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Lisa A. Frank is an associate with the Norcross, Georgia, firm of Thompson O’Brien Kemp & Nasuti, P.C.
For a lawyer, dealing with a title insurance company both before and during litigation can be one of the most frustrating experiences there is. Common complaints involve delay, delay, and delay. When the policyholder makes a claim that falls squarely under the provisions of the policy, both the policyholder and its lawyer expect a quick resolution and payment by the insurance company. After all, that is the point of having a title insurance policy. In some cases, however, instead of paying the claim the insurance company either flat out denies the claim or states that it will investigate. If an investigation ensues, it can seem to drag on interminably. The author has even encountered situations in which the insurance company turns on the claimant and sues for a declaratory judgment, seeking to determine whether it has to pay the claim at all. In such cases not only is the claimant damaged by the underlying title insurance problem, but also the insured incurs fees and expenses to defend the action brought by the company the claimant had paid for protection.
To address these situations, many states have "bad faith" statutes that encourage insurance companies to make payments within a reasonable amount of time. In these states the statutes can be applied to title insurance companies, which can suffer significant consequences. This article analyzes the operation and effect of Georgia's requirements as an example of a "bad faith" jurisdiction, which analysis can be applied to other states with similar legislation.
What Is "Bad Faith" and How Is It Shown?
In general, standard policies are issued by title insurance companies to both the property owner and the lender, insuring against loss or damage incurred by reason of, among other things, unmarketability of title or, in the case of title policies issued to lenders, the unenforceability of the lender's mortgage lien on the property and the priority of this mortgage lien over other encumbrances on the property. The most common type of title defect occurs when prior security interests are not resolved at closing or there is some encumbrance on the title based on either an inadequate or inaccurate property description. Because most transactions involve lenders, this article focuses on claims made under the lender's policy.
Once an owner or lender determines that there might be a defect in the title, the insured will notify the title insurance company, and, under the policy, the title insurance company usually has the option either to pay the claim after a reasonable and timely investigation or to cure the defect by seeking to either quiet any adverse title interests or confirm that its insured has the property interest originally intended by all the parties. This sounds simple and, in reality, it should be. In the claims process, though, sometimes it seems that the title insurance company is working against its insured because it is seeking to avoid paying the claim. That is when a statute for bad faith fees comes in.
Georgia's bad faith fees statute is designed to address this problem and is fairly typical in that it allows the insured to recover attorney's fees in addition to a monetary penalty:
In the event of a loss which is covered by a policy of insurance and the refusal of the insurer to pay the same within 60 days after a demand has been made by the holder of the policy and a finding has been made that such refusal was in bad faith, the insurer shall be liable to pay such holder, in addition to the loss, not more than 50 percent of the liability of the insurer for the loss or $5,000.00, whichever is greater, and all reasonable attorney's fees for the prosecution of the action against the insurer. The action for bad faith shall not be abated by payment after the 60 day period nor shall the testimony or opinion of an expert witness be the sole basis for a summary judgment or directed verdict on the issue of bad faith. The amount of any reasonable attorney's fees shall be determined by the trial jury and shall be included in any judgment which is rendered in the action; provided, however, the attorney's fees shall be fixed on the basis of competent expert evidence as to the reasonable value of the services based on the time spent and legal and factual issues involved in accordance with prevailing fees in the locality where the action is pending; provided, further, the trial court shall have the discretion, if it finds the jury verdict fixing attorney's fees to be greatly excessive or inadequate, to review and amend the portion of the verdict fixing attorney's fees without the necessity of disapproving the entire verdict. The limitations contained in this Code section in reference to the amount of attorney's fees are not controlling as to the fees which may be agreed upon by the plaintiff and the plaintiff's attorney for the services of the attorney in the action against the insurer.
Ga. Code Ann. § 33-4-6(a). In other words, if a written demand is made under a title insurance policy to the title insurance company, the title insurer is required to either pay the claim within 60 days of the date of that demand or have a really good reason for not paying. It is not enough for the insurance company to assert that it needs to thoroughly investigate the claim, because it is held to the terms of the title insurance policy. In most cases these terms give the insurance company the option to either pay the claim or institute required litigation to cure the defect. Atlantic Title Ins. Co. v. Aegis Funding Corp., 651 S.E.2d 507 (Ga. Ct. App. 2007). If the title company does neither, then in Georgia the insured can sue for bad faith fees equal to the greater of 50% of the liability of the insurer for the loss or $5,000, as well as for the insured's attorney's fees. Ga. Code Ann. § 33-4-6(a). Ultimately, however, it is the insured's burden to prove that the refusal to pay the claim was made in bad faith.
Although Georgia sets a specific time limit for responding to a claim, statutes in other states are less specific about what constitutes bad faith. In Illinois, for example, the statute imposes penalties for "vexatious and unreasonable" delay. 215 Ill. Comp. Stat. 5/155. In Missouri the statute authorizes a penalty when the insurer has refused to make payment "for a period of thirty days after due demand" and when "it shall appear from the evidence that the refusal was vexatious and without reasonable cause." Mo. Rev. Stat. § 375.296. "Whether an insurer's conduct is vexatious and unreasonable is a factual inquiry that requires the court to look at the totality of the circumstances, including 'the insurer's attitude, whether the insured was forced to file suit to recover and whether the insured was deprived of the use of its property.'" First Magnus Fin. Corp. v. Dobrowski , 387 F. Supp. 2d 786, 792 (N.D. Ill. 2005) (quoting Knoll Pharm. Co. v. Automobile Ins. Co. of Hartford, 210 F. Supp. 2d 1017, 1028 (N.D. Ill. 2002)).
Some jurisdictions have recognized bad faith claims as a matter of common law. See, e.g., McCullough v. Golden Rule Ins. Co., 789 P.2d 855 (Wyo.1990) (recognizing tort of bad faith denial of insurance claims). The claimant's remedy is significantly limited under the common law, however, as compared with statutory penalties. In some jurisdictions, the claimant is entitled only to payment of the covered amount plus interest. See Machan v. UNUM Life Ins. Co. of Am., 116 P.3d 342, 344-45 (Utah 2005) (collecting cases). Other jurisdictions allow recovery of consequential and special damages. Id. Some permit recovery of punitive damages if the claimant "can demonstrate the insurer's actions were willful or in reckless disregard of the insured's rights." Nichols v. State Farm Mut. Auto. Ins. Co ., 306 S.E.2d 616, 619 (S.C. 1983). This article, however, focuses primarily on the remedies available under bad faith statutes.
Because bad faith statutes are in the nature of a penalty, they are to be strictly construed, and this cuts both ways. In Georgia, the strict construction rule cuts in favor of the insured by setting forth a strict 60-day time for action by the title insurance company. A finding must be made after that time that the refusal was in "bad faith." In some cases, evidence of bad faith can be demonstrated simply by the time component. In Atlantic Title, the insurance company did not even make a tender until more than a year after the bad faith claims were filed, claiming that it was investigating whether the title defects could be cured. Atlantic Title , 651 S.E.2d at 509. Another way to demonstrate bad faith is to show that the insurance company did not take action prescribed under its own policy. In Atlantic Title, provisions in the title policy required the title insurance company to either pay the claim or take some action to cure the defect in title underlying the claim. A defect existed in that, although funds had been provided at closing to satisfy the prior mortgages on the property, these mortgages were not in fact cancelled. Id. at 508. Thus, when the title insurance company discovered the title defect, it should have taken action to cure the defect—such as by bringing a quiet title action against the prior lienholders—or paid the claim. Instead, the insurance company sued its own insured. Id. See also Stewart Title Guar. Co. v. West, 676 A.2d 953, 960 (Md. Ct. Spec. App. 1996) (stating that when an insured notifies an insurer of a title problem, the insurer may do one of three things: (1) pay the insured for the loss up to the amount of the coverage limits of the policy; (2) clear the title defect within a reasonable time; or (3) show that the alleged unmarketability or other title problems do not really exist and thus there is no way in which the insured could sustain any loss).
The Atlantic Title ruling is consistent with a prior Georgia case involving bad faith fees. Fidelity Nat'l Title Ins. Co. v. Matrix Fin. Servs. Corp., 567 S.E.2d 96 (Ga. Ct. App. 2002). In that case, two security deeds in favor of third parties were recorded between the date of the title agent's title search and the recordation date of the insured lender's security deed. Id. at 98. The insured in Fidelity National lost its collateral when one of these allegedly senior lienholders foreclosed on the property covered by the insured security deed. The insurer argued, perhaps with some merit, that its insured actually had a first priority interest in the subject property because the prior security deed on which the superior claim was premised conveyed no interest in the property, having secured a debt that was satisfied by a prior deed in lieu of foreclosure. Id. at 99–100. The court observed that no court had declared the prior transfer invalid, which would require a quiet title action to be brought in the county where the land was situated. Id. The insurer argued that the insured should have filed suit to re-establish the priority of its lien. Id. The court disagreed and determined that Fidelity National was liable to its insured for bad faith fees because it did not comply with the requirements of its own policy:
[The insured] obtained a title insurance policy to guard against a defect in the title. The policy required Fidelity to pay—or otherwise cure the title problem—in the event of such defect. Here, a defect clearly existed, triggering Fidelity's obligations under the policy. . . . Fidelity presented no valid grounds to contest [the insured's] insurance claim.
Id. at 102. Fidelity National unequivocally established that when a title defect clearly exists (the property covered by the insured mortgage had become the subject of a foreclosure action by another creditor asserting priority), there are no longer any valid grounds for the title insurer to fail to pay the claim. Id. at 99-100.
In following Fidelity National , the Atlantic Title analysis assumes that the alleged title defect falls within the coverage of the insurance policy. As the Montana Supreme Court has noted, the insurance company has no duty to defend if the asserted claim is not covered by the policy. "[A]n insurer may step out of a suit once it clearly and unequivocally demonstrates that the plaintiff's claim against the insured no longer falls within the policy's coverage." Insured Titles, Inc. v. McDonald, 911 P.2d 209, 212 (Mont. 1996).
Bad Faith May Be Properly Determined on Summary Judgment
Georgia's bad faith statute makes it clear that an insurer cannot cure its default by attempting to make payment after the 60-day period has ended. Under Ga. Code Ann. § 33-4-6: "The action for bad faith shall not be abated by payment after the 60 day period nor shall the testimony or opinion of an expert be the sole basis for a summary judgment or directed verdict on the issue of bad faith ." (Emphasis added.) In other words, even if the title insurance company eventually sees the error of its ways, its bad faith in not paying the claim in the first place does not disappear simply because it pays the claim late, sometimes after protracted litigation. In discovery, the fact that a party finally serves discovery responses or appears for a deposition does not prevent a court from finding that party in contempt for failing to do what should have been done in the first place. Section 33-4-6 takes a similar approach.
Here again, the statute cuts both ways because the insurance company is entitled to summary judgment or a directed verdict if it can show reasonable grounds for contesting the claim. See Florida Int'l Indem. Co. v. Osgood, 503 S.E.2d 371 (Ga. Ct. App. 1998) (casualty insurer cited material misrepresentations in the insurance application). In the Atlantic Title case, the court rejected the insurance company's claim that there were reasonable grounds to refuse payment. Instead, the court upheld the trial court's conclusion that the insurer was relying on "fanciful allegations of factual conflict to delay or avoid legitimate claims payment." Atlantic Title , 651 S.E.2d at 510 (quoting Cincinnati Ins. Co. v. Kastner , 504 S.E.2d 496, 499 (Ga. Ct. App. 1998)).
Similarly, in an appropriate case the insurer may be able to resolve the case on a motion to dismiss. In First Magnus Fin. Corp. , for example, a federal court found that the specific factual allegations of the complaint negated the plaintiff's claim of unreasonable delay. 387 F. Supp. 2d at 793.
How Much in Fees Can the Claimant Receive?
Bad faith statutes can be a bit confusing with respect to the penalty an insurer incurs. Under the Georgia statute, for example, "the insurer shall be liable to pay such holder, in addition to the loss, not more than 50 percent of the liability of the insurer for the loss or $5,000.00, whichever is greater, and all reasonable attorney's fees for the prosecution of the action against the insurer." Ga. Code Ann. § 33-4-6(a). It is the "not more than 50%" language of the Georgia statute that can seem confusing. Basically, if the loss incurred is $10,000 or less, the insured is limited to bad faith fees of $5,000. For a loss that exceeds $10,000, however, the fees are simply equal to 50% of the loss. For example, with a $50,000 loss, a claimant is entitled to $25,000 in bad faith damages, as well as reasonable attorney's fees.
The Illinois statute is similar. It provides that a court may award attorney's fees
plus an amount not to exceed any one of the following amounts: (a) 60% of the amount which the court or jury finds such party is entitled to recover against the company, exclusive of all costs; (b) $60,000; (c) the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any, which the company offered to pay in settlement of the claim prior to the action.
215 Ill. Comp. Stat. 5/155.
In Atlantic Title, the title insurance company argued that the penalty for bad faith was to be decided by a jury. Nothing in the Georgia statute, however, requires a jury's decision on the matter. To the contrary, although the modifier "not more than" is a bit confusing, the statute explicitly sets forth the calculation for bad faith penalties: "[T]he clear language of the statute provided for a payment of either 50 percent of the amount of the loss . . . or $5,000, whichever was greater." Byrd v. Regal Ins. Co., 621 S.E.2d 758, 760 (Ga. Ct. App. 2005) (emphasis added). The court, therefore, found that the title insurance company's interpretation was based on "an inaccurate parsing of the statute" in the hopes of reducing its exposure. Atlantic Title , 651 S.E.2d at 510.
A commentator had previously concluded, based on a review of the legislative history, that insurers found to have engaged in bad faith practices "will be liable to the policy holder for fifty percent of the insurer's liability for the loss, or $5,000, whichever is greater." Kathryn H. Wade, Note, Actions Against Insurance Companies: Change Provisions Relating to an Insurer's Liability for Bad Faith Refusal to Pay for Loss Covered by Insurance; Provide for Insurer's Duties with Respect to Settlement of Motor Vehicle Liability Policy Claims; Provide for a Private Cause of Action for Unfair Claims Settlement Practices in Certain Circumstances , 18 Ga. St. U. L. Rev. 167, 170 (2001). It seems that the phrase "not more than" is really an unnecessary modifier, causing undue litigation on the interpretation of a statute that really should leave no room for interpretation. Fortunately, the trial court and the court of appeals agreed, and the amount of fees allowed was more simply interpreted as set forth in Byrd.
What Does All This Mean?
In these changing economic times when more and more lenders are coming under the scrutiny of government regulatory agencies, and unfortunately more and more borrowers are unable to meet the obligations in their mortgages, it is important for lenders everywhere to obtain and maintain valid liens and security interests with proper priority in the property that serves as collateral for their loans. Lenders rely on their title insurance companies to indemnify them when title defects are discovered. Without such protection, a title insurance policy is not worth the paper it is printed on. Some insurance companies, however, appear to be taking longer to pay claims. The longer they delay, the longer they have use of the claimant's money.
Bad faith statutes discourage these delaying tactics. Under the Georgia statute, for example, unless the title insurance company can show (1) that it had "reasonable grounds to contest the claim," such as the insured lender's prior knowledge of the alleged title defect and acceptance of it before the loan closing, or a failure by the insured to comply with notification or other requirements under the policy, or (2) that liability is too close to call (which is really part and parcel of the same thing: if liability is too close to call, then the title insurance company probably had reasonable grounds to believe the claim is invalid), the title insurance company cannot justify delay in either paying the claim or taking reasonable steps to cure the defect, as set forth in the policy. Just as the insured is bound by the policy, so should the insurer be required to comply with its provisions.
Unfortunately, or fortunately, depending on which side of the fence one is on, under Georgia law parties are allowed to contract for anything if the contract's provisions are not illegal or do not violate Georgia public policy. Under that principle, insurance companies can rewrite their policies specifically to extend the time for resolving the claim past the 60 days set forth in the statute. The issue then becomes whether this provision would violate Georgia's public policy.
In the end, the issue may come down to the vigilance of owners and lenders. If insurance companies can successfully write policies that avoid bad faith statutes, lenders will have to become more vigilant in ensuring themselves clear, unencumbered, and marketable title on any property they intend to accept as security for money lent.
There may be a trend toward fewer title insurance claims and more malpractice claims. Lawyers will have to be hypervigilant at closings and may no longer be able to rely on the title insurance company to cover any defect that the closing lawyer could have or should have reasonably discovered.
When the economy goes sour, as it has in the recent past, title insurance companies may be tempted to delay the resolution of claims. Doing so, however, could be costly under bad faith claims statutes of many states. If a claimant can show that the insurer improperly delayed its handling of a claim, the insurer faces stiff penalties, in addition to paying the claimant's attorney's fees. In providing these penalties, bad faith statutes offer significant incentives for title insurance companies to work for their insureds, rather than against them.Return To Issue Index