Daily Development for Tuesday, October 28, 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; DUTY TO DEFEND; SETTLEMENT RIGHTS: Although insurer may avoid duty to defend by tendering insured's actual damages to insured, even if they are less than the total amount of insurance, policy language is vague as to how that amount is to be determined.

Fleishour v. Stewart Title Guaranty Co., 2009 Westlaw 2151154 (E.D. Mo. 7/16/09)

This case deals with the same policy condition that was the basic issue in First American Title Insurance Co. v. Grafton Partners, LLC., 2009 Westlaw 792263 (3/20/09), the DD for 8/25/09. The Insurers argued for different constructions of the policy condition in each case, however, and in neither case did the Insurer interpret the condition as the ALTA Forms Committee had interpreted the language in the 1992 ALTA policy comparison grid published when the condition was adopted.

Insured obtained a policy of title insurance in the amount of $121,500. Insured tendered to title Insurer a dispute involving a claim of adverse possession. Insurer determined that the injury to Insured was about $1000, and tendered that amount to Insured. Insured claimed that it was entitled to a defense unless insurer tendered the whole policy amount. In addition, it disagreed that the injury it had suffered was only $1000. The Grafton case, more or less, had concluded that under the policy condition asserted by the insurer, the insurer was required to tender the entire policy amount to avoid a duty to defend.

The policy language construed in Grafton consisted only of the following:

"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 in Grafton did note that the Insurer did not mention Part (b) of that same policy condition (probably for reasons that this Report will discuss below). The Insurer court in Fleishour, however, did argue that Part (b) gives the Insurer the right to pay an amount the Insurer concludes is the amount of the Insured's loss, albeit less than the policy amount, and still walk away from the duty to defend.  Here is the language of part (b), ignored in Grafton but stressed by the insurer in Fleishour.

“included in the list of options]

"(b) to Pay or Otherwise Settle with Parties Other than the Insured or With the Insured Claimant.

. . . (ii) to pay or otherwise settle with the Insured Claimant the loss or damage provided for under the policy, together with any costs, attorneys' fees, and expenses incurred by the Insured Claimant that were authorized by [Defendant] up to the time of payment and that [Insurer] is obligated to pay."

Section 8 of the policy provided that the Insured's liability under the policy "'shall not exceed the lesser of "the Amount of Insurance; or (ii) the difference between the value of the Title as insured and the valued of the Title subject to the risk insured against by this policy." The court concluded that, as a consequence, Insurer was entitled to avoid the duty to defend by settling  with Insured solely for the difference between the value of the property as insured and the value without the claimed adversely possessed property, whether Insured agreed or not. 

The court, however, indicated that the policy had no provision for determining how that loss should be established, and disputed that the Insurer was entitled to just pick a number out of the air - here $1000 - and satisfy its obligation to defend. The court therefore denied judgment on the pleadings for the Insured.

The concern in Grafton was the Insurer's new interpretation of Part (a) of this policy condition to permit the Insurer to treat the amount the Insurer' unilaterally estimated to be the amount of the Insured's loss as "the Amount of Insurance," pay that, and walk away from the duty to defend. In Fleishour, the concern was the Insurers' new interpretation of Part (b) to permit the Insurer similarly to estimate, unilaterally, an amount of the Insured's loss less than the policy amount, pay that, and walk away from the duty to defend.

Reporter’s Comment 1:  Part (b) giving the Insurer the option to "Pay or Otherwise Settle . . . With the Insured Claimant" was first added in the 1992 ALTA policy forms. Under pre-1992 ALTA forms, the Insurer was deemed to have the option to pay the full policy amount and walk away from further obligations, or defend or act to establish the title and then pay whatever amount of loss the Insurer was not able to avoid (other options existed that are not relevant to this discussion). The helpful Chart that ALTA published comparing the 1992 policies to the 1970 policies and the CLEs presented by title insurers to teach about the 1992 policy provisions said regarding this condition:

"CHANGE SHOULD BE NOTED. This [condition] . . . has been clarified to specifically authorize partial settlement with third parties in the name of the insured and with the insured . . .."

Reporter’s Comment 2:  No one was surprised by or objected to the concept that the Insurer and Insured might agree to a settlement of the Insured's claim that was less than the policy amount when the Insured admittedly suffered only a partial loss. As with most settlements, the idea was simply that when the Insurer and Insured agree to a settlement and the Insurer "pays or otherwise" satisfies the settlement agreement, the claim is done, though the policy remains in force for future claims up to the reduced Amount of Insurance. The condition does not say Pay or Settle, but "Pay or Otherwise Settle" – the concept being that the settlement could be by payment of money "or otherwise settling" the Insured's claims with some agreed to action, such as the Insurer buying the unexcepted prior interest, etc.

Black's Law Dictionary also defines "settlement" as "An agreement ending a dispute . . .."

But in Fleishour and Grafton, the Insurers seem to now be arguing that this condition authorizes just payment of the Insurer's estimate of the Insured's partial loss without any settlement with or agreement by the Insured.

Editor’s Comment: The editor doesn’t have the benefit of Professor Palomar’s historic perspective.  Looking at the issue without that benefit, the editor sees the critical question to be whether the language in part (b)   “to Pay or Otherwise Settle [with Insured]” means that the Insurer can unilaterally elect to pay or whether such payment must be part of a settlement to which the Insured must agree.  With the benefit of Professor Palomar’s instruction, the editor sees that the most logical construction is that the right “to Pay” must be part of a “Settlement.”  Even if this wasn’t clearly the best construction, it is, of course a possible one, and consequently likely to be the construction adopted by the court after applying the rule preferring constructions in insurance policies in favor of the insured. 

The Reporter for this item was Joyce Palomar of the University of Oklahoma Law School, author of Palomar on Title Insurance.  The editor started and finished the item, but Joyce provided the substance. 

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