USAA Casualty Insurance Company v. McInerney, 2011 IL App (2d) 100970

USAA insured the McInerneys under a homeowners policy and defended them in same, but USAA initially refused to defend in the Cyr underlying action.
The Cyrs purchased the McInerneys' Lake Bluff home in 2006 and received a residential real property disclosure stating limited seepage and post-sale remedies; sale closed July 27, 2006.
After possession, the Cyrs faced extensive water intrusion, basement flooding, and mold-related illnesses; they sought rescission or damages in a suit alleging contract breach, disclosure act violations, fraudulent and negligent misrepresentation.
The McInerneys allegedly negligently misrepresented the property condition in the disclosure report; the underlying complaint included a theory of negligent misrepresentation (count IV).
The trial court found USAA had a duty to defend based on negligent misrepresentation causing property damage and bodily injury tied to an occurrence; it awarded defense fees to the McInerneys.
On appeal, the court held USAA had a duty to defend, distinguishing Lane and applying Posing to conclude the alleged occurrence and damages were potentially within coverage.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Did USAA owe a duty to defend based on the underlying negligent misrepresentation claim?	McInerneys: misrepresentation allegations fall within policy as occurrence.	USAA: no duty; claims outside coverage or excluded by contract/intent.	Yes; negligent misrepresentation potentially within coverage; duty to defend exists.
Is the claim for negligent misrepresentation an 'occurrence' under the policy indicating property damage or bodily injury?	Cyrs allege occurrence causing damages; coverage should apply.	USAA: misrepresentation is not an occurrence and is excluded or outside coverage.	Yes; the complaint alleges an occurrence resulting in property damage and bodily injury, potentially within coverage.
Do Lane and the contract exclusion defeat coverage here?	Lane distinguishable; damages post-sale and negligent misrepresentation can be covered; no contract-based remedy dictates exclusion.	Lane controls; preexisting or contract-based relief removes coverage; loss-in-progress doctrine applies.	Lane distinguishable; contract exclusion does not bar coverage for negligent misrepresentation claims.

Dixon Distributing Co. v. Hanover Insurance Co., 161 Ill. 2d 433 (1994) (duty to defend determined by allegations within policy coverage)
Illinois Emcasco Insurance Co. v. Northwestern National Casualty Co., 337 Ill. App. 3d 356 (2003) (insurer obligated to defend if underlying allegations potentially within coverage)
United States Fidelity & Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64 (1991) (liberal construction of underlying complaint in favor of insured)
General Agents Insurance Co. of America, Inc. v. Midwest Sporting Goods Co., 215 Ill. 2d 146 (2005) (if any theory is potentially covered, insurer defends)
Pekin Insurance Co. v. Richard Marker Associates, Inc., 289 Ill. App. 3d 819 (1997) (doubt about coverage resolved in favor of insured)
Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90 (1992) (policy interpretation and defense duties framework)
Posing v. Merit Insurance Co., 258 Ill. App. 3d 827 (1994) (insurer liable to defend where underlying complaint alleges property damage from negligent conduct)
Lane v. Allstate Insurance Co., 345 Ill. App. 3d 547 (2003) (distinguishable preexisting damages; contract-based relief affects coverage)