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Misrepresentation Case Analysis

The effect of the decision is to render wholly ineffective the standard CGL exclusions of coverage for misrepresentations.

Claims under sec. 100.20 are now ubiquitous, whenever the facts give rise to an action for common-law misrepresentation, and with good reason — the statute authorizes double damages and attorney fees.

In addition, it is generally easier to prove a cause of action under ch. 100 than a common law misrepresentation claim. Common law misrepresentation requires proof of reasonable reliance; the statute requires none. K & S Tool & Die Corp. v. Perfection Machinery Sales, Inc., 2006 WI App 148, par. 41.

In contrast, virtually all statutory misrepresentation claims could also be brought under the common law. As the court in the case at bar notes, the statute was enacted to address shortcomings of common law causes of action. Admittedly, there may exist some set of facts under which the common law would apply, but not the statute, but such a case would be rare.

Thus, a CGL exclusion that bars coverage for misrepresentation fails its purpose, entirely, if it does not also bar statutory claims. Furthermore, the insurer is not merely liable, but is liable for double damages and attorney fees. In light of this decision, insurers must either raise CGL premiums, or adopt a broader exclusion.

Given that the purpose of the exclusion fails altogether unless statutory misrepresentation claims are also excluded from coverage, the court’s conclusion — “We assume that if an insurer wished to lump this special form of misrepresentation in with the more familiar common-law misrepresentations, it would have specifically mentioned the latter. Because it does not, we can assume that the insurer did not intend its exclusion to apply to code misrepresentation” — is highly questionable.

The court’s analysis is also flawed in its distinguishing of the Wisconsin Supreme Court’s decision in Everson v. Lorenz, 2005 WI 51, 280 Wis.2d 1, 695 N.W.2d 298, in which the court held that, under an identical insurance policy, negligent and strict responsibility misrepresentation do not constitute “accidents” that trigger coverage (it was undisputed that intentional misrepresentation is not an “accident”).

The court of appeals distinguished Everson for one reason — a statutory misrepresentation claim requires no element of scienter or intent.

The problem with this analysis is that strict liability misrepresentation doesn’t contain any such element, either, and yet, the Supreme Court held there was no coverage for it.

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The elements of strict liability misrepresentation are: (1) the representation must be of a fact and made by the defendant; (2) the representation of fact must be untrue; (3) the plaintiff must believe such representation to be true and rely thereon to his or her detriment; (4) the representation must be made on the defendant’s personal knowledge or under circumstances in which he or she necessarily ought to have known the truth or untruth of the statement; and (5) the defendant must have an economic interest in the transaction. Kailin v. Armstrong, 2002 WI 70, 252 Wis.2d 676, 643 N.W.2d 132, 148, fn. 23.

These elements are not identical to those in a statutory misrepresentation claim — (1) an advertisement, announcement, statement, or representation; (2) made with the intent to sell a product, service, or anything else; (3) that contains any assertion, representation, or statement of fact which is untrue, deceptive or misleading.

Nevertheless, the court of appeals’ observation in the case at bar — “Missing from these elements is any sort of scienter, negligence included, with respect to the truthful or misleading nature of the communication” — is equally true of a strict liability misrepresentation claim, which the court in Everson held excluded from coverage under identical policy language.

– David Ziemer

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David Ziemer can be reached by email.

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