There Must be an “Occurrence” for Liability Coverage to Apply

Another Failure of a Settlement Allowing Plaintiff to Sue Defendant’s Insurer

Sometimes what appears to be the most routine home sale transaction can result in grave legal problems and seriously complicated litigation. In James T. Krause and Patricia Ann Vanlear v. James M. Kerns and Christine C. Kerns, and American Automobile Insurance Company, No. 121,842, Court Of Appeals Of The State Of Kansas (October 16, 2020) 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.


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.

Krause and the Kernses settled the suit, and as part of the settlement the Kernses agreed to assign all of their rights under their insurance policy to Krause. The insurer successfully 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 disclosure at the sale 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.

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.

The insurance policy referenced by the settlement agreement referred to the homeowner insurance policy the Kernses had through AAIC. 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.”  Krause argued that “the damage to the Property that was conveyed by [the Kernses] to Krause in an occurrence.”

The district court granted AAIC’s motion for summary judgment and 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. 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.


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 the insurance policy excludes 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.

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.”

The entire linchpin of this case was whether 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.

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.”  An “occurrence” must be fortuitous, that is undesigned, sudden, and unexpected event, usually of an afflictive or unfortunate character, and often accompanied by a manifestation of force. Using that definition, there is no occurrence which would require AAIC to indemnify the Kernses for Krause’s suit against them.

The closing was not an occurrence as defined by the policy. The closing on the home was was designed, planned, and expected.

Costs to repair defects that existed at the time of the sale are not damages to tangible property caused by the misrepresentation.  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.

All of Krauses and AAIC’s additional arguments were immaterial 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.


There is only one reason to enter into a settlement agreement that takes an assignment of the rights of a defendant against its insurer and a covenant not to execute the judgment against the defendant is if the defendant is judgment proof. This case got the plaintiffs a judgment that it was unable to collect. Clearly, a misrepresentation that causes no damage, cannot be fortuitous especially when the misrepresentation was made intentionally and deceived the plaintiffs. If the Kerns had any assets sufficient to pay the judgment – and they should if they profited from the sale – it was silly to take the assignment. If they were judgment proof then analysis of the legal issues would have caused the plaintiffs’ lawyer to refuse to sue the insurer.

© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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