The Massachusetts Appeals Court has ruled that a husband and wife seeking coverage for a $1,000,000 claim against them, arising out of their prior ownership of a home, do not have coverage under their existing homeowner’s policy. The decision was a case of first impression in Massachusetts about whether bodily injury or property damage claims arising out of real property previously owned by an insured is excluded under the homeowner policy provision that bars coverage for property “Owned by an Insured” that is not identified in the policy as an “Insured Premises.”
The Appeals Court decision arose from a lawsuit between the sellers and the buyers of a Duxbury home situated near the water. The sellers, Dorothy and Christopher Norton (“the Nortons”), owned a Duxbury property that they sold in 2017. A year later, the home suffered severe damage with two floods within the space of two months.
After these floods, the buyers learned that the Nortons had knowledge of the house having an extensive history of flooding which they had failed to disclose.
In 2019, the buyers filed suit against the Nortons, alleging counts for misrepresentation, negligent misrepresentation, and breach of contract seeking the recovery of incurred costs and remedial measures totaling $1,000,000.00.
The Nortons sought coverage under the homeowner policy they had purchased from Norfolk & Dedham on their new home, claiming that the buyers’ suit alleged property damage. Norfolk & Dedham defended the Nortons under a reservation of rights but filed a declaratory judgment in Superior Court seeking to have the court rule there was no coverage. After the Superior Court ruled in Norfolk & Dedham’s favor, the Nortons appealed to the Appeals Court.
The $1.9 million home purchase and the $1 million claim for damages based on misrepresenting flooding at the property
The Nortons purchased a Duxbury property in 2012 very near the ocean for $1,325,000.00. Four years later, in October 2016, the Nortons listed the property for sale with a real estate broker.
As part of the sale process, the Nortons executed a “Seller’s Statement of Property Condition” dated October 19, 2016. In response to the question, if there were any “known water drainage problems” at the property, they responded “No.” On the question of the basement having “water,” “seepage,” or “dampness,” they also responded “No.” When answering the question “Do you know of any other problems which may affect the value or use of the property which may not be obvious to a prospective buyer,” the Nortons also answered “No.”
The Nortons statements were provided to the prospective buyers who were considering purchasing the property, including its eventual buyers. These buyers were allegedly party to various comments by the Nortons independent of the written property condition statement that indicated the Nortons’ Duxbury property did not have a water problem.
The buyers’ real estate agent allegedly was also told that there was no problem with water at the property by the Nortons and that they were unaware of flooding or water problems that might have caused the buyers’ home inspector to look for a prior history of flooding.
On February 17, 2017, the Nortons sold their Duxbury property to the buyers for $1,920,000.00.
Less than a year later, on January 4, 2018, the Duxbury property’s basement flooded with approximately 6 feet of water, causing considerable damage to the home and the personal property of the buyers. Two months later, on March 3, 2018, the property had an almost identical flood causing similar damage to the home.
As a result of these two flooding events, the buyers claimed they had incurred extensive engineering, architectural, construction, and site work expenses to prevent future flooding by both raising the house’s foundation several feet and changing the topography of the land around the house’s footprint. The buyers also claimed they had to replace the house’s utility systems and purchase new personal property. When the buyers finished the repairs and replacements, their costs incurred had supposedly reached almost $1,000,000.00.
The buyers learn that the Nortons knew about the flooding and file a lawsuit
Following the two floods at their recently purchased home, the buyers learned that in 2012, when the Nortons purchased the property, they had applied for flood insurance. As part of the application process, the insurance agent had informed the Nortons that their property “had a claims history for flood damage,” including a flood ruining the property’s furnaces.
Also, the buyers learned that in 2014, the Nortons had received a notice of a 25 percent flood insurance premium increase because their property was a “severe repetitive loss… property.” This designation meant that the property had a history of at least four claim payments of more than $5,000.00 from flooding.
Finally, the buyers found out that in August 2016, the Nortons received a flood loss claim history report detailing eight prior flood damage claims at the property. Two months after receiving this report, the Nortons had listed the property on the realtors’ Multiple Listing Service, with no disclosure in the listing for any of the prospective buyers about the property’s flooding history.
The Norfolk & Dedham homeowner policy for the Nortons’ new home
After the Nortons sold their property, they moved from Duxbury and purchased a new home in Sandwich.
In September 2017, seven months after the Nortons sold the Duxbury property, Norfolk & Dedham issued the Nortons a homeowners insurance policy for their home in Sandwich. The policy was effective from September 2017 through September 2018 and had a $1,000,000 property limit under coverage A. The policy’s declarations page listed the “residence premises” as the Nortons’ Sandwich address. The policy covered the “residence premises” along with related structures and personal property.
The policy also had a $1,000,000 liability limit providing coverage “[i]f a claim is made, or a suit is brought against an insured for damages because of bodily injury or property damage’ caused by an occurrence to which this coverage applies.”
However, the policy did not apply to “Bodily injury” or “Property Damage” arising out of a premises: “(a) Owned by an insured’; (b) Rented to an insured’; or (c) Rented to others by an insured’; that is not an insured location.”
An insured location was defined as the “residence premises,” or “the part of other premises” used by the insured “as a residence” and “which is shown in the [policy’s] declarations. “
The buyers’ lawsuit and Norfolk & Dedham’s declaratory judgment
Based on the information the buyers had learned about the Nortons’ prior knowledge of flooding at their Duxbury property, the buyers, in 2019, filed a three-count complaint in Superior Court against the Nortons seeking $1,000,000 in damages for 1) misrepresentation, 2) negligent misrepresentation, and 3) breach of contract.
The gist of the buyers’ claims was that the Nortons had known of the property being flood-prone and having had a history of at least eight flooding events and that they had failed to disclose this information when they had a duty to do so. The buyers also alleged that if the Nortons had told them about the property’s flooding history, they would not have bought the property.
When the Nortons were served with the suit, they filed the claim with Norfolk & Dedham, alleging that their homeowner’s policy provided property damage coverage for the lawsuit filed by the buyers of their Duxbury home.
Norfolk & Dedham provided a defense under a full reservation of rights to the Nortons. However, it also filed a declaratory judgment on September 6, 2019, seeking a declaration that its homeowner’s policy provided no coverage and that it should be allowed to terminate the reservation of rights under which it was defending the Nortons.
In its declaratory judgment suit, Norfolk & Dedham alleged that the Sandwich homeowner policy only applied to risks associated with their ownership of that home and did not apply to the claims arising out of the Nortons’ past ownership of the Duxbury property. In particular, Norfolk & Dedham alleged that the Nortons’ previous ownership of the Duxbury property was excluded from coverage because it was not the then “residence premises” or an “insured location” under the policy, and thus the owned-property exclusion applied.
The Superior Court decision
In Norfolk & Dedham’s declaratory judgment suit the Nortons argued for coverage, asserting that the suit by the buyers of their Duxbury property alleged a liability claim for property damage which triggered Norfolk & Dedham’s duty to defend, if not to indemnify. They asserted their buyers’ lawsuit alleged an occurrence that happened during the policy period, namely the flooding, which in turn precipitated the underlying lawsuit.
On summary judgment, the Superior Court found against the Nortons on all their coverage claims.
First, the Court found that Norfolk & Dedham’s liability coverage under its homeowner policy underwrote the risks associated with the Nortons’ ownership of the Sandwich property and did not extend to the Duxbury property.
Second, the Court found that even if the policy did extend coverage to the Duxbury property, despite it not being an insured location, the owned-property exclusion that bars personal liability coverage to claims against the insured for property damage arising out of premises owned by an insured, rented to an insured or rented to others by an insured “that is not a listed “insured location” on the policy applied. The Court did not find persuasive the Nortons’ argument that this exclusion did not apply because they did not own the Duxbury property at what they alleged as the occurrence: the January and March floods of the Duxbury property’s basement. The Court rejected the Nortons’ claim that phrase used in the exclusion “premises owned by the insured” had an ambiguity which limited the exclusion to mean “premises currently owned by an insured.”
Third, the Court ruled even if the prior two grounds did not preclude coverage, the policy still did not provide coverage because the allegations in the underlying suit did not lie within the scope of the policy. The buyers’ claims did not arise from “property damage” caused by an “occurrence” under the policy, the Court noted. The policy defines “Property Damage” as “physical injury to, destruction of, or loss of use of tangible property.” The buyers’ suit alleged that the Nortons intentionally or negligently failed to disclose latent defects and a history of flooding before their sale of the Duxbury property. The Court noted that it was not the Nortons’ failure to disclose the history of flooding at the Duxbury property that caused the property damage.
Finally, the Court ruled that the Nortons also had no coverage because the alleged “occurrence did not occur within Norfolk & Dedham’s policy period.”
The Nortons’ homeowner insurance on their Sandwich home was effective from September 2017 through September 2018. The buyers alleged that the Nortons’ alleged misrepresentations took place when the Nortons made affirmative representations about the condition of the home on October 19, 2016. All of the other alleged misrepresentations occurred on or before February 17, 2017, when the Nortons closed their sale with the buyers. To the Court, the relevant “occurrence” dates when the buyers’ harm ocurred was when Nortons made alleged misrepresentations and not the dates of the subsequent flooding. The alleged misrepresentation dates all occurred before the Nortons obtained their Norfolk & Dedham policy.
Appeals Court Ruling
After the Superior Court entered judgment in favor of Norfolk & Dedham, the Nortons appealed to the Appeals Court.
As opposed to the Superior Court, the Appeals Court focused only on the exclusion that applied to bodily injury and property damage arising out of an uninsured location. That exclusion barred coverage for:
‘Bodily injury’ or ‘property damage’ arising out of a premises:
- Owned by an ‘insured’;
- Rented to an ‘insured’; or
- Rented to others by an ‘insured’;
that is not an ‘insured location.
The Appeals Court next restated that the Norfolk & Dedham policy defines the “insured location” as the “residence premises,” which, in turn, is defined as the “dwelling where [the insured] resides” that is identified on the policy’s declaration page.
In the case of the Nortons’ homeowner policy, only their home in Sandwich appeared on the declaration page. The Appeals Court noted that “There is no dispute that the Duxbury property is not an insured location under the policy.”
The Nortons sought to avoid the exclusion by arguing that the “owned by an insured” provision had to mean owned during the policy period and could not mean property that was “previously owned by the insured.” That reading, if adopted by the Appeals Court, would mean the exclusion would not apply because the Nortons no longer owned the Duxbury property when the flooding occurred and caused the property damage. However, the judges adopted the view of Norfolk & Dedham that the policy applies if the Nortons owned the property “at the time of the purported misrepresentations and the events leading up to the sale of the home.”
The Appeals Court supported its adoption of Norfolk & Dedham’s by pointing out that:
“It would be anomalous then to construe the exclusion not to apply simply because the Nortons sold the property before they made the claim for coverage. Were we to conclude otherwise, “we would be providing insureds with more insurance protection for having sold their property than would be attributable to them during the time they owned the property.”
The Appeals Court’s analysis was that if the Nortons had still owned the Duxbury property without listing it as an insured property on their homeowner policy for their Sandwich home, the exclusion would apply. Thus, ruling that the exclusion applies to previously owned property
“avoids the counterintuitive result that an insured who sells an unlisted premises would instantly obtain coverage for liabilities that had been excluded while the insured still owned the premises”
The judges summed up their ruling by stating:
“Indeed, by the Nortons’ logic, a subsequently issued homeowner’s policy on a different property would require the insurer to defend third-party claims arising out of any property that the insured formerly owned…as long as the event causing the bodily injury or property damage occurred during the policy period [of the subsequent policy].”
Based on this analysis, the Appeals Court affirmed the Superior Court judgment in favor of Norfolk & Dedham, finding no coverage for the suit against the Nortons
Twenty days to apply for further appellate review to the Supreme Judicial Court
The Massachusetts Appeals Court is an intermediate appellate court. The ultimate judicial authority resides with the Supreme Judicial Court. Parties dissatisfied with an Appeal Court’s decision may apply for further appellate review. However, the allowance of any further appeal is discretionary with the Supreme Judicial Court.
Under the Massachusetts Rules of Appellate Procedure, the Nortons have until Monday, November 29, 2021, to apply for further appellate review.
Agency Checklists will keep its readers posted if an application for further appellate review is filed and the Supreme Judicial Court accepts the case.
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
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