Daily Development for Thursday, February 19, 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 dirt@umkc.edu TITLE INSURANCE; DUTY TO DEFEND: Insurer has no obligation to cure a defect after insured has transferred property, but still is liable to defend an action for trespass arising from the period of time that insured was in title. Chicago Title Insurance Company v. Investment Limited Partnership, 2004 U.S.App. LEXIS 920 (4th Cir. 2004). The insured owner had conveyed land away using a special warranty deed, and only later learned of a title defect created by a predecessor in title (a) the title insurer is not liable to the insured for cost of curing the defect because the title policy coverage has been terminated, and (b) nevertheless, the insurer is obligated to provide legal defense for the insured as against an action for trespass based on damage done while the policy was in effect. In 1986, 100 Investment assembled parcels in Maryland to create a 300-acre tract for residential development. One of the assembled parcels was acquired from Miller, and consisted of 1.145 acres. The entire assemblage of 300 acres was insured by Safeco Title Insurance Corporation (which later became part of Chicago Title). 100 Investment subdivided the 300-acre parcel, recorded a declaration of CC&Rs governing the subdivision, deeded common areas to a homeowners association, and in 1995 sold the subdivision to a builder, NVR Homes, except for 12 acres that were retained by 100 Investment. The 288 acres sold to NVR Homes included the Millers' 1.145 acres. The deed from 100 Investment to NVR Homes was a special warranty deed, protecting NVR Homes against title defects created by 100 Investment but not against defects created by its predecessors. NVR Homes proceeded to build and sell homes, eventually selling the 1.145 acres to three different homeowners. In July 2001, 100 Investment learned that the Millers had conveyed their 1.145 acres to a different buyer, the Khan Profit Sharing Plan, in 1982. (The court's decision does not say, but we must assume the Millers-to-Khan conveyance was recorded prior to the Millers-to-100 Investment conveyance, and was somehow missed by the Safeco title search.) In order to "clean up" the title it had conveyed to NVR Homes, 100 Investment purchased the 1.145 acres from a successor-in-interest of Khan, paying $175,000. Meanwhile, Khan filed suit against 100 Investment for trespass upon the 1.145 acres from 1986 to 1995. 100 Investment sent a notice of claim to Chicago Title, seeking reimbursement of the $175,000 and a defense to the trespass action. Chicago denied both requests, and filed a lawsuit against its insured, in federal court (diversity jurisdiction), seeking declaratory relief. On cross-motions for summary judgment, the trial court ruled in favor of 100 Investment, awarding $175,000 plus interest and attorneys' fees, and ordering Chicago Title to provide a legal defense to the trespass action. The Fourth Circuit Court of Appeals reversed as to the award of damages, and affirmed as to the order for a defense. As to the first issue, i.e., Chicago Title's liability for the $175,000 paid to clear title, the Court began by explaining that its decision would be based on Maryland law and, in particular, law of contract interpretation. Specifically, the Court looked to the intentions of the parties in entering into the insurance contract. The first argument made by Chicago Title was that 100 Investment's policy coverage was terminated when it conveyed the subject land by special warranty deed. The insurer cited policy language providing for coverage as long as the insured "retained an estate or interest in the land," and for continuation of coverage as long as the insured has "liability by reason of covenants of warranty" given in a conveyance of insured land. In this latter connection, the insurer said the special warranty deed did not make 100 Investment liable for defects created by its predecessors. 100 Investment responded, first by saying that it "retained an estate or interest in the land," because it still owned 12 of the original 300 acres of "insured land." In addition, 100 Investment argued that it continued to have warranty obligations as to the 1.145 acres because it had (1) subdivided the land and certified the plat, (2) represented that it was the "owner of all (the) land" in recorded CC&Rs, and (3) represented in its conveyance of the common areas to the homeowners association that it had imposed the CC&Rs on all of the land in the subdivision. The Court agreed with Chicago Title, holding that the insured's conveyance of 288 acres terminated policy coverage as to that portion of the "insured land," even though coverage continued for the 12 acres that were retained. The Court concluded this is the only logical interpretation of policy language. As for continuation of coverage in connection with "covenants of warranty," the Court held that none of the documents cited by 100 Investments "contains any language warranting title to the 1.145-acre tract against actions taken by previous owners of the tract." In this connection, the Court cited Maryland statutes that prohibit implied warranties of title to real estate, and require express language to create a general warranty of title. Since the required language was not present, the Court concluded that 100 Investment had no liability to NVR Homes for the defect created by the Millers, and, likewise, Chicago Title had no liability to 100 Investment. On the second issue, insurer liability for legal defense of the trespass action, the Court agreed with 100 Investment. The Court was persuaded by the fact that Khan's complaint was based on the insured's actions from 1986 through 1995, when the policy was in effect for the 288 (and 1.145) acres, consistent with the title policy coverage. The Court said Chicago Title was trying to treat the policy as "claims made" coverage, while there is no policy language to support this interpretation. Reporter's Comment: While the insured's repurchase of the 1.145 acres to help NVR Homes may seem laudable, one must remember it was not legally obligated to do so and, therefore, the cost was not compensable by the title insurer. This was probably a case where the ultimate owners (i.e., homeowners) did not have title policies, and people looked up the chain for a deep pocket. Still, as the Court points out, in the absence of a general warranty this risk falls upon the current owner(s). On the other hand, the insurer's obligation to defend the trespass action seems pretty clear. In order for the coverage to be limited to "claims made" within a certain period, one would expect this limitation to be clearly spelled out in the policy itself. There is no such limitation in the title policy. On the other hand, the policy requires an insured to provide notice of claim promptly upon learning of a potential title problem, and statutes of limitations under state law may bar the claim of an insured who waits too long. In this case, assuming the Khan action is not barred by statutes of limitations, it would appear Chicago Title will be obligated not only to provide a defense for its insured, but also indemnify the insured if the defense is unsuccessful. Too bad. If the parties had sooner seen the light, this could have been a good example of the value of title insurance. Comment by First American Title V.P. Jack Murray: I believe that the Fourth Circuit's decision in this case was correct and well reasoned. The holding regarding the lack of coverage after conveyance by a special warranty deed is in accord with Gebhardt Family Restaurant, L.L.C. v. Nation's Title Ins. Co. of New York, 132 Md. App. 457 (2000) (which the Fourth Circuit cited with approval), in which the court held that a transfer of land by special warranty deed from two family members to an LLC, of which they were the only members, terminated coverage under a policy naming the individual family members as the insured parties, where the alleged title defect had not been created or agreed to by the grantors. According to the Fourth Circuit, 100 Investment Limited Partnership "gave a special warranty [deed], promising only that [defendant] had not itself created any defect in title - a warranty whose breach would be specifically excluded from coverage. At the point of conveyance . . . any preexisting defect in title became [the grantee's] problem and [the grantee] would have to obtain its own title insurance to protect itself from any problem that might be caused by that defect." But the obstinacy of Chicago Title in refusing to defend the trespass clam is perplexing, especially since CT persisted in clinging to its position all the way to the Fourth Circuit Court of Appeals (only one notch below the U.S. Supreme Court), and obtaining only a reported adverse ruling for its efforts. Perhaps, once CT denied coverage based on the "termination in coverage" (which was correct) they had no good will left in that community and were unlikely to be the insurer of choice on any subsequent sales of subdivision lots.... so why not deny the trespass claim also? It would seem that a basic trespass claim is a tort claim, not a title claim, which should have been properly defended by CT's property and casualty carrier. But Chicago Title never contended that the trespass claim was a tort claim (or something other than a title claim); its only argument on this issue was that the termination of coverage via the special warranty deed ended 100 Investment's coverage for the defense of the trespass litigation -- even though the "trespass" clearly occurred during the policy period. 100 Investment argued that "the damage for which the claims were asserted arose because of the defective title to the 1.145-acre Miller tract during the period before 100 Investment conveyed the tract to NVR Homes." The Fourth Circuit agreed with this conclusion. According to the court, "Insofar as the basis of the Khan litigation was a dispute over title to the 1.145-acre Miller tract while 100 Investment was still the purported owner of the tract, the policy covers the loss or damage." As the reporter points out, it looks fishy that Mr. Kahn sat around for nine years (1986 to 1985) without somehow realizing that someone was "trespassing" on his property. But, again, CT did not appear to argue that any statute of limitations (or common law laches) applied in this case. The Reporter for this item was Bert Rush, writing for the First American Title internal newsletter: "LandSakes." Readers are encouraged to respond to or criticize this posting. Items reported on DIRT and in the ABA publications related to it are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data provided and opinions expressed by the DIRT editor the sole responsibility of the DIRT editor and are in no sense the publication of the ABA. 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