Beware of negligence lawsuits regarding property sale agreements

Ontario’s Court of Appeal found a home insurer, in principle, has a duty to defend a claim against a homeowner in a property sale, because a lower court can’t assume the home insurance policy’s exclusion for ‘intentional acts’ such as fraud would apply to a buyer’s claim of negligence.

Nonetheless, the home insurer does not have to defend the property sale claim, the Appeal Court ultimately ruled, because the property sellers were too late in notifying their insurer about the claim.

In Kerk-Courtney v. Security National Insurance Company (TD General Insurance Company), the insurer’s duty to defend a lawsuit against a policyholder turned on the interpretation of an “entire agreement” clause in the home’s purchase and sale agreement.

As framed by the Appeal Court, the question is whether a negligence claim related to statements made in the purchase agreement clearly fit within the insurer’s policy exclusion for intentional acts.

In 2016, Karen Joanne Kerk-Courtney and Daniel Joseph Courtney sold their Gorham, Ont., property to Danielle Fex and Robert Duncan. (Daniel Joseph Courtney was not a registered owner of the property.)

The Agreement of Purchase and Sale (APS), dated Oct. 27, 2016, contained an “entire agreement” clause, providing that the APS, including any attached schedules, constituted the entire agreement. The schedules included a listing summary and a Seller Property Information Statement (SPIS).

After the sale, Fex and Duncan discovered defects with the property, including ice damming, mould growth, run-off issues, skirting damage, and rodent damage.

They sued the property sellers, seeking damages for fraudulent or negligent misrepresentation related to the condition of the property at the time of the sale. Fex and Duncan claimed that when they entered into the APS, they relied on misrepresentations in the listing, the SPIS, and oral statements made by the sellers.

These allegations have not been proven in court.

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Kerk made a claim to her home insurer, Security National, to defend in the lawsuit. Security National denied a duty to defend the claim.

A lower court found the insurer did not have a duty to defend the claim. But in so doing, it found the ‘entire agreement’ clause in the APS would make it impossible for any negligence-based tort claims against the sellers to succeed, as summarized by the Appeal Court. That’s because the insurance policy excludes coverage for any “intentional or criminal act or failure.”

Fex and Duncan appealed, arguing the lower court judge should not have presumed the lawsuit would fail because all of its allegations about the ASP would have fallen under the policy’s “intentional acts” exclusion.

The Appeal Court observed the buyers’ lawsuit does not distinguish between intentional and negligent claims.

“The [sellers] argue that since alleged oral misrepresentations, if made negligently, would not be captured either by the [insurance policy’s] contractual liability exclusion or the exclusion for intentional acts or failures to act in the policy, [Security National] therefore has a duty to defend the action,” as the Appeal Court summarized.

On this point, the Appeal Court agreed. It found the lower court justice incorrectly assumed all of the allegations related to the ASP would fall under the ‘intentional acts’ exclusion in the policy.

At the same time, the Appeal Court found the insurer did not have a duty to defend for a different reason; that is, property sellers took too long to notify their insurer of the claim. “The [policyholders] learned of the [buyers’ lawsuit] in November 2018,” the Appeal Court found. “They defended the action on Mar. 28, 2019.