Insured vs. Insurer: Who Is Insured, What Is Insured, Exclusions & Exceptions
Who Is Insured?
With respect to who is insured by title insurance policies, the decisions that have been handed down in the last year or so reaffirm that, consistent with basic contract law principles, the parties who benefit from such policies tend to be limited to the particular parties who have purchased the policies, and not parties associated with, but who are distinct from, the purchasers of the policies. In a decision out of U.S. District Court for the District of Delaware, Rosemary Angelo was the insured under an owner’s policy. She conveyed the subject property to herself and her husband, Ronald Angelo, as trustees of a trust. When disputes arose with developers, Ronald, as an individual, sued the insurer. U.S. District Court Judge Richard G. Andrews held that Ronald was not insured under the relevant owner’s policy. Angelo v. NVR, Inc., Civil Action No. 18-523-RGA, 2020 WL 1443214 (D. Del. 2020).
My survey disclosed that a couple of decisions have been added to the longstanding line of authorities for the proposition that borrowers are not third-party beneficiaries of loan policies. See Dillon v. Bayview Loan Servicing, Case No. 2:18-cv-01582-RFB-FJY, 2019 WL 4781847 (D. Nevada 2019); Fidelity National Title Insurance v. Vontell, Docket No. CV-17 6024608, 2019 WL 4513087 (Conn. Super. Ct. 2019). A leading case on this issue is Kenny v. Safeco Title Insurance Co., 113 Cal. App. 3d 557 (1980).
According to the U.S. Bankruptcy Court for the District of New Mexico, an LLC member is not insured under owner policy issued to an LLC. See Mazel v. Las Cruces Abstract and Title Co., Case No. 14-13729 ta7, Adv. No. 18-01057-t, 2020 WL 1671550 (Bankr. D. N. M. 2020). In footnote 8 of the Mazel decision, the court states that “[s]ome of the (Bankruptcy) Trustee’s claims against Fidelity remind the Court of onlookers who, seeing a car hit a city bus, climb onto the bus after the accident and start complaining of neck pains”.
What Property Is Insured?
Likewise, on the question of what land is covered by title insurance policies, courts have generally continued to limit coverage to the specific and precise land expressly described in the policy. In decisions from the West Virginia Supreme Court of Appeals and the U.S. District Court for the District of Pennsylvania, the proposition that land not described in an owner’s policy is not insured was reaffirmed. See Tritapoe v. Old Republic National Title Insurance Co., Case No. 19-0100, 2020 WL 1487813 (W. Va. 2020) (unpublished); 631 North Broad Street, LP v. Commonwealth Land Title Insurance Co., Civil Action No. 17-02805, 2018 WL 4051798 (D. Pa. 2018) aff’d by 778 Fed. Appx. 164 (3d Cir. 2019).
In another case, out of Nevada, a buyer purchasing lakefront property did not first obtain a survey. The relevant subdivision plat showed an 18-foot gap between the lots that the policy holder bought and a lake. In the resulting litigation, the Supreme Court of Nevada held for the insurer; the Court concluded that the buyer received title to property described in title insurance contract and, therefore, the discrepancy between the boundaries of the lots and the lake did not comprise an event triggering coverage: “a title insurance policy does not insure against losses due to a seller’s misrepresentations or a buyer’s failed expectations”. Schiller v. Fidelity National Title Insurance Co., 444 P. 3d 459, 2019 Nev. Unpub. LEXIS 805, at *8 (Nev. 2019).
What Constitutes a Covered Risk/Title Defect?
In contrast, a recent decision from the Court of Appeals of Georgia held that a recorded notice of contamination remediation, as well as concomitant easements, a right of first refusal, and prohibition on use of ground water, was a covered defect in title. Due to typing errors, these encumbrances were not listed in the relevant loan title policy. After the issuance of the policy, the lender foreclosed on the property, and sued the insurer, who defended on basis that the notice concerned use of the property, not title. The state appellate court held that a jury could determine that the easements and use restrictions were, in fact, within the coverage of the title policy, and also could award a verdict of $4.2 million against the insurer for the damage caused by the notice, affirming the same. See Old Republic National Title Insurance Co. v. RM Kids, LLC, Case No. A19A0971, 2019 WL5257548 (Ga. App. 2019).
In terms of covered risks, some recent decisions sided with the insurers. In a decision out of New Jersey, a utility connection fee was held not to be a lien covered by an owner’s policy. See Concepts TV Productions, LLC v. Sharpe, Case No. A-4431-17T3, 2019 WL 4020197 (N. J. Super. Ct. App. Div. 2019) (Per Curiam). See also on this issue, Spencer v. Anderson, 669 SW 2d 862 (Tex. App. 1984). Likewise, a dispute between an owner-insured and a neighbor over the use and maintenance of conveyor bridges was not covered, because, as the U.S. District Court for the Northern District of Ohio held, title was not being challenged, but rather the use of, and right to repair, the conveyer bridges was at issue. See Pandora Distribution, LLC v. Ottawa OH, LLC, Case No. 3:12-cv-2858, 2019 WL 2924995 (N. D. Ohio 2019).
Exclusions
Exclusions were also a significant topic of judicial treatment in my survey. In a pair of decisions issued by the U.S. District Court for the District of Nevada, post-policy homeowners’ association liens were held to be excluded by the paragraph 3(d) exclusion in ALTA form loan policy. See Wells Fargo Bank, N.A. v. Fidelity National Title Insurance Co., Case No. 3:19-cv-00241-MMD-WGC, 2020 WL 886940 (D. Nev. 2019); Deutsche Bank National Trust Co. v. Fidelity National Title Insurance Co., Case No. 3:19-cv-00468-MMD-WGC, 2020 WL 1638808 (D. Nev. 2019). Despite the exclusion contained in paragraph 3(a) of the ALTA form policy, the U.S. District Court for the Northern District of Illinois held an insurer liable for a tax reimbursement amount that a lender paid after foreclosure, even though the lender was aware of the relevant tax reimbursement agreement before it made the loan. See Bank of America, N. A. v. Chicago Title Insurance Co., Case No. 17-cv-00407, 2020 WL 1904069 (N. D. Ill. 2020). Consistent with the substance of the paragraph 3(a) exclusion, but not citing or expressly relying on it, the California Court of Appeal for the Fourth Appellate District held that an insured’s encroachments, constructed after the policy date, and the insured’s alleged tortious conduct toward neighbors were not covered by an owner’s policy. See Mortazavi v. Federal Insurance Co., Case No. D072923, 2019 WL 2609779 (Cal. App.).
In Security Title Guarantee Corporation of Baltimore v. 915 Decatur St. NW, LLC, a D.C. federal judge held that an owner could make a viable claim after the owner had conveyed title. The opinion discusses, at length, a Fourth Circuit decision and a decision from the Arizona Court of Appeals, which address the question of whether a claim under a title insurance policy may be brought after the subject property has been conveyed by the insured. See Chicago Title Insurance Co. v. 100 Investment Ltd. Partnership, 355 F. 3d 759 (4th Cir. 2004); and Centennial Development Group, LLC v. Lawyers Title Insurance Corp., 310 P. 3d 23 (Ariz. App. 2013). While the U.S. District Court for D.C. concluded that such a claim could be brought post-conveyance, it ultimately held that the insurer did not have to defend the insured against fraud allegations, pursuant to the paragraph 3(a) exclusion. The court otherwise reserved for final disposition issues concerning the insurer’s duty to indemnify.
Likewise, in a decision out of the U.S. District Court for the Northern District of Texas, mechanic lien claims that arose when a construction lender ceased funding a construction loan were excluded under the exclusions contained in paragraphs 3(a) and 3(d) of the ALTA form policy. See Hall CA-NV, LLC v. Old Republic National Title Insurance Co., Civil Action No. 3:18-CV-00380-X, 2020 WL 869722 (N. D. Tex. 2020). Also following the paragraph 3(a) exclusion, the U.S. Bankruptcy Court for the District of New Jersey ruled that an insurer could deny the duty to defend, when an insured purchaser bought the subject property, while being aware of a potential lease option and an option to purchase claims held by a former occupant of the property, where the relevant title policy contained an exception for unrecorded leases. In Re Pazzo Pazzo, Inc., Case No. 18-13516-JKS, Case No. 18-13914-JKS, Adversary No. 18-0216-JKS, 2019 WL 6699694 (Bankr. D. N. J. 2018). In a different decision out of the federal courts in New Jersey, the U.S. District Court held that an owner’s policy did not protect an insured, under the paragraph 3(d) exclusion, when the insured made fraudulent statements to a second insurer upon resale. Westcor Land Title Insurance Co. v. Alicea, Case No. 19-8474 (SDW) (LDW), 2019 WL 6724311 (D.N.J. 2019). Moreover, the court also independently ruled that the policy had terminated upon resale, by the limited warranty deed executed by the insured.
Exceptions
Through my survey, I was able to identify ten decisions on exceptions. In the first decision, handed down by the State of Washington Court of Appeals, if the buyer had secured a pre-closing survey, that survey would have disclosed to him and the title insurer that the seller has abandoned an access easement listed in the deed and title policy. See Haley v. Hume, 448 P. 3d 803 (Wash. App. 2019). Consequently, the appellate court concluded that the survey exception applied. Moreover, the Haley court held that the insurer did not need to rely on extrinsic evidence (i.e., outside the “eight corners” rule) for the exception to apply.
Title commitment exceptions have consequences! For example, in one case, out of Illinois, the title commitment gave buyer notice of a pending road expansion. See Cosentino v. Kunkle, No. 2-18-1001, 2019 WL 4318750 (Ill. App. 2019). In a second case from Texas, the commitment disclosed residential use restrictions. See Sides v. Saliga, No. 03-17-00732-CV, 2019 WL 2529551 (Tex. App. 2019). In both cases, the buyer did not read the closing papers. In the first case, the buyer’s action against the seller failed because the buyers had actual notice of the relevant road expansion project. The buyers in the second case had lost in an action brought by their neighbors, who were suing to enforce the use restrictions. There, the court held that the buyers had both actual and constructive notice of the restrictions. The “I did not read the closing documents” defense did neither plaintiff any good in these cases.
In three opinions, discussed above, trial-level and appellate courts found that insurers had no liability under the affirmative terms of the title insurance policies at issue. However, in each, the courts went on to hold that, even if there had been coverage for the matters at issue, exceptions would have preempted coverage. See Tritapoe v. Old Republic National Title Insurance Co., Appeal No. 19-0100, 2020 WL 1487813 (W. Va. 2019) (survey and parties in possession); Angelo v. NVR, Inc., Civil Action No. 18-523, 2020 WL 1443214 (D. Del. 2019) (Master and Maintenance Declarations listed in Schedule B); 631 North Broad Street, LP v. Commonwealth Land Title Insurance Co., Appeal No. 18-3094, 778 Fed. Appx. 164, 2019 WL 3383878 (3d Cir. 2019) (survey exception).
In a case out of Arizona, Diversified, a lender, knew it was extending credit for a third-priority lien. Prior liens were referenced in Diversified’s deed of trust. However, the insurer failed to list the prior liens in the loan policy. Diversified, then, sold the loan to BAPCO, who made a claim. The insurer denied the claim. BAPCO sued and the insurer counterclaimed to reform the policy. The Arizona Court of Appeals held for the insurer, ruling that, regardless of BAPCO’s assignee status, the deed of trust itself reflected the lien position. See BAPCO LLC v. Fidelity National Title Insurance Co., Appeal No. CA-CV 18-0345, 2019 WL 5576863 (Az. App. 2019).
Trespass does not equal title policy claim. In state court litigation in Michigan, insureds bought a house in 1985. Their owners’ policy made exception for two easements held by the City of Ann Arbor, as well as unrecorded easements. In 2013, the insureds noticed damage to some walls and the floor of their home. The City of Ann Arbor fixed one of its pipes on their lot and the problems ceased. The insureds hired an engineer, who believed that the pipes were laid outside of the bounds of the city’s easements. The insureds sued their insurer, claiming damages for the city’s trespass. In a per curiam decision, the Michigan Court of Appeals held that there was no evidence that the pipes were outside the limits of the easements, other than the engineer’s opinion; even if they were, given the vintage of the pipes, the city likely acquired a prescriptive easement; and, even if the city had no prescriptive easement, it was trespassing, and the title policy does not insure against trespass. See Harris v. Fidelity National Title Insurance Co., Appeal No. 346156, 2020 WL 969208 (Mich. App. 2020). Also on the principle that title insurance policies do not insure against trespass, see Southwest Title Insurance Co. v. Woods, 449 SW 2d 773 (Tex. 1970).
Munden v. Stewart Title Guaranty Co. may only be a federal district court opinion. However, it has an excellent discourse on the meaning of “public records” in title insurance policies. The Mundens bought a 768-acre tract in Idaho in 2012. Stewart was the insurer. In 2014, the Mundens bought 660 acres to the south of the first tract. Chicago Title issued the policy on that tract. A few years later, Bannock County changed its ordinances to allow the Public Works Director to close the only road to the 768 acres from December to April. The Mundens sued the county and filed claims with both insurers. The county filed counterclaims, claiming that the road had been a public road since 1963, that it has a width of 50 feet, and that the Mundens conduct had damaged the road. This suit between the Mundens and the county was still pending, when the Mundens sued the insurers in federal court. Judge Nye notes that the Mundens’ federal case against Stewart and Chicago Title does not affect the state court suit. First, he noted that the tort claim was not covered by the title policies.
Next, Judge Nye engages in a scholarly discussion of “public records” as defined by the owner’s policies. He reviewed two circuit court decisions on the question. See Hon Realty Corp. v. First American Title Insurance Co., 291 Fed. Appx. 951 (11th Cir. 2008) & Haw River Land & Timber Co. v Lawyers Title Insurance Corp., 152 F. 3d 275 (4th Cir. 1998). In this case, the road was created off-record, by operation of state statute and county ordinances that are not “public records” as defined in the title policy. Therefore, while the Mundens were on constructive notice of the county’s easement when they purchased the relevant tracts, those easements were “not of public record” as described in General Exception 3 in the Mundens’ owners’ policy. Accordingly, Judge Nye held for the insurers and dismissed the federal court suit. See Munden v. Stewart Title Guaranty Co., 443 F. Supp. 3d 1170 (D. Idaho 2020).
In the final case on exceptions, Mattlage, the plaintiff, tried selling his property while he had an ongoing dispute with DSF, a solar panel company. DSF had recorded a security agreement when Mattlage purchased the panels on credit. The title company listed DSF’s filing under Schedule C of two commitments, for two potential sales. Neither attempted sale closed. Mattlage sued DSF to remove the cloud on title and for deceptive trade practice claims. The U.S. District Court for the Western District of Texas held that the fixture filing was not a cloud on title. Listing this security interest merely reflected a risk assessment decision made by the title company “. . . in the context of operating (its) business.” The title coverage claims were dismissed, and Mattlage was permitted to proceed with his deceptive trade practices claim. See Mattlage v. Dividend Solar Finance, LLC, Case No. 6:19-CV-00409-ADA, 2019 WL 6464006 (W. D. Tex. 2019).