Daily Development for Monday, August 23, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri firstname.lastname@example.org
TITLE INSURANCE; ARBITRATION CLAUSES: Arbitration clause contained in title insurance policy is valid and binding where insured accepted the insurer’s defense of a claim and thereafter waited ten years to challenge the validity of the clause.
Bird Peak Corp. v. Lawyers Title Insurance Corp., 2004 U.S. App. LEXIS 16237 (2nd Cir. 8/6/04)
Insureds bought development property in 1993 and obtained title insurance policies in the amount of $639,000 collectively. The following year, insureds were sued by a local neighborhood association, which asserted the ownership of a road. They tendered defense of the claim to the title company, which did defend.
The court does not tell us exactly how the litigation came out, but clearly the result was not to the liking of the insureds, because in 2003 they sued the title company for damages based upon its issuance of the policy. The court, once again, is very vague about the details of the insureds’ causes of action.
Insurers moved to dismiss the action, or to stay in favor of arbitration, because the policies contained a clause indicating that either party could submit to arbitration “any controversy or claim between the Company and the insured arising out of or relating to this policy, any service of the Company in connection with its issuance or the breach of a policy provision or other obligation.”
The insureds argued that they had no actual knowledge of the arbitration clause, had never expressly agreed to it and that it was void.
The trial court disagreed and granted the motion to dismiss and insureds appealed.
In an opinion that is made the more confusing for its brevity, the court appears to base its opinion on the fact that the insureds (one of whom was a lawyer specializing in contract law) knew or should have known of the arbitration clause at the time that it accepted the benefits of the contract and thereafter for almost a decade before they sued the insurer.
Comment 1: The title insurance lawyer who gleefully sent this case to the editor reports that the decision (a Second Circuit Federal Court decision, after all) is very important to the industry because of the increasing reliance that title insurers are placing upon binding arbitration as a means to avoid extended litigation and runaway juries. (The part about runaway juries is the editor’s projection.) So, best wishes to our friends in the industry for finding such a useful precedent in their gift box.
Comment 2: The editor has no quarrel with the case insofar as it stands for the interpretation the editor suggests ought to be made of the it, set forth above - that a party who accepts significant benefits of a contract ought not to later be permitted to argue against other elements of the contract on the grounds that it never read them. This should be true whether the insured is a trained contract law specialist or a four handicap real estate developer who never reads anything he signs.
Comment 3: But the opinion likely is going to be cited for the proposition that parties who receive policies containing arbitration clauses are bound by them even if they never accept any insurance benefits under these contracts and even though they never saw the contract prior to closing on the transaction and paying the insurance premium.
To the editor, this goes too far. It smacks of the “shrink wrap” tactics that caused so much controversy in the attempt by those favoring the software industry to get the UCC to provide that consumers were bound by the terms of complicated licensing and warranty provisions as of the time that they opened the plastic sealer on a software package, even though they had no way of reading these provisions until after they opened the package. Consumer groups tap danced all over that idea, and, in the editor’s view, with good reason.
Although one might argue that sophisticated parties who order title insurance in commercial transactions ought to make themselves familiar with the product they are acquiring, the reality is that title insurers are constantly tinkering with their policies, and in many jurisdictions different insurers might use different policy forms, and it would be difficult for most insurance customers really to keep track of every change.
The title insurance industry often has the ability to provide to customers copies of their policies in advance of coverage, but rarely does so. There is no reason that it shouldn’t be expected to publicize the existence of a binding arbitration provision in the policies, especially where no option is offered to dodge the clause. It is true that the dynamics of some transactions make it impossible for the insurer to communicate with customers prior to closing, but these transactions are rare. More often, there is a title report or binder issued, and certainly the arbitration clause could be spelled out there.
Comment 4: Although many state legislatures, pressed by various kind of product vendors, have adopted enabling legislation permitting arbitration clauses in consumer deals, most of the legislation requires that the customer receive clear notification of the clause in extra big type and many statutes even require separate initialing of the arbitration clause. (Note that these kinds of statutes often relate only to consumers - this case is not a consumer case.)
Arbitration clauses are no so fundamental to the insurance company’s undertaking that we should compel parties acquiring title insurance to be limited to the arbitration remedy simply as a function of the insurance. Where an insurance customer is arguing that the company didn’t perform as it promised, it should be entitled to litigate unless steps have been taken to insure that it knew or should have known that it had agreed to a limited arbitration remedy when it accepted the insurance.
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