District Court Rules No Duty to Defend or Indemnify for Alleged Fraudulent Real Estate Transaction

By: James J. Buldas

Judge Cynthia Reed Eddy of the United States District Court of the Western District of Pennsylvania recently issued a Memorandum Opinion in the case of Encompass Indemnity Company v. Lauren Rachel Takacs (2:14-cv-01725-CRE), granting Encompass’ Motion for Judgment on the Pleadings in an Action for Declaratory Judgment. The Court adopted Encompass’ argument that it owed no duty to defend or indemnify its insured, Ms. Takacs, in an underlying litigation that was commenced by the buyer of her home. In reaching its decision, the court analyzed the four corners of the underlying complaint, the applicable homeowner’s insurance policy and the substantive state law of Pennsylvania.

The facts were not in dispute by the parties. Encompass agreed to defend Ms. Takacs pursuant to a reservation of rights in the underlying state court litigation, and while doing so, commenced the subject Declaratory Judgment Action. The allegations in the underlying complaint were that Ms. Takacs knowingly failed to disclose problems regarding the home, in violation of the Pennsylvania Real Estate Seller Disclosure Law (RESDL) and the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL).

Pursuant to the terms and conditions of the Policy, a duty to defend and/or indemnify was only owed if it was for “property damage” arising out of an “occurrence.” Encompass argued that the home-buyer’s claim did not fall under the definition of these terms, because there was no tangible damage caused to the property by Ms. Takacs. Instead, the essence of the claim was contractually based for economic damages only. To put it another way, the material issues pertaining to the house were already in existence at the time of the sale. Encompass also argued that since the claim was not accidentally-based, and instead sounded in fraudulently-based intentional acts, it did not constitute an “occurrence.”

The Western District Court recognized this was an issue of first impression, as there were no decisions out of the Appellate Courts of Pennsylvania or the Third Circuit Court as binding precedent. However, the Court agreed with the primary case relied upon by Encompass, USAA Casualty Insurance Company v. Bateman 2008 WL 4761718 (E.D. Pa. 2008), finding it to be persuasive, and therefore, adopted its reasoning with its Memorandum. Bateman rested on a similar set of underlying facts, albeit with differing causes of action. The Court also highlighted several other cases in jurisdictions outside of the Third Circuit, which have held there is no duty to defend or indemnify for real estate transaction-based claims under homeowner’s policies of insurance.

Judge Eddy’s Memorandum provides a thorough analysis of these cases and succinctly outlines the reasoning why coverage for such claims, and the risk associated therein, were not contemplated by insurers when issuing homeowner’s policies. In conclusion, the Court noted that “to find coverage existed in this case would be to find that based on an act of sale, a homeowner’s insurance becomes the warrantor for the condition of the property” and, that such, would not be favorable law in the Commonwealth of Pennsylvania.