DIRT Development for Wednesday, August 25, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

TITLE INSURANCE; INSURER’S DUTY TO DEFEND: Massachusetts federal court rules that title insurer may not avoid the duty to defend by tendering to insured the value of the portion of insured’s property that has been put into dispute, where this amount falls short of the total amount of the policy.

First American Title Insurance Co. v. Grafton Partners, LLC., 2009 Westlaw 79263 (3/20/09)

Grafton had a title policy insuring his property for a total amount of $16,000,000.  A dispute arose with a neighbor concerning the neighbor’s alleged adverse possession of a portion of Grafton’s land, and Grafton tendered defense of the suit to the Insurer.  At first, the insurer agreed to the defense. 

Two years later, with the lawsuits still stewing (one for trespass and a counterclaim for adverse possession) Insurer obtained an appraisal of the property in dispute and the appraisal revealed a value of $26,300.  Insurer tendered this amount to Grafton, alleging that this satisfied its obligation to defend.  Grafton returned the check, indicated that the loss in value to the total property he owned if the adverse possession succeeded would exceed $5,000,000, and took the position that the Insurer could avoid the duty to defend only by tendering the total amount of the policy.

Grafton engaged in a number of other lawsuits relating to these matters, but none involved an insurable claim.

The critical language concerning whether tender of the value of the disputed property satisfied the Insurer’s duty was contained in Section 6 of the policy:

“In case of a claim under this policy, the Company shall have the following additional options:

(a) To Pay or Tender Payment of the Amount of Insurance.

To pay or tender payment of the amount of insurance under this policy together with any costs, attorneys' fees and expenses incurred by the insured claimant, which were authorized by the Company, up to the time of payment or tender of payment and which the Company is obligated to pay.

Upon the exercise by the Company of this option, all liability and obligations to the insured under this policy, other than to make the payment required, shall terminate, including any liability or obligation to defend, prosecute, or continue any litigation, and the policy shall be surrendered to the Company for cancellation.

The court tipped its hand when it discussed the dispute: 

“The disagreement presented by this motion is over the meaning of "the amount of insurance under this policy" in Section 6(a). [Insurer] assumes, without meaningful discussion, that "the amount of insurance" is equivalent to the amount of "loss" that Grafton would suffer from the adverse claim-which the [Insurer] then asserts is determined by the appraised value it obtained for the disputed portion of the Property. Grafton's position is that "the amount of insurance" signifies the "policy limits"-the insurer's "total liability under the policy prior to the resolution of the underlying claim."” (Emphasis added)

The court concluded that the language of the policy was unambiguous and permitted Insurer to avoid its defense obligation only by tendering the total face amount of the policy.

Comment: In fact, the Editor had always read the language in question consistently with the view of the court, and believes that title officers for the Insurer who had lectured his class had taken that position.   So the position taken by this major title insurer in this case is newsworthy, even though it got creamed by the federal judge.  Title insurance expert Joyce Palomar transferred this case to the editor and affirms that it correctly states the law in her view as well.

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