Occurrence Requirement under General Liability Coverage Form

The motion before the court was from the insurer seeking a declaration that it did not owe the insured a duty to defend or to indemnify based on the claims filed against it. The court had to address the issues of the whether an occurrence happened and if so, whether the business activities exclusions applied. This case is Allstate Insurance Company v. Harkleroad, 2010 WL 2076941 (S.D.Ga.).

Allstate filed a declaratory judgment action seeking clarification under liability policies it issued to the Claxtons. The Claxtons are defendants in a lawsuit filed by Harkleroad in which she alleged that the Claxtons sold her a piece of property without informing her of past and/or present damage to the home due to wood decaying fungus.

The Claxtons purchased the property at issue in 2004. The property was purchased “as is”. Prior to the closing, an exterminating company performed an inspection of the house and reported that the property had been treated for termite infestation and that there had been an infestation of wood decaying fungus on the sills, joists, and sub flooring of the house. The Claxtons signed a structural inspection waiver that meant they did not require an inspection of the structural damages that could exist in the house; they accepted the property “as is”. The Claxtons made some improvements in the house and then sold the place to Harkleroad.

In 2006, Harkleroad undertook plans to remodel the house's kitchen. During the process, she was informed of the existence of mold and rotten wood in the crawl space of the house that caused significant structural damage throughout the flooring of the house. She was told the repairs would cost over $100,000. Harkleroad then sued the Claxtons, claiming fraud, a breach of contractual duty to transfer the property in a good and marketable condition, gross negligence, and material misrepresentations. The Claxtons turned the lawsuit over to the insurer, Allstate, which then brought this declaratory judgment action.

Allstate claimed that it did not owe coverage to the Claxtons because none of the allegations constituted an occurrence and that certain exclusions in the policies prevented any possible coverage. The United States District Court, Southern District, Georgia, noted that the insurer's duty to defend turns on the language of the insurance contract and the allegations of the complaint asserted against the insured. Upon review of these items, the court said that the policies require that the insurer pay when an insured becomes legally obligated to pay for personal injuries or damages caused by an occurrence. Furthermore, the policies require that, to constitute a covered occurrence, Harkleroad's allegations must qualify as an accident; that is, the allegations must qualify as an event that takes place without one's foresight or expectation or design. The court found that some of the allegations cannot be and were not predicated upon facts constituting an occurrence.

The allegations of fraud and misrepresentation would not constitute an occurrence because these items do not occur by accident and are not accidental in nature. As for the allegations of breach of contractual duty and gross negligence, the business activities exclusions applied. The court noted that the exclusions applied to any property damage arising out of past or present business activities of an insured person, and the activity in this case was well within the nature of the business of the Claxtons; the court found that the sale of the house to Harkleroad qualified as a business activity.

So, some of the claims did not constitute an occurrence and the other allegations were excluded from coverage since they were based on activity related to and arising out of the Claxtons' business activities as defined in the policies. Allstate's motion for summary judgment was granted and the court found that Allstate was under no duty to defend or indemnify the Claxtons on any of the claims asserted against them by Harkleroad.

Editor's Note: The main point here is that the U.S. District Court first examined whether the claims against the insured constituted an occurrence. That is the beginning point for any review of liability coverage for an insured. The CGL form and other liability policies usually require in the insuring agreement between the insured and the insurer that any alleged bodily injury or property damage claims against the insured be caused by an occurrence. This term is defined in the policies as an accident, that is, an event that is unforeseen and unplanned, from the standpoint of the insured. If this threshold is not met, if the allegations against the insured do not equate with an accident, there is no need to examine any exclusions in the policies. The liability policy will not offer any defense or indemnity to the insured.