Court Opinion

ID: 4577871
Source: CourtListenerOpinion
Date Created: 2020-10-16 15:04:39.785355+00
Date Added: 2024-06-11T13:35:13.161117
License: Public Domain

No. 121,842

             IN THE COURT OF APPEALS OF THE STATE OF KANSAS

                     JAMES T. KRAUSE and PATRICIA ANN VANLEAR,
                                     Appellants,

                                             v.

                       JAMES M. KERNS and CHRISTINE C. KERNS,
                                    Defendants,

                                            and

                     AMERICAN AUTOMOBILE INSURANCE COMPANY,
                                   Appellee.

                              SYLLABUS BY THE COURT

1.
       Summary judgment is appropriate when the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, show there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as
a matter of law.

2.
       When there is no factual dispute, appellate courts review an order regarding
summary judgment de novo.

3.
       An accident, as required under an insurance policy's definition of occurrence, is an
undesigned, sudden, and unexpected event, usually of an afflictive or unfortunate
character, and is often accompanied by a manifestation of force.

                                             1
4.
       A buyer closing on a home is not an occurrence under an insurance policy when
an occurrence requires there to be an accident because closing on a home is designed,
planned, and expected.

5.
       An assumption of liability statement located in a seller's disclosure statement is not
an occurrence because the assumption of liability was not an accident.

       Appeal from Johnson District Court; DAVID W. HAUBER, judge. Opinion filed October 16, 2020.
Affirmed.

       Douglas J. Patterson, of Juris, LLC, of Leawood, for appellants.

       Matthew K. Holcomb and Scott R. Schillings, of Hinkle Law Firm LLC, of Wichita, for appellee.

Before HILL, P.J., MALONE, J., and WALKER, S.J.

       WALKER, J.: Sometimes what appears to be the most routine home sale
transaction can result in grave legal problems and seriously complicated litigation. In this
case, James M. and Christine C. Kerns owned a residence covered by a homeowner's
insurance policy issued by American Automobile Insurance Company (AAIC). The
Kernses entered into a contract to sell their home to James T. Krause and Patricia Ann
Vanlear (collectively Krause). As part of the sale, the Kernses provided a disclosure
statement which indicated that there were no problems with several common areas of
concern when buying a home. However, according to Krause the disclosure either
misrepresented a number of issues or outright omitted problems with the home.

       Krause sued the Kernses under a number of different theories. Krause and the
Kernses settled the suit, and as part of the settlement the Kernses agreed to assign all of

                                                  2
their rights under their insurance policy to Krause. After Krause initiated garnishment
proceedings against AAIC, the insurer moved for summary judgment arguing, in part,
that coverage under the policy was not triggered because there was no "occurrence"
which the policy required. The district court agreed and granted AAIC summary
judgment. Krause timely appeals.

                                                  FACTS

       In March 2016, the Kernses entered into a contract to sell their home to Krause.
Several months before entering into the contract, the Kernses provided Krause with a
"Seller's Disclosure and Condition of Property Addendum." The disclosure stated that
"SELLER understands that the law requires disclosure of any material defects,
known to SELLER, in the Property to prospective Buyer(s) and that failure to do so
may result in civil liability for damages."

       Krause specifically points out that the Kernses disclosed that

       "a. Defendants had owned the Property for sixteen (16) years.
       "b. Swimming Pool and Equipment—Operating and Staying with the Property.
       "c. Any water leakage or dampness in the house, crawl space or basement - No.
       "d. Any problems with fireplace including, but not limited to firebox, chimney,
       chimney cap or gas line - No.
       "e. Any repairs or other attempts to control the cause or effect of any problem
       described above - No.
       "f. Any other environmental issues - No.
       "g. Any other conditions that may materially affect the value - No.
       "h. Any other condition, including but not limited to financial, that may prevent
       you from completing the sale of the Property - No.
       "1. Disclose any material information and describe any significant repairs,
       improvements or alterations to the Property not fully revealed above - None.
       "j. The undersigned SELLER represents, to the best of their knowledge, the

                                                    3
       information set forth in the foregoing disclosure Statement is accurate and
       complete.
       "k. Other provisions of the Disclosure."

       According to Krause, after closing on the property they discovered multiple issues
with the property that were not properly addressed in the disclosure. As examples, Krause
alleged that the pool was in serious disrepair, the fireplace was unusable because of
ventilation problems, there was a leak in the basement, and the lawn irrigation system
was largely inoperable.

       In late 2016, Krause sued the Kernses for property damage and other relief. The
suit was dismissed without prejudice in October 2017. Krause filed a second suit against
the Kernses in January 2018. The suit included eight claims, all of which related to the
Kernses' misrepresentations or omissions in the disclosure.

       The suit between Krause and the Kernses was settled. As part of the settlement,
the Kernses agreed to stipulate to a final judgment in the amount of $79,482 in favor of
Krause. The Kernses also agreed to assign "all of their rights, claims, and causes of action
against AAIC and its agents, brokers, employees, officers and all other persons or entities
relating to our arising" out of the Kernses insurance policy with AAIC. Additionally,
Krause agreed to not take any action to collect from their judgment against the Kernses.
Instead, Krause could only pursue collection of the judgment against AAIC.

       Subsequently, Krause brought AAIC into the current suit through garnishment
proceedings to recover the judgment amount. AAIC filed a motion for summary
judgment arguing that the insurance policy did not cover misrepresentations made by the
Kernses, and therefore, AAIC was not liable for any damages Krause suffered.

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       Krause filed a cross-motion for summary judgment arguing that the insurance
policy covered the Kernses' misrepresentations and, thus, AAIC was obligated to satisfy
Krause's claims against the Kernses.

       The insurance policy referenced by the settlement agreement referred to the
homeowner insurance policy the Kernses had through AAIC. Under the policy, AAIC
agreed to insure "Property losses and bodily injury; personal injury; or property
damage caused by an occurrence."

       Essentially, Krause argued that an "occurrence," as defined by the insurance
policy, included the "failure of [the Kernses] to remedy or otherwise correct the errors
and omissions from disclosure made by [the Kernses] in the disclosure." Further, Krause
asserted that "a damage 'occurrence' happened to Krause—when they closed on their
acquisition of the Property at a time when [the Kernses] had previously assumed the
obligation of representing the house accurately in the disclosure." Krause argued that "the
damage to the Property was conveyed by [the Kernses] to Krause in an occurrence."

       The district court granted AAIC's motion for summary judgment and denied the
Krause's motion for summary judgment. The district court disagreed with Krause's
arguments that there was an occurrence as defined by the insurance policy. The district
court found that "[e]very cause of action in the underlying petition relate[d]" to the
Kernses' disclosure and that the disclosure was not an occurrence.

       The district court also noted that even if the disclosure and subsequent damages
constituted an occurrence as defined by the policy, Krause still could not recover because
of another exclusionary clause in the policy. Under the heading "LOSSES NOT
COVERED—LIABILITY AND MEDICAL PAYMENTS TO OTHERS," the following
exclusionary language appears: "C. Personal Liability Coverage does not apply to: . . . 7.
Any claim or liability arising, in whole, or in part out of any written or oral statement

                                              5
made, or which should have been made, by you or others on your behalf which is
material to the sale of any property." The district court concluded that AAIC had no duty
to indemnify the Kernses because the Kernses' statements and Krause's reliance on those
statements clearly fell within the exclusion set out by Section C.7.

       Krause timely appealed the district court's order.

                                               ANALYSIS

       On appeal, Krause argues the district court erred in granting AAIC's motion for
summary judgment because the Kernses' misrepresentations and omissions in the
disclosure constituted an occurrence under the insurance policy.

       As an initial matter, Krause "agrees that there is a provision in the [AAIC] Policy
which, in and of itself, would preclude any claim made against [AAIC] to satisfy a
typical seller's disclosure claim from a person acquiring the property from its insured."
Thus, Krause acknowledges Section C.7. of the insurance policy is exclusionary of the
claims they make, but they argue that the case does not rely solely on the assumption that
"[AAIC] is responsible to Krause based upon the indemnity policy insuring [the Kernses]
relating only to a misrepresentation." But, as we explain below, we find this to be a
strained interpretation which cannot successfully evade the blunt force of the policy
provisions defining an occurrence.

       The standards for a court considering summary judgment motions in Kansas are
oft-repeated and are very clear:

       "'"Summary judgment is appropriate when the pleadings, depositions, answers to
       interrogatories, and admissions on file, together with the affidavits, show that there is no
       genuine issue as to any material fact and that the moving party is entitled to judgment as
       a matter of law. The trial court is required to resolve all facts and inferences which may

                                                     6
      reasonably be drawn from the evidence in favor of the party against whom the ruling is
      sought. When opposing a motion for summary judgment, an adverse party must come
      forward with evidence to establish a dispute as to a material fact. In order to preclude
      summary judgment, the facts subject to the dispute must be material to the conclusive
      issues in the case. On appeal, we apply the same rules and when we find reasonable
      minds could differ as to the conclusions drawn from the evidence, summary judgment
      must be denied."' [Citation omitted.]" Patterson v. Cowley County, Kansas, 307 Kan.
      616, 621, 413 P.3d 432 (2018).

      Where there is no factual dispute, appellate review of an order regarding summary
judgment is de novo. Martin v. Naik, 297 Kan. 241, 246, 300 P.3d 625 (2013).

      Under the policy, AAIC agreed to insure the Kernses in the event of: "A. Property
losses and bodily injury; personal injury; or property damage caused by an
occurrence; or B. Loss assessment that is charged against you; during the policy period."
As part of that coverage, if a claim or suit was brought against the Kernses, AAIC agreed
to:

      "1.   pay on behalf of the insured up to the limit of insurance shown on the Declarations
            for damages for which the insured is legally liable. Damages include prejudgment
            interest awarded against the insured; and,
      "2.   settle or defend, as we consider appropriate, any claim or suit asking for these
            damages. In addition to our limit of liability, we will pay all defense costs we incur.
            Our duty to defend ends when our limit of liability for this coverage has been
            exhausted by payment of judgments or settlements. We have no duty to defend any
            suit or settle any claim for bodily injury, personal injury or property damage
            not covered under this policy."

      But once again under the heading "LOSSES NOT COVERED—LIABILITY
AND MEDICAL PAYMENTS TO OTHERS," in Section C.1. the following language
appears:

                                                   7
       "C. Personal Liability Coverage does not apply to:
           1. Liability to others assumed by an insured under a contract or agreement unless
              that contract or agreement:
              a. directly relates to the ownership, maintenance or use of an insured location;
              b. is entered into by the insured prior to an occurrence; and
              c. is not covered elsewhere in this policy."

       Krause argues that the exception to Section C.1. brings their claims within AAIC's
policy because the Kernses assumed liability through the disclosure statement and each of
the requirements after the "unless" in Section C.1. are present. As Krause explains it, the
Kernses assumed liability through the disclosure statement in the housing contract and
the housing contract and disclosure statement directly relate to the ownership,
maintenance, or use of the Kernses' home—the insured location. Krause then argues that
the housing contract was entered into by the Kernses prior to an occurrence—the
occurrence being closing on the home after receiving the disclosure statement. And
finally, Krause notes that the claim is not covered elsewhere in the policy.

       In response, AAIC argues that Krause is fundamentally incorrect in their
interpretation of Section C.1. According to AAIC, the language in Section C.1. relates to
"agreements where the insured assumes the liability of another, such as a hold harmless
or indemnity provision." AAIC cites two out-of-state cases—Gibbs M. Smith, Inc. v. U.S.
Fidelity, 949 P.2d 337, 341 (Utah 1997), and Olympic, Inc. v. Providence Wash. Ins. Co.,
648 P.2d 1008, 1011 (Alaska 1982)—to support its point. As AAIC explains it, liabilities
assumed by the insured in this context do "not involve liabilities incurred directly by the
insureds themselves, but rather the liabilities of others assumed by the insured."

       But we need not address this argument because, even if we assume that Krause is
correct that Section C.1. arguably applies to situations like the one here, AAIC is still not
liable because the exception in Section C.1. is simply irrelevant if there was no
occurrence. This is so because the entire linchpin of this case, in our opinion, is whether

                                                   8
there was an occurrence, as defined in the policy, which would trigger coverage. If there
was no occurrence, then there is no policy coverage and thus no need to look to any other
policy provisions of inclusion or exclusion. Krause contends that the Kernses' faulty
disclosure statement which they relied on at the closing of the contract constituted the
occurrence requiring policy coverage. AAIC denies this. We believe resolution of the
case is controlled by the answer to this question.

       As defined by the policy:

       "Occurrence means:
       a. Under Coverage For Damage to Your Property: accidental loss and damage to
         covered property which occurs during the policy period and is caused by one or more
         causes of loss we cover.
         ....
       b. Under Coverage For Liability And Medical Payments To Others:
         (1) An accident, including continuous or repeated exposure to the same general
                harmful conditions, which results, during the policy period, in bodily injury or
                property damage; or
         (2) An act or series of acts of the same or similar nature that occurs during the policy
                period and which results in personal injury."

       Krause argues that Kansas courts have previously held that the terms
"'occurrence'" and "'accident'" are ambiguous and "as such must be construed in a manner
favorable to the insured." For support, Krause cites to Lee Builders, Inc. v. Farm Bureau
Mut. Ins. Co., 281 Kan. 844, 137 P.3d 486 (2006).

       In Lee Builders, Inc., the Kansas Supreme Court held that an occurrence existed
where faulty materials and workmanship caused a home to be continuously exposed to
moisture. 281 Kan. 844, Syl. ¶ 6. In that case, the homeowner sued Lee Builders, who
was in charge of constructing the home, after the homeowner noticed that his windows

                                                    9
were leaking. Lee Builders' insurance company denied coverage for the issue, stating that
the leaky windows did not meet the insurance policy's definition of property damage or
occurrence.

       The insurance policy in question defined an occurrence as "'[a]n accident,
including continuous or repeated exposure to substantially the same general harmful
conditions.'" 281 Kan. at 850. The term accident was not defined by the policy. 281 Kan.
at 850. In its opinion, the Kansas Supreme Court noted that the United States District
Court of Kansas, when addressing a similar issue, held that "'the Kansas Supreme Court
would find that the damage that occurs as a result of faulty or negligent workmanship
constitutes an "occurrence" as long as the insured did not intend for the damage to
occur.'" 281 Kan. at 854 (quoting Fidelity & Deposit of Maryland v. Hartford Cas., 189
F. Supp. 2d 1212, 1218 [D. Kan. 2002]). The Kansas Supreme Court also cited
approvingly to the court's conclusion in Fidelity & Deposit of Maryland that Kansas
courts would hold that the "generally accepted meaning" of accident was "'an undesigned,
sudden, and unexpected event, usually of an afflictive or unfortunate character, and often
accompanied by a manifestation of force.'" Lee Builders, Inc., 281 Kan. at 852 (quoting
Fidelity & Deposit of Maryland, 189 F. Supp. 2d at 1216).

       Ultimately, the Kansas Supreme Court held that the moisture damage was an
occurrence under the policy "because faulty materials and workmanship provided by [Lee
Builders'] subcontractors caused continuous exposure of the Steinberger home to
moisture. The moisture in turn caused damage that was both unforeseen and unintended."
281 Kan. at 859. Moreover, the court noted that even if it assumed that the policy's
definition of occurrence was ambiguous the result would be similar. The court reasoned
that ambiguity in an insurance policy "'should not be allowed to defeat the coverage
reasonably to be expected by the insured.'" 281 Kan. at 858.

                                            10
       But the situation in Lee Builders, Inc. is not similar to the situation in this case.
While the term occurrence was defined similarly to AAIC's policy, the purported
occurrence is of a totally different character. See 281 Kan. at 850. In Lee Builders, Inc.,
the use of faulty materials and workmanship "caused continuous exposure of a home to
moisture, which in turn caused damage that was both unforeseen and unintended." 281
Kan. 844, Syl. ¶ 6. The occurrence there was directly related to the construction and
maintenance of the home.

       Here, for AAIC to cover the Kernses' liability, there must have been an
occurrence—defined as "[a]n accident, including continuous or repeated exposure to the
same general harmful conditions, which results, during the policy period, in bodily
injury or property damage." Like in Lee Builders, Inc., the term accident is not defined.
But the Kansas Supreme Court seemed to approve of the definition in Fidelity & Deposit
of Maryland—"'an undesigned, sudden, and unexpected event, usually of an afflictive or
unfortunate character, and often accompanied by a manifestation of force.'" Lee Builders,
Inc., 281 Kan. at 852 (quoting Fidelity & Deposit of Maryland, 189 F. Supp. 2d at 1216);
see Harris v. Richards, 254 Kan. 549, 553, 867 P.2d 325 (1994) (defining accident in the
same way).

       Using that definition, there is no occurrence here which would require AAIC to
indemnify the Kernses for Krause's suit against them. As Krause states in their brief, their
argument relies on "obligations assumed by the insured . . . entered into by the insured
prior to an occurrence (the occurrence being the Krause closing on the home after
receiving the Disclosure statement which they relied upon)." But, in our opinion, the
closing was not an occurrence as defined by the policy. Krause closing on the home was
not "'an undesigned, sudden, and unexpected event, usually of an afflictive or unfortunate
character, and often accompanied by a manifestation of force.'" Lee Builders, Inc., 281
Kan. at 852 (quoting Fidelity & Deposit of Maryland, 189 F. Supp. 2d at 1216). On the
contrary, Krause closing on the home was designed, planned, and expected.

                                              11
       Alternatively, Krause argues that the occurrence was the Kernses' failure to
"remedy or otherwise correct the errors and omissions from disclosure made by [the
Kernses] in the Disclosure and failure to maintain the property in the condition as
disclosed by [the Kernses] in the Disclosure which had suffered continuous or repeated
exposure to the same general harmful conditions." But again, this does not seem to be an
undesigned, sudden, and unexpected event. The Kernses made their disclosure and
provided incorrect information. Krause does not explain how this was an accident on the
Kernses' part.

       Krause cites to a recent Missouri case, American Family Mutual Ins. Co. v.
Sharon, 596 S.W.3d 135 (Mo. Ct. App. 2020), to support their argument that the
misrepresentation itself constitutes an occurrence under the insurance policy. In Sharon,
the home seller misrepresented that there had not been any water damage or dampness in
the house. However, shortly after buying the property, Sharon's new home experienced
significant water leaks and water damage in the basement. Sharon sued the seller for
negligent misrepresentation.

       At the time of the sale, American Family provided homeowners insurance to the
seller. The insurance policy was similar to the one in this case, requiring an occurrence
and defining occurrence as "an accident, including exposure to conditions, which results
during the policy period, in . . . property damage. Continuous or repeated exposure to
substantially the same general harmful conditions is considered to be one occurrence."
596 S.W.3d at 140. The district court declared that the insurance policy did not require
American Family to defend or indemnify the seller.

       On appeal, the appellate court, relying on earlier Missouri caselaw, held that a
negligent misrepresentation can be an "accident" as required under the policy. 596
S.W.3d at 144. But the court's analysis did not end there. For the seller to be covered

                                            12
under the policy, absent some exclusion, the accident must also result in property
damage. 596 S.W.3d at 145.

       The court went on to hold that Sharon could not "recover costs to repair defects
that existed at the time of the sale because they are not damages to tangible property
caused by the misrepresentation." 596 S.W.3d at 146. However, the court reasoned,
Sharon's claim relied on the idea that the negligent misrepresentation "caused post-sale
water damage because he would not have purchased the property but for the
misrepresentations or he relied on the misrepresentations and as a result did not take
corrective action that would have prevented said damage." 596 S.W.3d at 146.

       Sharon is not binding precedent on this court. Nor is the case particularly
instructive given the facts in this case. While Missouri courts have held that an accident,
under homeowner insurance policies, can include a seller's negligent misrepresentations,
that is not the situation in Kansas. Missouri courts do not seem to define an accident in
the same way as Kansas courts. In Kansas, an accident in this context is "'an undesigned,
sudden, and unexpected event, usually of an afflictive or unfortunate character, and often
accompanied by a manifestation of force.'" See Lee Builders, Inc., 281 Kan. at 852
(quoting Fidelity & Deposit of Maryland, 189 F. Supp. 2d at 1216). But even if we
agreed with the Missouri court's interpretation and held that the Kernses'
misrepresentations constituted an accident under the policy, the remaining facts here
differ from those in Sharon.

       In this case, Krause's claims do not rely on damage that was incurred after the
negligent misrepresentations. In contrast to the damage to the property in Sharon,
Krause's claims focus solely on property damage that occurred before the Kernses made
their disclosures. The applicability of Sharon is limited in this case. But there is Kansas
law which is instructive.

                                             13
       Holding that AAIC was not required to insure the Kernses for their
misrepresentations or omissions is consistent with prior Kansas caselaw. In Bush v. Beal,
26 Kan. App. 2d 183, Syl. ¶ 2, 987 P.2d 1103 (1999), a panel of our court held that an
insurance policy did not cover a seller's negligent misrepresentations because the damage
to the property was not caused by the misrepresentations.

       In Bush, plaintiff Bush purchased a residence with undisclosed termite damage
from Beal. After obtaining a default judgment against Beal, Bush initiated garnishment
proceedings against Beal's insurance company. The insurance policy in Bush provided
that coverage would exist for property damage caused by an occurrence. Occurrence was
defined as "'an accident, including exposure to conditions, which results in: . . . property
damage.'" 26 Kan. App. 2d at 184. The insurance company argued that the termites, not
Beal's negligent misrepresentations, caused any property damage.

       Our court agreed, holding that there was "no coverage under the [insurance] policy
because the damage to the conveyed property was not caused by the negligent
misrepresentations of Beal. The damage was caused by termites." 26 Kan. App. 2d at
185.

       A similar situation exists here. Occurrence has a similar definition in this case as it
did in Bush. And, like in Bush, the damage here was not the result of the Kernses'
misrepresentations or omissions. The damage was caused by some other factor or factors
not related to the misrepresentations or omissions. See 26 Kan. App. 2d at 184-85.

       Krause attempts to differentiate this case from Bush by arguing that the Kernses
assumed liability through their disclosure statement and this constituted an occurrence.
However, the assumption of liability present in the disclosure statement does not create
an occurrence under the definition in the policy. The assumption of liability was not an
accident.

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       Ultimately, we believe the district court did not err by granting AAIC's motion for
summary judgment and holding there was no occurrence as defined by AAIC's policy.
And the existence of such an occurrence is the necessary predicate for application of
provisions allowing coverage under any other language of the policy.

       Additionally, even if we would find the existence of an occurrence triggering
coverage under the policy, we agree with the district court's final holding that the
provisions of section C.7. are fatal to Krause's case. In language that seems particularly
applicable to this case, C.7. excludes any "claim or liability arising, in whole, or in part
out of any written or oral statement made, or which should have been made, by you or
others on your behalf which is material to the sale of any property." Krause concedes that
this language appears facially adverse to their claims, even as they try to craft a way
around its provisions.

       The upshot is that, even if we assume that Section C.1. would apply to situations
where an insured assumes liability through an improper disclosure, Krause's argument
that personal liability coverage applies under the exception in Section C.1. is not
persuasive. Under Section C.1., liability assumed by the insured under a contract or
agreement is not covered by the policy unless, in part, the contract is "entered into by the
insured prior to an occurrence." Again, we believe none of the postdisclosure events
qualify as occurrences under the language of AAIC's policy.

       Finally, AAIC argues that even if Krause is correct in their arguments, AAIC
would not cover the claims because other exclusions in the policy remove coverage.
AAIC points to Section B.2. in the policy which states:

       "2. We do not cover loss or damage caused directly or indirectly by any of the following.
           Such loss or damage is not covered regardless of any other cause or event that
           contributes concurrently or in any sequence to the loss:

                                                   15
           ....
      f.   Fraudulent, dishonest or criminal acts by or at the direction of an insured."

AAIC also raises other similar provisions but does not delve into as much detail
regarding them. Regardless, these arguments are immaterial in this case because the
district court did not err when it granted summary judgment in favor of AAIC because
there was no occurrence and therefore no coverage under the policy.

      Affirmed.

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