

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David Ziemer can be reached by email.