by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

TITLE INSURANCE; DAMAGES: When a cloud on title is discovered, the measure of an insured's damages under a title insurance policy is either (1) the cost of removing the cloud of title, or, if the encumbrance cannot be removed, (2) the difference in the fair market value with and without the encumbrance on the date the encumbrance is discovered.

Swanson v. Safeco Title Insurance Co., 925 P.2d 1354 (Ariz. Ct. App. 1995).

Plaintiffs bought property subject to a seller's short term purchase money loan. Defendant insured the title for that transaction. Later Plaintiffs attempted to refinance the purchase money loan with an institutional lender. Although apparently the lender's agent recommended approval of the loan from a financial point of view, the refinancing loan failed because of a cloud on title identified by a new title company brought in by the new lender. This cloud on title was an unreleased lien from an earlier deed of trust given by a prior owner to the property. The note secured by the deed of trust had been released, but the trustee had never released the lien through a reconveyance of record. Before Plaintiffs could address the issue of clearing title and getting the refinancing loan, the existing purchase money lender foreclosed and acquired the property at foreclosure sale.

Plaintiffs sued their original title insurer, which had issued a policy that did not disclose the unreleased lien. The trial court awarded plaintiffs damages in the amount their "equity" in the property - the difference between the fair market value of the property, and the total amount of the encumbrances on the property. On appeal, the Arizona Supreme Court reversed, and adopted California's definition of an insured's "actual loss" under a title insurance policy, as set forth in Overholtzer v. Northern Counties Title Ins. Co., 253 P.2d 116, 122 (Cal. Ct. App. 1953). Damages are either: (1) the cost of removing the cloud of title, or, if the encumbrance cannot be removed, (2) the difference in the fair market value with and without the encumbrance on the date the encumbrance is discovered

The court noted in particular that the failure of an insured party to obtain refinancing for the property plays no role in the correct calculation of damages.

Comment 1: Perhaps other dirt lawyers, like the editor, wonder how the facts described in this case came to pass. How could it be that the existing mortgage could pass through foreclosure while the mortgagors were dithering about an unreleased lien that clouded their title? Surely evidence could have been produced that would either have satisfied the mortgagees or a court that would have justified delaying the sale while the refinancing mortgage could be closed. The title company, of course, would have arranged some compromise, but it claimed here that it had not received notice of the problem (the plaintiff's lawyer claimed that he sent such notice.) There must have been a history of delinquencies or other "bad blood" between plaintiffs and their original mortgagees for this bad thing to have happened.

Comment 2: Although the court purports to clarify all relevant damages issues, one wonders whether it really has done so. The value of property with a significant unresolved lien, of course, is quite low. But when the lien turns out to be meaningless, the value returns to market. The court's emphasis on the "difference value" in this case seems misplaced, because it would appear that the cost of removing the old lien - basically the cost of tracking down the trustee - is the only real issue.

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