Alleged Negligent Misrepresentation on Condition of Home is Not an Occurrence Causing Property Damage

    The court found that even if the insured's negligent misrepresentations constituted an accident, the disclosures did not cause physical damage to the property. Wood v. USAA Cas. Ins. Co., 2024 U.S. Dist. LEXIS 180624 (D. S.C. Sept. 12, 2024). 

    The insured, Clinton Wood, purchased a townhome in January 2014. After the purchase, Wood experienced leaks and significant water intrusion, as did other townhome owners in the same development. Wood and the other owners retained an engineer to evaluate the cause of the water damage. The engineer determined that the water intrusion was caused by defects in the design and construction of the residence. The engineer told Wood that the proposed repairs would not adequately address and resolve the water intrusion and leaks, and that the problems would continue even if repairs were made.

    In May 2016, Wood sold the residence to Robert S. Lyon. Wood disclosed leaks and water damage. Wood indicated that the entire roof was replaced. He did not disclose, however, that he was advised by the engineer that the repairs Wood made to the roof would be inadequate to resolve the water intrusion issues.

    In 2019, the residence then owned by Lyon flooded. Lyon asserted that the water intrusion was caused by the defects in the roofing system that had not been adequately addressed. Lyon sued Wood, asserting claims for, among other things, negligence, fraud, failure to disclose material information, and negligent misrepresentation. 

    Wood sought a defense and indemnity under his homeowners and umbrella policies issued by USAA. USAA denied coverage and refused to provide a defense. Wood sued USAA seeking an order declaring that the policies covered the damages sought by USAA.

    USAA moved for judgment on the pleadings. USAA argued that the underlying complaint did not allege Lyon's purported injuries or damages were caused by an "occurrence" and there was no property damage. Even if Wood's alleged misrepresentations concealed from Lyon the defects in the residence, Wood's words or omissions did not cause property damage as defined in the policies. Woods' alleged misrepresentations did not alter the tangible property, meaning the only harm that occurred as a result of the misrepresentations was that Mr. Lyon did not purchase the home he expected to purchase.

    The court agreed with USAA that the alleged misrepresentations did not cause physical damage to tangible property. The alleged physical property damage was caused by faulty design or construction. Wood's purported misrepresentations merely induced Lyons to purchase the property which was already defective and vulnerable to water intrusion. 

    Therefore, USAA's motion was granted. The underlying lawsuit did not allege an "occurrence" that caused the purported property damage as required by the policies.