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Allegation of "Negligent Misrepresentation" Fails to Trigger Coverage in PA

January 12, 2009

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In <i>Erie Insurance Exchange v. Maier</i>, the Pennsylvania Superior Court recently held that a lawsuit did not allege an “occurrence” under the Erie policy, even though the allegations against the insured included a claim of negligent misrepresentation.

The underlying lawsuit was filed by First National Bank, and its complaint alleged the purchaser (Erie's insured) and the seller of a house (a debtor to the bank) participated in a fraud upon the bank as a creditor. The bank claimed the parties misrepresented the true purchase price of the house in order for the seller to obtain additional cash from the transaction. The parties set the purchase price of the house at $650,000 and the bank agreed to forego its interest in the house that was higher than that amount. But the insured also paid the seller an additional $200,000 for “personal property” in which, conveniently for the seller-debtor, the bank had no security interest.

A single count in the complaint alleged that the insured made a "negligent misrepresentation," and the insured alleged that was sufficient to trigger coverage under the Erie policy. But the court ruled that there was no “occurrence” under the policy because the bank acknowledged the insured knew that the sale price was undervalued. In fact, the Bank would be unable to prevail in the lawsuit without proving the insured was involved in an intentional fraud. Couching the claim in terms of the insured’s negligence did not trigger coverage, and thus, Erie had no duty to defend or indemnify the insured.

The important point for insurers and counsel is that the the use of a "magic word" such as negligence in a pleading is not always enough to carry the day in coverage controversies.

Thanks to Mendel Simon for his contribution.

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