Daily Development for Friday, October 16, 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; ENDORSEMENTS; EXCEPTIONS: Title insurer may not rely on a specific exception contained in the general Schedule B list of exceptions in a lender’s policy to avoid coverage of a title defect that arises under a specific endorsement (ALTA 9) providing coverage against a “right of refusal or [a requirement for] the prior approval of a future purchaser or occupant.”.

Nationwide Life Ins. Co. v. Commonwealth Land Title Ins. Co., 579 F.3d. 304 (3rd Cir. 2009)

This opinion reverses a District Court opinion that apparently was not well received among title insurance commentators. 

Insurer issued a $3.5 million loan policy relating to property that was subject to a Declaration that inter alia gave an identified  third party the right to approve any transfers of the subject property. [This right may be of questionable enforceability, but the question in this case, arising on insurer’s motion to dismiss, is whether the insurer has any coverage responsibility, so the issue of enforceability of the right is not yet ripe.] Insurer listed this Declaration in its listed exceptions in Schedule B, stating it was not insuring against the priority of the Declaration versus the insurer’s security interest.

The policy contained an ALTA 9 endorsement, specifically providing insurance against, among other things, “any instrument referred to in schedule B . . . containing “[a right of] prior approval of a future purchaser or occupant.”  But the language of this endorsement states that it applies to such instruments “unless expressly excepted in Schedule B.”  And as stated, the offending Declaration was listed as an exception to Schedule B.

Nevertheless, Insured argued, the mere listing of a general Declaration in Schedule B does not state an exception to the specific coverage of the endorsement, essentially because, if it did, there would be no point to the endorsement. 

“[I]t surpasses strange to think that [Insured] would pay for an ALTA 9 Endorsement just to cover matters already listed as subordinate to its interest in Schedule B, Part II. . . “

The court concluded that one purpose of the ALTA 9 Endorsement was to provide notice of restrictions on sale and other matters that might reduce the value of the security.  “By permitting insurers to except expressly all loss from an instrument simply by listing that instrument in Schedule B, Part I, [Insurer’s interpretation would strip away this notice benefit from the ALTA 9 Endorsement.” 

The court concludes that the insurer must list specifically a right restricting the sale of the land as an exception to the Endorsement or call out the specific provision so providing when it states the exception for the Declaration in Schedule B.

Comment 1: The opinion contains an extended discussion noting that its view of the policy is consistent with “best practices” recommended by title insurers themselves and with industry custom and practice as described by commentators Joyce Palomar and James Gosdin.

Comment 2: The editor finds appealing the practical argument that the insurer must have felt it was getting *something* for the money it laid out for the endorsement, and, in light of the courts’ tendency to read insurance policies as giving the insured what it expects, rather than what the language expressly provides, the decision is correct.  The court accuses the Iinsurer of attempting “to lead us down a path that would make title insurance a Barmecide feast.”  The editor has no idea what such a feast comprises, but from context he would prefer not to partake. 

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