Daily Development for Wednesday, August 23, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

TITLE INSURANCE; EXTENT OF COVERAGE; BOUNDARY OVERLAPS: Overlap of improvements on insured property onto adjacent property constitute an “encumbrance” on title and are covered by title insurance policy if insurer has waived survey exception. 

First American Title Insurance Co. v. Dahlmann, 2006 Wi. 65, 2006 Wisc. LEXIS 358 (6/7/06)

The property was a hotel parcel.  The survey showed that there were overlaps onto adjacent property of surface improvements.  In exchange for additional consideration, the insurer waived the survey exception and simply entered specific exceptions for these overlaps.

In fact, the underground garage also intruded onto city right of way in the same area, and this was not picked up on the survey and not excepted.  Apparently an accurate survey would have disclosed this overlap, but of course the insurer had withdrawn the standard exception for defects that an accurate survey would disclose.  It also withdrew the standard exception for “any encroachment or overlapping of improvements.” 

The insurer nevertheless refused the tender of coverage because it asserted that it only had insured the parcel described in the policy, and the overlaps were on property not covered by the policy - city right of way. 

The court held that the insurance of “encumbrance on title” covered defects in ownership of the improvements even if the defect resulted from a protrusion of the improvements beyond the insured’s described parcel.  It did so both because the insurer had waived the survey exception in connection with concerns at overlaps.  But it also necessarily had to conclude that specific language of the policy permitted such a construction.  This was a tough analysis, as the policy’s standard form language said, first, that it insured any loss or damage by reason of: “”Title to the estate or interest described in Schedule A being vested other than as stated herein; 2) Any defect in or lien or encumbrance on the title. 

What “title” is that?  Why that described in Exhibit A, of course.  And Exhibit A describes a parcel that does not include the encumbrance.  First American cited case law in California, Washington and Nebraska supporting this position.  The court cited, in response a Wisconsin case involving a deed warranty against encumbrances that held that an encroachment of improvements on the subject property onto other property constituted an “encumbrance” on the subject property, even though the physical reality of it was on other property. 

Of course, the court also stressed that the insurer had waived both the survey exception and the exception for “encroachment or overlapping of improvements..”  The insurer argued that this only referred to encroachments of improvements outside of the insured property onto the property itself.  The court said that there was no reason to read the intent in deleting this exception so narrowly.  The insurer had an obligation to clarify to the insured that the removal did result in insurance against its own improvement encroaching beyond the boundary.

The court read the deletion of the survey exception as indicating that the lender intended to rely upon the accuracy of the survey as its protection against survey defects.  (Why, exactly should this be true?)

In the final analysis, the court concluded that an encroachment was an encumbrance only when it was “substantial.”  Here the encroachment was over 1900 square feet and the City was demanding an annual payment of almost $4000 to license the encroachment.  Otherwise, it was insisting on removal - likely  a much more expensive proposition. The court remanded for a determination of substantiality here, but the outcome seems foregone. 

The court cited cases from Illinois and Washington (departing from the authority of an earlier cases cited by the insurer in that state) to the effect that under the circumstances of removal of an exception against encumbrances, projections from the improvements on the insured property would be covered.

Comment 1: Of course, the issue only arises if the exception is removed.  But the editor agrees that the burden ought to be on the insurer to clarify that its actions don’t mean what an reasonable insured would think they meant.  In context, the editor concludes a reasonable insured would view itself covered in this case.

Comment 2: Note that the court reserved for another day the issue of whether marketability coverage would also be implicated.   Treating this as a marketability problem in fact is more consistent with the language of the  policy and likely would have brought the court to the same outcome here. 

Comment 3: [by Jack Murray - First American Title Insurance Chicago Office].  The issue decided by the court in the Dahlmann case should no longer arise under the new 2006 ALTA Owner’s and Loan Policies. Covered Risk 2(c) has been added to these policies, and provides express survey coverage that some courts have held does not exist in the printed versions of the 1992 (and earlier) ALTA policy forms. This new Covered Risk makes it clear that, absent a specific survey exception in Schedule B, survey coverage is provided, including encroachments of improvements onto adjacent land. This new provision reads as follows:

“(c) Any encroachment, encumbrance, violation, variation, or adverse circumstance affecting the Title that would be disclosed by an accurate and complete land survey of the Land. The term encroachment” includes encroachments of existing improvements located on the Land onto adjoining land, and encroachments onto the Land of existing improvements located on adjoining land.”

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