THIRD DIVISION

										July 2318, 2003

No. 1-02-3490

CNA INSURANCE COMPANY, as subrogee		)	Appeal from the

of Michael Gregg and Kathy Gregg,		)	Circuit Court of

								)	Cook County. 						

	Plaintiff-Appellant,			)				

								)	

		v.						)	

								)

SILVIO DIPAULO and JUDY DIPAULO,		)	Honorable

								)	James F. Henry,

	Defendants-Appellees.			)	Judge Presiding.

	JUSTICE WOLFSON delivered the opinion of the court:

	Michael and Kathy Gregg entered into a real estate contract

to buy a house from the defendants, Silvio and Judy DiPaulo. 

When the Greggs moved in, they began redecorating the house.  They

made a heart-sinking discovery: termites.  The house was infested

with termites.  CNA paid the Greggs for the costs of repair and

replacement pursuant to their homeowner's policy.  Then CNA, as

the Greggs' subrogee, sued the DiPaulos for common law fraud

based on false statements and concealment.  

	The trial judge granted summary judgment to the defendants,

finding CNA could not subrogate to its insured's collateral

contract rights.  The court relied entirely on our decision in

State Farm General Insurance Co. v. Stewart, 288 Ill. App. 3d 678, 681 N.E.2d 625 (1997).  We find Stewart does not control this case.  We reverse the trial court's order and remand for further proceedings.

FACTS

	According to CNA's complaint, on or about March 6, 1998, the

Greggs entered into a real estate contract to purchase from the

defendants certain real property located at 102 Prospect Court,

Prospect Heights, Illinois.  The parties agreed on a selling

price of $465,000.  Defendants provided a Residential Real

Property Disclosure Report indicating they were not aware of a

current infestation of termites or wood boring insects or of a

structural defect caused by previous infestations of termites or

other wood boring insects.  During a house inspection on March

11, 1998, defendants made verbal representations to the Greggs

denying any past or current termite infestation.  The Greggs'

insurance policy through CNA, effective from May 7, 1998, through

May 7, 1999, provided coverage for loss or damage caused by

termite infestation.  The policy contained language whereby CNA

obtained the Greggs' rights to recover against a third party if

it paid for damage to the property.  The Greggs closed on the

property on June 5, 1998.

	On or about September 3, 1998, the Greggs discovered the

property was infested with termites.  After removing some

wallpaper and exposing the drywall, they found pinholes and

tunnels caused by termites.  They also discovered patchwork on the drywall and other efforts to conceal the termite infestation. 

CNA made payment pursuant to the homeowner's policy of

$487,623.93 for repair and replacement costs and living expenses

incurred during the repair.  CNA filed its subrogation claim,

based on common law fraud, against the defendants.  The trial

court entered summary judgment in favor of defendants.  

DECISION

	There is no factual dispute here.  The question is whether

the defendants are entitled to summary judgment as a matter of

law.  735 ILCS 5/2-1005(c) (West 2000).  We review de novo the trial court's grant of summary judgment to the defendants. 

Morris v. Margulis, 197 Ill. 2d 28, 35, 754 N.E.2d 314 (2001).  

	The issue is whether to allow CNA to subrogate to its

insured's claim for fraud against the defendants.  The right of

subrogation is an equitable remedy that allows one who has

involuntarily paid a debt or claim of another to succeed to the

rights of the other with respect to that claim or debt.  Dix Mutual Insurance Co. v. LaFramboise, 149 Ill. 2d 314, 319, 597 N.E.2d 622 (1992).  The right of subrogation may be grounded in

equity or may be founded on an express or implied agreement. 

Stewart, 288 Ill. App. 3d at 686, citing Bost v. Paulson's Enterprises, Inc., 36 Ill. App. 3d 135, 139, 343 N.E.2d 168 (1976).  The doctrine rests on the principle that justice is attained by placing ultimate responsibility for the loss on the

one against whom in good conscience it ought to fall.  Dix Mutual Insurance Co., 149 Ill. 2d at 319.  Whether the right of subrogation exists depends on the equities of each case.  Dix Mutual Insurance Co., 149 Ill. 2d at 319.  

	A subrogee "steps into the shoes" of the person whose claim

he has paid and may only enforce those rights which the latter

could enforce.  Continental Casualty Co. v. Polk Brothers, Inc., 120 Ill. App. 3d 395, 397, 457 N.E.2d 1271 (1983).  

	In this case, CNA may assert a right of subrogation against

the defendants if: (1) the Greggs could maintain a cause of

action against the defendants and (2) it would be equitable to

allow CNA to enforce a right of subrogation against the

defendants.  Dix Mutual Insurance Co., 149 Ill. 2d at 319.    

	First, we examine the status of the Greggs' "shoes" which

CNA seeks to step into.  That is, could the Greggs have sued the

DiPaulos for common law fraud had they not sought coverage for

their losses from CNA?  The answer is yes.

	Sellers of real estate have a duty to disclose defects which

could not be discovered on a reasonable and diligent inspection. 

Mitchell v. Skubiak, 248 Ill. App. 3d 1000, 1005, 618 N.E.2d 1013 (1993).  While the seller's silence in not disclosing defects,

standing alone, is not enough for a fraud action, there is enough when that silence is combined with active concealment.  That is

what we held in Mitchell, where the home buyers discovered various defects and damage to the property that were not obvious

or were concealed during the plaintiffs' inspection.  The

complaint alleged the sellers concealed the defects, kept silent,

and made misrepresentations about them.  We found there were

sufficient allegations of intentional false material statements

reasonably relied on by the buyers to support the fraud

complaint.  Mitchell, 248 Ill. App. 3d at 1004-06.  See also Posner v. Davis, 76 Ill. App. 3d 638, 644, 395 N.E.2d 133 (1979) (finding of fraud supported where defendant-sellers actively

concealed a flooding problem and water damage and said nothing

about them).  In addition, a fraud claim may be based solely on a

seller's false representation made in a disclosure report

pursuant to the Residential Real Property Disclosure Act (765

ILCS 77/20 (West 1998)).  Rolando v. Pence, 331 Ill. App. 3d 40, 42, 769 N.E.2d 1108 (2002). 

	In this case, CNA alleged the DiPaulos falsely said they

were not aware of a termite infestation.  They said it in verbal

statements to the Greggs and in the written disclosure report. 

Their purpose, proven successful, was to induce the Greggs to buy

the house.  The Greggs relied on the false statements and

incurred damages as a result.  CNA has alleged common law fraud.  See Redarowicz v. Ohlendorf, 92 Ill. 2d 171, 185-86, 441 N.E.2d 324 (1982).  

	If the Greggs could sue the DiPaulos for fraud, it would

appear to follow that their subrogee, CNA, could sue the

DiPaulos.  But the trial court found our decision in Stewart was an insurmountable obstacle to CNA's lawsuit.

	In Stewart, Vito DeFrancesco contracted to sell an apartment building to Nancy Stewart.  After DeFrancesco delivered the deed

and possession to Stewart, but before she paid him the full

contract price, the building was destroyed by fire.  DeFrancesco

collected insurance proceeds for the loss from his insurer, State

Farm General.  Stewart made a claim against her insurer, Hartford

Insurance Company, and collected on her policy.  State Farm

General, as DeFrancesco's subrogee, sued Stewart, seeking to

recover from the Hartford proceeds that part of the purchase

price she had not yet paid to DeFrancesco.  The court, noting

that State Farm General's liability to DeFrancesco had nothing to

do with Stewart's obligation to pay the balance of the contract,

held State Farm General had no right to be subrogated to the

"collateral contract rights" of its insured.  Stewart, 288 Ill. App. 3d at 689.

	The Stewart decision was grounded in a Minnesota Supreme Court decision, Board of Trustees of First Congregational Church of Austin v. Cream City Mutual Insurance Co., 255 Minn. 347, 96 N.W.2d 690 (1959).  There, the Church sold its property to the

city of Austin under a contract.  There was a fire that destroyed

the church.  Austin still owed the Church $75,000.  Cream City,

the Church's insurance company, after paying on its policy,

claimed it had a right to be subrogated to the Church's claim

against Austin for the balance of the purchase price.  The court

disagreed, holding Cream City could not be subrogated to

collateral contract rights which its insured had against Austin.

	There are major differences between Stewart and this case.  Those differences condemn the DiPaulos' position.  In fact,

Stewart and Cream City support CNA's subrogation theory.

	First, CNA is not trying to assert the Greggs' contract

rights against the DiPaulos.  CNA alleges common law fraud,

nothing else.  The same fraud the Greggs could have asserted

against the DiPaulos.

	Second, and more importantly, the Stewart and Cream City decisions involved fires that the defendants had nothing to do

with.  No one suggested Nancy Stewart or the city of Austin was a

wrongdoer.  The Minnesota court said, and Stewart reiterated:

		"it is the universally accepted rule that an insurer

may be subrogated to the insured's rights against any

person wrongfully causing a compensable loss to the insured." (Emphasis added.)  Stewart, 288 Ill. App. 3d at 688-89, quoting Cream City, 255 Minn. at 353.

	Further, in Stewart, we said that although State Farm General paid DeFrancesco for his fire-related losses, that

payment was independent of Stewart's contractual debt to

DeFrancesco "insofar as Stewart did not cause those losses." 

Stewart, 288 Ill. App. 3d at 690.

	That, according to CNA's complaint, is exactly what happened

in this case--the DiPaulos wrongfully caused the loss to the

Greggs.

	The DiPaulos cannot sidestep the cause of action by saying,

as they do here, they did not cause the termite infestation. 

That is not CNA's lawsuit.  The claim is the DiPaulos caused loss

to the Greggs by concealing the infestation and making false

statements about it.

	The DiPaulos are right when they say if CNA were to succeed

it could recover its payout to the Greggs and also keep the

premiums it was paid for the policy.  That, they say, is a

windfall for CNA.  Calling it a windfall is an exaggeration at

best, spiced with a measure of gall.  It is the DiPaulos who

would reap a windfall if they were allowed to commit fraud and

keep the purchase price money.

CONCLUSION

	We reverse the judgment of the trial court and remand for

further proceedings.

	Reversed and remanded.        

	SOUTH, P.J., and HALL, j.j.jJ., concur.