Find Legal Information

THIRD DIVISION
July 23, 2003

Michael and Kathy Gregg entered into a real estate contractto buy a house from the defendants, Silvio and Judy DiPaulo. When the Greggs moved in they began redecorating the house. Theymade a heart-sinking discovery: termites. The house was infestedwith termites. CNA paid the Greggs for the costs of repair andreplacement pursuant to their homeowner's policy. Then CNA, asthe Greggs' subrogee, sued the DiPaulos for common law fraudbased on false statements and concealment.

The trial judge granted summary judgment to the defendants,finding CNA could not subrogate to its insured's collateralcontract rights. The court relied entirely on our decision inState Farm General Insurance Co. v. Stewart, 288 Ill. App. 3d678, 681 N.E.2d 625 (1997). We find Stewart does not controlthis case. We reverse the trial court's order and remand forfurther proceedings.

FACTS

According to CNA's complaint, on or about March 6, 1998, theGreggs entered into a real estate contract to purchase from thedefendants certain real property located at 102 Prospect Court,Prospect Heights, Illinois. The parties agreed on a sellingprice of $465,000. Defendants provided a Residential RealProperty Disclosure Report indicating they were not aware of acurrent infestation of termites or wood boring insects or of astructural defect caused by previous infestations of termites orother wood boring insects. During a house inspection on March11, 1998, defendants made verbal representations to the Greggsdenying any past or current termite infestation. The Greggs'insurance policy through CNA, effective from May 7, 1998, throughMay 7, 1999, provided coverage for loss or damage caused bytermite infestation. The policy contained language whereby CNAobtained the Greggs' rights to recover against a third party ifit paid for damage to the property. The Greggs closed on theproperty on June 5, 1998.

On or about September 3, 1998, the Greggs discovered theproperty was infested with termites. After removing somewallpaper and exposing the drywall, they found pinholes andtunnels caused by termites. They also discovered patchwork onthe 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 expensesincurred during the repair. CNA filed its subrogation claim,based on common law fraud, against the defendants. The trialcourt entered summary judgment in favor of defendants.

DECISION

There is no factual dispute here. The question is whetherthe defendants are entitled to summary judgment as a matter oflaw. 735 ILCS 5/2-1005(c) (West 2000). We review de novo thetrial 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 itsinsured's claim for fraud against the defendants. The right ofsubrogation is an equitable remedy that allows one who hasinvoluntarily paid a debt or claim of another to succeed to therights of the other with respect to that claim or debt. DixMutual Insurance Co. v. LaFramboise, 149 Ill. 2d 314, 319, 597N.E.2d 622 (1992). The right of subrogation may be grounded inequity or may be founded on an express or implied agreement. Stewart, 288 Ill. App. 3d at 686, citing Bost v. Paulson'sEnterprises, Inc., 36 Ill. App. 3d 135, 139, 343 N.E.2d 168(1976). The doctrine rests on the principle that justice isattained by placing ultimate responsibility for the loss on theone against whom in good conscience it ought to fall. Dix MutualInsurance Co., 149 Ill. 2d at 319. Whether the right ofsubrogation exists depends on the equities of each case. DixMutual Insurance Co., 149 Ill. 2d at 319.

A subrogee "steps into the shoes" of the person whose claimhe has paid and may only enforce those rights which the lattercould 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 againstthe defendants if: (1) the Greggs could maintain a cause ofaction against the defendants and (2) it would be equitable toallow CNA to enforce a right of subrogation against thedefendants. Dix Mutual Insurance Co., 149 Ill. 2d at 319.

First, we examine the status of the Greggs' "shoes" whichCNA seeks to step into. That is, could the Greggs have sued theDiPaulos for common law fraud had they not sought coverage fortheir losses from CNA? The answer is yes.

Sellers of real estate have a duty to disclose defects whichcould 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 enoughwhen that silence is combined with active concealment. That iswhat we held in Mitchell, where the home buyers discoveredvarious defects and damage to the property that were not obviousor were concealed during the plaintiffs' inspection. Thecomplaint alleged the sellers concealed the defects, kept silent,and made misrepresentations about them. We found there weresufficient allegations of intentional false material statementsreasonably relied on by the buyers to support the fraudcomplaint. Mitchell, 248 Ill. App. 3d at 1004-06. See alsoPosner v. Davis, 76 Ill. App. 3d 638, 644, 395 N.E.2d 133 (1979)(finding of fraud supported where defendant-sellers activelyconcealed a flooding problem and water damage and said nothingabout them). In addition, a fraud claim may be based solely on aseller's false representation made in a disclosure reportpursuant to the Residential Real Property Disclosure Act (765ILCS 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 theywere not aware of a termite infestation. They said it in verbalstatements to the Greggs and in the written disclosure report. Their purpose, proven successful, was to induce the Greggs to buythe house. The Greggs relied on the false statements andincurred damages as a result. CNA has alleged common law fraud. See Redarowicz v. Ohlendorf, 92 Ill. 2d 171, 185-86, 441 N.E.2d324 (1982).

If the Greggs could sue the DiPaulos for fraud, it wouldappear to follow that their subrogee, CNA, could sue theDiPaulos. But the trial court found our decision in Stewart wasan insurmountable obstacle to CNA's lawsuit.

In Stewart, Vito DeFrancesco contracted to sell an apartmentbuilding to Nancy Stewart. After DeFrancesco delivered the deedand possession to Stewart, but before she paid him the fullcontract price, the building was destroyed by fire. DeFrancescocollected insurance proceeds for the loss from his insurer, StateFarm General. Stewart made a claim against her insurer, HartfordInsurance Company, and collected on her policy. State FarmGeneral, as DeFrancesco's subrogee, sued Stewart, seeking torecover from the Hartford proceeds that part of the purchaseprice she had not yet paid to DeFrancesco. The court, notingthat State Farm General's liability to DeFrancesco had nothing todo 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 SupremeCourt decision, Board of Trustees of First Congregational Churchof Austin v. Cream City Mutual Insurance Co., 255 Minn. 347, 96N.W.2d 690 (1959). There, the Church sold its property to thecity of Austin under a contract. There was a fire that destroyedthe 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 claimagainst Austin for the balance of the purchase price. The courtdisagreed, holding Cream City could not be subrogated tocollateral 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' contractrights against the DiPaulos. CNA alleges common law fraud,nothing else. The same fraud the Greggs could have assertedagainst the DiPaulos.

Second, and more importantly, the Stewart and Cream Citydecisions involved fires that the defendants had nothing to dowith. No one suggested Nancy Stewart or the city of Austin was awrongdoer. The Minnesota court said, and Stewart reiterated:

"it is the universally accepted rule that an insurermay be subrogated to the insured's rights against anyperson wrongfully causing a compensable loss to theinsured." (Emphasis added.) Stewart, 288 Ill. App. 3dat 688-89, quoting Cream City, 255 Minn. at 353.

Further, in Stewart, we said that although State FarmGeneral paid DeFrancesco for his fire-related losses, thatpayment was independent of Stewart's contractual debt toDeFrancesco "insofar as Stewart did not cause those losses." Stewart, 288 Ill. App. 3d at 690.

That, according to CNA's complaint, is exactly what happenedin this case--the DiPaulos wrongfully caused the loss to theGreggs.

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 lossto the Greggs by concealing the infestation and making falsestatements about it.

The DiPaulos are right when they say if CNA were to succeedit could recover its payout to the Greggs and also keep thepremiums it was paid for the policy. That, they say, is awindfall for CNA. Calling it a windfall is an exaggeration atbest, spiced with a measure of gall. It is the DiPaulos whowould reap a windfall if they were allowed to commit fraud andkeep the purchase price money.

CONCLUSION

We reverse the judgment of the trial court and remand forfurther proceedings.

Reversed and remanded.

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