Daily Development for

Monday, December 1, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

The Reporter for today's Daily Development if Professor Joyce Palomar of the Oklahoma Law School - author of a noted treatise on Title Insurance Law published by Matthew Bender.

TITLE INSURANCE; DUTY TO DEFEND: Insurer's duty to defend does not include any duty to take affirmative action to clear property of encumbrances identified by survey subsequent to issuance of policy.

Eliopoulos v. Nation's Title Ins. of New York, Inc., 912 F.S. 28 (N.D.N.Y. 1996)

Insured acquired a certain tract of land already subdivided into legal lots. Subsequently, a surveyor identified various encumbrances on the property. The encumbrances, if they represented valid claims against insured's title, would have reduced substantially the value of his subdivision by making the existing lots unlawful, thereby requiring a resubudivision which would have led to considerable loss in economic value. The insured tendered this problem to the title company, which took the position that its policy did not include any duty to fund an affirmative action to clear title. The holders of the encumbrances were not bringing any legal action challenging insured's title, and consequently there was no duty to defend. Although the presence of the encumbrances reduced the value of the land, the insured also refused to pay for the reduction in value, taking the position that the policy restricted its liability to claims as to which there has been a "final determination." As there had been no judicial test of the validity of any of the encumbrances, the insurer concluded that it had no liability.

The title policy was a standard form policy insuring "against all loss or damages not exceeding the amount of insurance stated herein and in addition the costs and expenses of defending the title, estate or interest insured, which the insured shall sustain by reason of any defect or defects of title affecting the premises described in Schedule A or affectin gthe interest of the insured therein as herein set forth, or by reason of unmarketability of the title of the insured to or in the premises, or by reason of liens or incumbrances affecting title . . . excepting all loss and damage by reason of . . . the conditions of this policy hereby incorporated."

A part of the conditions included the following:

(a) This company will, at its own cost, defend the insured in all actions or proceedings founded on a claim of title or incumbrances not excepted in this policy.

(b) This company shall have the right and may, at its own cost, maintain or defend any action or proceeding relaing to the title or interest hereby insured, or upon or under any covenant or contract relating thereto which it considers desirable to prevent or reduce loss hereunder."

The insured had a number of other title problems in addition to the encumbrances at issue in this part of the case. It settled a substantial claim for $165,000, and the court remands another claim for determination of whether an exclusion to coverage relating to problems with easements "abutting" the property applies to easements within the boundaries of the property itself.

Thus, the insurer was in no mood to be a "good guy" and participate in the cost of clearing the encumbrances involved in this part of the dispute if the policy did not clearly mandate such action.

The court granted summary judgment to the insurer regarding the claim on the encumbrances. The insurer had no duty to pay for the costs of clearing title, since the policy language quoted above clearly differentiated between suits agains the insured and suits to defend title that it would initiate. As to the latter, the title insurer had discretion whether or not to initiate suit. The court rejected the insured's claim that the duty to initiate a lawsuite arose whenever there was a "cognizable" or "justiciable" encumbrance.

The insured further argued that under the duty to indemnify the insurer had responsibility to pay damages due to the appearance of incumbrances not excepted from the policy, and that such damages included the cost of bringing a lawsuit to set aside such encumbrances. The court, however, pointed to language that stated that "No claim for damages shall arise or be maintainable under this policy except. . . [w]here there has been a final determination adverse to the title . . " and "Wherever the term 'final determination' . . . is used in this policy, it emans the final determination of a court of competent jurisdiction after disposition of all appeals or after the time to appeal has expired." Again, summary judgment for insurer, since there had been no lawsuits as yet, and the responsibility for damages arose only after such lawsuits were resolved adverse to the insured. No duty arose here to pay for those lawsuits.

The court does not discuss whether damages would be payable under the "marketability" covereage, perhaps because of the fact that the real damages sufferred by the insured related to loss of an advantageous zoning situation that may not have been included in such coverage.

Reporter's Comment 1: The holding that there is no duty to defend until a third party has made a claim or counterclaim against the insured title in a legal proceeding is notunusual. Several courts have reached that same conclusion, though other jurisdictions disagree and hold that the insurer has a duty to initiate legal action to clear title defects.

Reporter's Comment 2: But the Eliopoulos court went further and held that the title insurer also had no duty to indemnify for losses resulting from claims of encumbrances, so long as no court had made a "final determination" that the encumbrances existed. If this holding were correct, title insurance would be nothing but litigation insurance. An insured could never recover unless an adverse claimant or the insured filed a lawsuit. The fact that title insurance covers more than just lawsuits being filed against the insured title is clear from policy's insuring clauses. The insuring clauses of the owner's policy in Eliopoulos provided that the policy covered "all loss or damage . . . and in addition the costs and expenses of defending the title, estate or interest insured, which the insured shall sustain by reason of any defect or defects of title . . .or by reason of unmarketability of the title of the insured to or in the premises, or by reason of liens or incumbrances affecting title . . .." Clearly, the title insurer's obligation to assume the costs of defending the title is in addition to its obligation to pay for the insured owner's losses sustained by reason of unmarketability of the title or the existence of an encumbrance or title defect.

Also militating against the court's conclusion in Eliopoulos is the "Determination of Loss" condition of standard owners' title insurance policies, in which the insurer agrees to pay the insured's "actual loss" resulting from covered title defects. "Actual loss" is defined by title insurers in the 1992 version of the standard ALTA owners policy and by courts construing earlier policy versions as "the difference between the value of the insured estate or interest as insured and the value of the insured estate or interest subject to the defect, lien or encumbrance insured against by this policy." Thus, when the property's fair market value is diminished by the existence of encumbrances, the insured owner is entitled to indemnification. Nevertheless, if the Eliopoulos court was correct, if a buyer who offered one million dollars for a property reduced its offer to $900,000 after discovering a mortgage or tax lien in the amount of $100,000 recorded against its title, the insured owner would have no claim so long as the lienholder had not filed either a lawsuit or a counterclaim in a suit initiated and paid for by the insured.

One reason for the Eliopoulos court's erroneous result is that, though the court was interpreting an owners' policy, the court relied on a New York case that construed a lender's policy -- Chrysler First Fin. Servs. Corp. v. Chicago Title Ins. Co., 156 Misc.2d 814, 595 N.Y.S.2d 302, 306 (N.Y.Sup.Ct.1993). The measurement of loss under an owner's policy is quite different than under a lenders policy. See Green v. Evesham, 430 A. 2d 944 (N.J. Super. 1981) ; CMEI Corp. v. First American Title Ins.Corp., 447 So. 2d 427 (Fla. App. 1984). Unfortunately, most judges know too little about title insurance to know that cases construing the measurement of an indemnifiable loss under lenders' policies are not appropriate guides for the measurement of an indemnifiable loss under an owner's policy. Many attorneys also are not aware of the distinction. The reporter personally believes that it is misleading to a court and unethical for an attorney to cite lenders' policy cases defining the measure of "loss" in owners' policy cases without explaining to the court the distinctions, i.e., for a loss under a lender's policy the lender must sustain an out-of-pocket loss, while under owner's policy the market value of the owned property just must be lower with the defect than it would be without.

Reporter's Comment 3: The court in Eliopoulos also quoted the policy's "Limitation of Liability" condition as saying that no claim shall be maintainable unless there has been a final determination by a court adverse to the title. . In standard ALTA owners policies, this condition states that no claim shall be maintainable in the event of litigation until there has been a final determination by a court adverse to the title. This standard condition is intended to keep the insurer from having to pay the insured after a trial court ruling adverse to the title, even though the appellate court might reverse. While the condition protects the title insurer who pursues litigation to defend or establish the title, it does not require a court's final determination before an insured can recover for an unequivocal title defect, lien or encumbrance.

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