TOP 10 ISSUES IN MAKING OR DEFENDING TITLE INSURANCE CLAIMS

November 9, 2012

Prepared by:

Bradley N. Beisel BEISEL & DUNLEVY, P.A. Minneapolis, MN

John M. Koneck FREDRIKSON & BYRON, P.A. Minneapolis, MN

John F. Nielsen BEISEL & DUNLEVY, P.A. Minneapolis, MN

TABLE OF CONTENTS Page I.

WHEN MUST NOTICE OF A CLAIM BE GIVEN?........................................................ 1

II.

ALL FOR ONE AND ONE FOR ALL: IS THE TITLE COMPANY REQUIRED TO DEFEND ALL COUNTS IF ONLY SOME ARE COVERED?............................................................................................................................. 2

III.

WHEN IS THE LOSS VALUED? ........................................................................................ 5

IV.

AGENCY LIABILITY: WHEN IS THE UNDERWRITER LIABLE FOR THE ACTS OF THE AGENT, SOLVENCY OF TITLE INSURANCE COMPANY AND IMPACT ON COVERAGE. ................................................................. 6

V.

SCOPE OF THE DUTY TO DEFEND. ............................................................................. 11

VI.

CHOICE OF COUNSEL AND RESERVATIONS OF RIGHTS: WHAT SHOULD THE TENDERING ATTORNEY DO WHEN CLAIM ACCEPTED UNDER A RESERVATION OF RIGHTS? ...................................................................... 12

VII.

THE AVAILABILITY OF CONSEQUENTIAL DAMAGES. ...................................... 16

VIII. CONTINUATION OF COVERAGE AFTER FORECLOSURE .................................. 17 IX.

MATTERS CREATED, SUFFERED, ASSUMED OR AGREED TO. ......................... 18

X.

TERMINATION OF OWNERS COVERAGE UPON TRANSFER............................. 20

Top 10 Issues in Making or Defending Title Insurance Claims

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INTRODUCTION The downturn hit the title insurance industry as hard as it hit real estate markets generally. According to Fitch’s “Title Insurance U.S. Special Report,” while title insurers’ profitability improved in 2010 compared to 2009, operating performance remains considerably weaker than the strong profits reported from 2004 to 2007. Phip Gusman, Fitch: Title Insurers’ Profitability Up, But Likely Not Sustainable (March 25, 2011), http://www.propertycasualty360.com /2011/03/25/fitch-title-insurers-profitability-up-but-likely-n. According to some commentators, the downturn has made it more difficult for insureds and title insurers to resolve title policy disputes. Rob Chrisman, Perspective on Rejected Title Insurance Claims; Even More Negative News for RMIC; Commercial Delinquency Rates (August 3, 2011), http://www.mortgagenewsdaily.com/ channels/pipelinepress/08032011-title-insurance-claims.aspx. The materials below address the authors’ view of the top ten legal issues arising in disputes between title insurers and their insureds regarding claims made under title insurance policies. 1 I.

WHEN MUST NOTICE OF A CLAIM BE GIVEN? A.

Policy Provisions. Section 3 of both the Conditions in the ALTA 1992 Owner’s Policy and ALTA 2006 Owner’s Policy states that the insured must notify the title insurance company “promptly in writing” (i) in the case of any litigation covered by the policy, (ii) in case knowledge shall come to an insured hereunder of any claim of title or interest which is adverse to the insured title and which might cause loss or damage for which the title insurance company would be liable, or (iii) if the insured title is “rejected as unmarketable.” Using slightly different language, Section 3 of both the ALTA 1992 Owner’s Policy and the ALTA 2006 Owner’s Policy also provide that, if an owner fails to promptly provide written notice as provided above, and the title insurance company is prejudiced by the insured’s failure, the title insurance company’s liability is reduced “to the extent of the prejudice.” In addition, Section 5 of the Conditions in the ALTA 1992 Owner’s Policy requires that the insured furnish to the company a signed and sworn to proof of loss or damage within 90 days after the insured ascertains the facts giving rise to the loss or damage if the insured does not provide the required proof of loss or damage and the company is prejudiced by such failure, the title insurance company’s obligations under the policy shall terminate. Section 4 of the Conditions in the ALTA 2006 Owner’s Policy provides that, if the title insurance company is unable to determine the amount of loss or damage, the title insurance company may, at its option, require that the insured furnish a signed proof of loss. The ALTA 2006 Owner’s Policy does not contain the same provision that the

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The issue whether this difficulty is the result of the downturn creating more circumstances in which claims arise, insureds more aggressively making claims, or title insurers more aggressively denying them, while interesting and worthy of discussion, is beyond the scope of these materials. Top 10 Issues in Making or Defending Title Insurance Claims

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ALTA 1992 Owner’s Policy contained regarding termination of insurance in the event that the insured fails to provide the proof of loss. B.

Notice Disputes. The purpose of these notice requirements is to permit the title insurer to make a prompt and thorough investigation of the facts and circumstances affecting the insurer’s liability. See, e.g., Joyce Palomar, TITLE INSURANCE LAW, Ch. 8, § 8:5. Regarding notice of a claim, because the insured’s failure to give notice affects the insured’s claim only if the title insurance of the title insurer is prejudiced, the issue most commonly litigated where an insured has failed to provide prompt notice of a claim, is whether the title insurer has been prejudiced. For example, courts have held that the insured’s failure to provide notice of a claim has no impact on coverage if the title insurer’s defense would have been unsuccessful if the appropriate notice had been given. See, e.g., Moe v. Transamerica Title Ins. Co., 21 Cal. App. 3d 289, 302, 98 Cal. Rptr. 547 (1st Dist. 1971). Examples of the type of prejudice that a title insurer might suffer include the passage of time resulting in the loss of evidence, see, e.g., Countrywide Home Loans, Inc. vs. Stewart Title Guar. Co., 2007 WL 4613046 (E.D. Wis. 2007), or allowing a third party to commence and prosecute litigation without giving notice to the title insurer so that it could protect its interests, see, e.g., Worthey v. Sedillo Title Guaranty, Inc., 85 N.M. 339, 512 P.2d 667 (1973). But even in this latter situation, the title insurer must demonstrate that it has suffered financial prejudice. Id. Regarding proof of loss, under the ALTA 2006 Owner’s Policy, because of the omission of language from earlier versions of the policy that provided that the title insurer’s liability terminated if the proof of loss is not submitted, it appears that the only remedy for the title insurer in the event of the insured’s failure to submit the appropriate notice is to withhold payment on the claim. As noted above, however, the ALTA 1992 Owner’s Policy contained a provision that allows the title insurer to terminate its liability in the event that the insured does not submit the proof of loss. Most courts interpreting the ALTA 1992 Owner’s Policy language continue to require actual prejudice to the insurer before the insurer is relieved of liability. Joyce Palomar, TITLE INSURANCE LAW, Ch. 8, § 8:6, at Note 7.

II.

ALL FOR ONE AND ONE FOR ALL: IS THE TITLE COMPANY REQUIRED TO DEFEND ALL COUNTS IF ONLY SOME ARE COVERED? When a title insurer is required to defend an insured, other claims not covered by the policy may accompany covered claims prompting a question as to whether the insurer has the duty to provide a defense for only covered claims or for claims outside the scope of policy coverage as well. See J. Bushnell Nielsen, Title & Escrow Claims Guide, Ch. 4, § 4.7.

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A.

Policy Provisions. Typical of title insurance policy language is Section 4(a) of the Conditions in the ALTA 1992 policy, which states that the insurer will provide a defense for the insured “but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against by this policy.” Section 5(a) of the Conditions in the 2006 Policy similarly states that the defense “obligation is limited to only those stated causes of action alleging matters insured against by this policy.” Courts have found the 1970 policy to require a defense of only covered claims. Lawyers Title Ins. Corp. v. JDC (America) Corp., 818 F.Supp. 1543 (S.D. Fla. 1993), affirmed 52 F.3d 1575 (11th Cir. 1995).

B.

Partial Defense and Apportionment. Two approaches exist when addressing this duty to defend question. Most courts hold as a general rule that the insurer must make a complete defense where a complaint includes a covered allegation. Windt, Insurance Claims and Disputes, Second Edition, §4.13, p. 162. This position may be justified by the impracticality or impossibility of prorating fees between the covered and non-covered claims and retaining separate counsel for these two portions of the defense. Id. However, many jurisdictions allow for and favor pro rata fee apportionment where covered and non-covered claims are sufficiently distinct as to make such a split feasible. Securities Service Inc. v. Transamerica Title Ins. Co., 20 Wash.App. 664, 583 P.2d 1217 (1978); Native Sun Investment Group v. Ticor Title Ins. Co., 189 Cal.App.3d 1265, 235 Cal.Rptr. 34 (1987). If a partial defense of an insured is to be made, such a defense can be accomplished by either providing separate counsel for covered claims or by apportioning the fees of a single representation between the covered and non-covered claims. One recent case has rejected the complete defense requirement even though the covered and non-covered claims were inextricably intertwined, noting that title insurance differs from general liability insurance which carries with it the “in for one, in for all rule.” GMAC Mortgage, LLC v. First American Title Ins. Co., 2012 WL 669965 (D.Mass.) (case decided by federal court which certified the question of the whether the in for one, in for all rule applies to title insurance.)

C.

Complete Defense and Reservation of Rights. The California Supreme Court has adopted a second approach in Buss v. Transamerica Ins. Co., 65 Cal.Rptr.2d 366, 375, 939 P.2d 766, 775 (1997). Like the rule discussed above, where there is a “mixed” claim, California requires the insurer to defend the entire action entirely and immediately. Id. However, this approach differs in that the defense cannot be split during the underlying litigation. If the insurer wishes to recover its costs in defending non-covered claims, it must pay the entire cost of defending the original action after which it can seek a coverage determination and reimbursement from in the insured for those costs. Id. at 376, 776. In adopting this approach, the California court noted the above reasons along with the potential for claims to change from covered to not covered and vice versa. Id. at 775, fn. 10. Other courts have followed this approach despite policy language. See Little Italy Dev. LLC v. Chicago Title Ins. Co., 2011 WL 2532663 (N.D. Ohio); Philadelphia Indem. Ins. Co. v. Chicago Title Ins. Co., 2012 WL 2115487 Top 10 Issues in Making or Defending Title Insurance Claims

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(N.D.Ill.) (June 10, 2012) (citing Little Italy and declining to follow the Enron case discuss below). Minnesota follows California’s complete defense approach, at least with respect to non-title insurance cases. In Minnesota, the duty to defend extends to every claim that arguably falls within the scope of coverage and the duty to defend one claim creates a duty to defend all claims. Westfield Ins. Co. v. Kroiss, 694 N.W.2d 102 (Minn. App. 2005); Metro. Prop. & Cas. Ins. Co. v. Miller, 589 N.W.2d 297 (Minn. 1999); Scottsdale Ins. Co. v. Universal Crop Protection Alliance, LLC, 620 F.3d 926 (8th Cir. 2010); General Cas. Co. of Wisconsin v. Wozniak Travel, Inc., 762 N.W.2d 572 (Minn. 2009); Wooddale Builders, Inc. v. Maryland Cas. Co., 722 N.W.2d 283 (Minn. 2006); Prahm v. Rupp Construction Co., 277 N.W.2d 389, 390 (Minn. 1982). If any part of the action is arguably within coverage, the insurer must defend and should reserve the right contest coverage. AMCO Ins. Co. v. Inspired Technologies, Inc., 2011 WL 3477188 (8th Cir. 2011); Dixon v. National American Ins. Co., 411 N.W.2d 32 (Minn.Ct.App. 1987); Brown v. State Automobile & Casualty Underwriters, 293 N.W.2d 822, 825–26 (Minn. 1980). The burden is on the insurer to show that all parts of a cause of action are outside the scope of coverage. Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d 161 (Minn. 1986); Atlantic Mut. Ins. Co. v. Judd Co., 367 N.W.2d 604 (Minn.Ct.App. 1985); AMCO Ins. Co. v. Inspired Technologies, Inc., 2011 WL 3477188 (8th Cir. 2011). Nevertheless, the title insurance policy language clearly allows title insurers to decline to defend an insured against non-covered counts in a single suit and a strong argument can be made against this rule in the case of title insurance because the separate claims in title insurance cases tend to be more distinct and easily separable. Addressing this issue, the Eighth Circuit ruling in Enron v. Lawyers Title Ins. Corp. 940 F.2d 307 (8th Cir. 1991) approved of the proposition that both defense responsibilities and associated costs may be allocated among covered and noncovered claims when the policy so provides, stating: We note that courts have taken a strong stand against holding insurers liable for the defense costs of claims of claims their policies do not cover, even when those claims are joined with covered claims. For example, the Fifth Circuit has joined the Six Circuit in holding that an insurer should be held liable for the defense of covered and noncovered claims only where “‘there is no reasonable means prorating the costs of defense between the covered and not-covered items.” EEOC v. Southern Publishing Co., 894 F.2d 785, 791 (5th Cir. 1990) (quoting Insurance Co. of N. Am. v. FortyEight Insulations, Inc., 633 F.2d 1212, 1224 (6th Cir. 1980), cert. denied, 454 U.S. 1109, 102 S.Ct. 686, 70 L.Ed.2d 650 (1981). See also Okada v. MGIC Indem. Corp., 823 F.2d 276, 282 (9th Cir. 1986) (“If an action … incorporates both covered and uncovered claims, the parties must apportion the costs so that [the insurer] need only pay for amounts generated in defense of covered claims.”); Harborside Refrigerated Svcs., Inc. v. IARW Ins. Co., 759 F.2d 829, 831 (11th Cir. 1985) (stating that Top 10 Issues in Making or Defending Title Insurance Claims

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defense costs should be apportioned between covered and noncovered claims where practicable).” Id. at 312. Because the trial court failed to make a finding as to the factual allegations underlying a potentially non-covered claim, the Enron court remanded the case on the duty to defend issue. Id. at 311. III.

WHEN IS THE LOSS VALUED? A.

Policy Provisions. The ALTA 1992 Owner’s Policy, and prior ALTA policies, did not address the date on which the value of the insured property interests were to be determined for purposes of comparing the difference in value with and without the title defect. Section 8(b)(ii) of the Conditions in the ALTA 2006 Owner’s Policy addresses the issue but only where the title insurer provides the insured a defense in litigation, or institutes and prosecutes litigation. In Section 8(b)(ii) of the Conditions in the ALTA 2006 Owner’s Policy, in the event of litigation defended or pursued by the title insurer, “the Insured Claimant shall have the right to have the loss or damage determined either as of the date the claim was made by the Insured Claimant or as of the date it is settled and paid.” As one commentator has written, The fact that title insurers’ national trade organization, the American Land Title Association, has not fixed a date for measurement of loss in their standard policies supports the conclusion that no one particular date is always appropriate for valuing the insured’s loss under a title insurance policy. One needs to look in each case at what risks the investor in real estate really assumed, and what risks the title insurer assumed. Joyce Palomar, TITLE INSURANCE LAW, Ch. 10, § 10:16.

B.

Caselaw. In some cases, courts have used the date of the policy for title insurance as the date to determine the amount of the insured’s loss. See, e.g., Citicorp Sav. of Illinois vs. Stewart Title Guar. Co., 840 F.2d 526, 530 (7th Cir. 1988). Other courts have used the date that the title defect was created to measure the amount of the insured’s loss. See, e.g., In re Gordon, 317 Pa. 161, 176 A. 494 (1935). A third date sometimes used is the date of the trial in which the validity of the title defect was determined, see, e.g., Fohn v. Title Ins. Corp. of St. Louis, 529 S.W. 2d 1 (Mo. 1975), or the date of the trial court’s decision determining the title defect, see, e.g., Fidelity Union Cas. Co. v. Wilkinson, 94 S.W.2d 763 (Tex. Cir. App. Dallas 1936). Most courts, however, have used the date that the defect was discovered as the date on which the insured’s loss should be measured. See, e.g., Overholtzer v. Northern Counties Title Ins. Co., 116 Cal. App. 2d 113, 253 P.2d 116 (1st Dist. 1953).

C.

Evidence Issues. The evidence commonly used to determine the fair market value of the property as of date of the discovery is either (i) an appraisal, (ii) the price and purchase agreement between the insured and a buyer of the property, or (iii) if Top 10 Issues in Making or Defending Title Insurance Claims

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the date of discovery of the defect is close enough to the time that the insured acquired the property, the amount that the insured paid to purchase the property. Joyce Palomar, TITLE INSURANCE LAW, Ch. 10, § 10:16. For an interesting case discussing the various dates for determining the insured’s loss and ultimately concluding that the date of the discovery of the defect was most appropriate, see Hartman v. Shambaugh, 96 N.M. 359, 630 P.2d 758 (1981). IV.

AGENCY LIABILITY: WHEN IS THE UNDERWRITER LIABLE FOR THE ACTS OF THE AGENT, SOLVENCY OF TITLE INSURANCE COMPANY AND IMPACT ON COVERAGE. A.

Liability of Underwriter for Acts of the Agent. In addition to title insurance law and policy language, general agency and insurance law play a role in determinations of agency in a title insurance context. See J. Bushnell Nielsen, Title & Escrow Claims Guide, Ch. 17. 1.

Agency generally. Liability for the acts of insurance agents is governed by general agency law. See Nehring v. Bast, 258 Minn. 193, 103 N.W.2d 368 (1960); Modern Life Ins. Co. v. Todd, 184 Minn. 36, 237 N.W. 686 (1931). Insurers are generally liable for the acts of their agents when done within the scope of employment. Eddy v. Republic Nat’l Life Ins. Co., 260 N.W.2d 174 (Minn. 1980). Acts not within the scope of employment are binding on the insurer only where the agent has apparent authority. Hockemeyer v. Pooler, 268 551, 130 N.W.2d 367 (1964). Agents may have actual, implied, or apparent authority which, in addition to estoppel in some cases, may make their acts binding on the underwriter. See Pesina v. Juarez, 288 Minn. 379, 181 N.W.2d 640 (1966).

2.

Actual authority. A written agency contract between the agent and insurer will typically define the bounds of an agent’s actual authority. It is this contract which gives the agent authority to solicit and issue title insurance policies in the name of the underwriter. In addition to the areas described below, the agency contract may also include limits on the geographic area covered by the agent, place maximum policy amounts issuable without specific approval, and require approval for certain extra-hazardous risks. a.

Implied authority. Although the agency contract may delegate express authority in detail, the specific authority for most acts is created by the grant of powers implied or inferred from the words, customs, and relations between the parties. Restatement of Agency 2d (1978), §7, Comment C, p. 29.

b.

Functions outside agency. A title agent’s authority and agency is limited and certain agent functions fall outside the agency relationship with the underwriter. Underwriters have been held not liable for the acts of agents within these functions.

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i.

Escrow and closing duties. Under most agency contracts, underwriters are not liable for the acts of agents during agents’ escrow duties. Courts have likewise held that underwriters are not liable for these acts under respondeat superior theories. See Bodell Construction Co. v. Stewart Title Guar. Co., 945 P.2d 119 (Utah App. 1997); Stancell v. Spicer, 557 A.2d 939, 939-40 (D.C. App. 1989); Universal Bank v. Lawyers Title Ins. Corp., 73 Cal.Rptr.2d 196, 62 Cal.App.4th 1062 (2 Dist. 1997); Sussman v. First Financial Title Co. of Fla., 793 So.2d 1066, 26 Fla.L. Weekly D1883 (Fla.App. 4 Dist. 2001). Agents closing a real estate transaction are not to be construed as agents of the underwriter for any acts outside of the closing of the title insurance contract. See Southwest Title Ins. Co. v. Northland Building Corp., 542 S.W.2d 436 (Tex.App. 1976), aff’d in part, rev’d in part, 552 S.W.2d 425, 428, 20 Tex. Sup. Ct. Jour. 352 (Tex. 1977); Cameron County Savings Ass’n v. Stewart Title Guar. Co., 819 S.W.2d 600, 604 (Tex.App. 1991); Spring Garden 79U, Inc. v. Stewart Title Guar. Co., 874 S.W.2d 945 (Tex.App. 1994); Bodell Construction Co. v. Stewart Title Guar. Co., 945 P.2d 119 (Utah App. 1997); Nechadim Corp. v. C.J.P. Abstract, LLC, 67 A.D.3d 656, 888 N.Y.S.2d 162, 2009 N.Y. Slip Op. 07993 (N.Y.A.D. 2 Dept. 2009). The authority to issue policies does not typically create underwriter agency liability for closing duties handled by the agent. See Lawyers Title Ins. Corp. v. Dearborn Title Corp., 904 F.Supp. 818 (N.D.Ill. 1995); National Mortgage Warehouse v. Bankers First Mortgage Co., 190 F.Supp.2d 774 (D.Md. 2002); Lucas v. Kensington Abstract, LLC, 20 Misc.3d 1135(A), 872 N.Y.S.2d 691 (Table), 2008 WL 3823776 (N.Y.Sup.), 2008 N.Y. Slip Op. 51734(U) (unpublished); Fidelity Nat’l Title Ins. Co. v. Mussman, 930 N.E.2d 1160 (Ind.App. 2010). The plain language of the agency contract has been held to bar the existence of agency liability for the agent’s acts at closings. In re Taneja, 2010 WL 4882826 (Bankr.E.D.Va.); Wells Fargo Bank, N.A. v. Old Republic Nat’l Title Ins. Co., 2009 WL 4927145 (E.D.Va.2009) (permanent citations not yet available). Likewise, the underwriter is not liable for alleged fraudulent conduct at closings. See Proctor v. Metropolitan Money Store, 579 F.Supp.2d 724 (D.Md. 2008), later decision 645 F.Supp.2d 464 (2009); Haley v. Corcoran,

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659 F.Supp.2d 714 (D.Md. 2009); HAS Residential Mortgage Services of Texas, Inc. v. Stewart Title Guar. Co., 7 A.D.3d 426, 776 N.Y.S.2d 791 (N.Y.A.D. 1 Dept. 2004), app. den., 3 N.Y.3d 607, 818 N.E.2d 667, 785 N.Y.S.2d 25 (N.Y. Sep 21, 2004). The Eighth Circuit addressed the issue of underwriter liability for the acts of agents in Bluehaven Funding, LLC v. First American Title Ins. Co., 94 F.3d 1055 (8th Cir. 2010). The Bluehaven court held that the title insurer was not liable for losses incurred by lender due to title agent employee’s theft of closing money and rejected the underwriter’s audit power as evidence of agency. Id; see also PAL Properties LLC v. Ticor Title Ins. Co., 2008 WL 5158894 (Mich.App.) (unpublished), app.den. 483 Mich. 1032, 765 N.W.2d 616 (Mich. Jun 03, 2009). Some courts, however, have declined to follow the approach adopted in the cases above. See American Home Mortgage Corp. v. First American Title Ins. Co., 2007 WL 3349320 (D.N.J.) (unpublished); Lee v. Dublin Manor Corp., 2007 WL 2259190 (S.D.Ohio) (unpublished). (both decisions issued on motions to dismiss, no substantive rulings on agency). In Coldwell Banker Relocation Services, Inc. v. TRW Title Ins. Co., the court found an underwriter liable for a title agent’s escrow acts, in part based on the issuance of a closing protection letter. 74 F.3d 1243, 1996 WL 5156 (8th Cir. Jan. 8, 1996) (per curiam) (unpublished). However, the Eighth Circuit refused to follow that case in Bluehaven noting the unpublished, nonprecedential nature of the case. 94 F.3d 1055. ii.

Torts. Generally, the underwriter is not liable for the intentional torts of its agents. In the case of misrepresentation, underwriters have been held not liable. See Spring Garden 79U, Inc. v. Stewart Title Guar. Co., 874 S.W.2d 945 (Tex.App. 1994) (underwriter not liable under deceptive trade practice act for agent misrepresentation at closing); Adler v. Heldman, 169 A.D.2d 925, 564 N.Y.S.2d 828 (Sup.Ct.App. 1991) (underwriter not liable for agent’s fraudulent misrepresentation of title). However, two cases have upheld punitive damages against underwriters for the torts of agents without explaining the basis for underwriter liability. Lawyers Title Ins. Corp. v. Vella, 570 So. 2d 578 (Ala. 1990) (agent and underwriter liable for misleading insured by disregarding underwriter’s form of exception);

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Ford v. Guarantee Abstract and Title Co., Inc., 553 P. 2d 254 (Kan. 1976) (agent conducting closing failed to obtain vesting deed for insured). Negligence actions by insureds against underwriters have likewise failed as have attempts to collect punitive damages under “managerial agent” theories. Focus Investment Associates, Inc. v. American Title Insurance Co., 992 F.2d 1231 (1st Cir. 1993) (no state law cause of action for negligent hiring and supervision); Krehling v. Baron, 900 F.Supp. 1578 (M.D.Fla. 1995) (no duty to insured); Enright v. Lubow, 202 N.J.Super. 58, 493 A.2d 1288 (1985); app. 215 N.J. Super. 306, 521 A.2d 1300 (1987) (agent independent, not authorized to carry out allegedly culpable act). 3.

Apparent authority and estoppel. In some situations, the underwriter may be made liable for the acts of an agent even where the agent acts outside its actual authority. a.

Apparent authority. Apparent authority will sometimes make the acts of an agent binding on the insurer even where the agent has no actual authority for the act in question. Apparent authority applies in situations where the principle has held out the agent as possessing authority or knowingly permits the agent to assume such authority. Hornblower & Weeks-Hemphill Noyes v. Lazere, 301 Minn. 462, 222 N.W.2d 799 (1974); Hagedorn v. Aid Ass’n for Lutherans, 297 Minn. 253, 211 N.W.2d 154 (1973). Apparent authority is based on the conduct of the principal rather than the acts of the agent. Mulligan v. Farmers Nat’l Bank, 194 Minn. 451, 260 N.W. 630 (1935); Lyman Lumber Co. v. Three Rivers Co., 400 N.W.2d 811 (Minn.Ct.App. 1987). Although apparent authority may extend beyond the agency contract, it has been held that where the agent’s power is expressly limited apparent authority to do acts beyond such limits should be found only where clearly inferred. Hertz v. Security Mut. Ins. Co., 131 Minn. 147, 154 N.W. 745 (1915). Three elements are necessary for a finding of apparent authority: 1) that the principal held the agent out as having authority or permitted the agent to act on his behalf, 2) that the party dealing with the agent had actual knowledge of that holding out or permission, and 3) that proof of the agent’s apparent authority was found in the conduct of the principal not the agent. Hockemeyer v. Pooler, 268 551, 130 N.W.2d 367 (1964). It must also be shown that the insured was a person of ordinary prudent business habits who was led to believe that the agent possessed the authority

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exercised. (1960).

Nehring v. Bast, 258 Minn. 193, 103 N.W.2d 368

In the title insurance context, it was held that an agent had no apparent authority to accept claims where policy stated that claims were to be submitted to the underwriter and there were no manifestations from the insurer to suggest otherwise. Worthey v. Sedillo Title Guaranty, Inc., 85 N.M. 339, 512 P.2d 667 (1973). Similarly, one court stated the following regarding the distribution of policy forms to an agent: Possession of such materials does not of itself create an appearance of authority sufficient to bind the insurer to any insurance contract executed in its name by the agent, nor does such possession, though vested by the principal, clothe an agent with apparent authority to make contracts of insurance which differ in terms from such forms. 3 Couch on Insurance 2d, Sec. 26:67 at p. 541, citing Perry v. New York Life Ins. Co., Sup., 22 N.Y.S.2d 696 (1940), and Great American Casualty Co. v. Eichelberger, Tex.Civ.App., 37 S.W.2d 1050 (1931). Applefield v. Commercial Standard Ins. Co., 176 So.2d 366, 376-7 (Fla.App. 1965). The court did not hold the underwriter liable for the agent’s insuring of a transaction tainted by fraud. Id. Policy forms were also held not to create apparent authority to review estoppel letters not affecting the title policy. Southwest Title Ins. Co. v. Northland Building Corp., 542 S.W.2d 436 (Tex.App. 1976), aff’d in part, rev’d in part, 552 S.W.2d 425, 20 Tex. Sup. Ct. Jour. 352 (Tex. 1977). b.

Estoppel. Apparent authority is said to rest on estoppel and requires that all the elements of estoppel be present. Mulligan v. Farmers Nat’l Bank, 194 Minn. 451, 260 N.W. 630 (1935); Schoenborn v. State Bank, 159 Minn. 205, 198 N.W. 801 (1924). Although there is a clear overlap between apparent authority and estoppel, a distinction is sometimes made in that only the latter requires a change in position. See Restatement of Agency 2d (1978), § 8A, Comment A, p. 39. Where an agent acts outside the scope of its authority, the insurer is not liable for the reliance of an insured on such actions unless the insurer is estopped to deny the agent’s authority. Segal v. Bart, 140 Minn. 167, 167 N.W. 481 (1918). Estoppel to deny the agent’s authority occurs where the principal places an agent in a situation which creates a justified assumption and dealing with the agent on the basis of that assumption. Duluth Herald & News

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Tribune v. Plymouth Optical Co., 286 Minn. 495, 176 N.W.2d 552 (1970); McGee v. Breezy Point Estates, 283 Minn. 10, 166 N.W.2d 81 (1969). B.

V.

Solvency of Title Insurance Company and Impact on Coverage. Where the underwriter becomes insolvent, an insured may hope to enforce the policy against the title agent. 1.

Agent liability under the policy. In most jurisdictions, an agent is not liable to the insured for such losses under the policy. See Mickam v. Joseph Louis Palace Trust, 849 F.Supp. 516, 520 (E.D. Mich. 1993); Old Republic Nat’l Title Ins. Co. v. Kaufman, 1997 WL 309212 (S.D.N.Y.) (unpublished); Eller Media Co. v. DGE, Ltd., 2004-Ohio-4748, 2004 WL 2002449 (Ohio App. 8 Dist.) (unpublished); Boyce v. Cassese, 941 So.2d 932 (Ala. 2006); McColgan v. Brewer, 906 N.Y.S.2d 353, 75 A.D.3d 876, 2010 N.Y. Slip Op. 06128 (N.Y.A.D. 3 Dept.). Such a holding is consistent with general insurance agency law that the agent does not become the insurer by procuring a policy for the insured.

2.

Agent liability after insurer insolvency. It has likewise been held that the insolvency of the underwriter does not create liability in the title agent under the policy. New West Federal Sav. & Loan Ass’n v. Guardian Title Co. of Utah, 818 P.2d 585 (Utah 1991) (citing 3 Couch on Insurance 2d § 25:48). However, one court held that where an agent is sued following the underwriter’s bankruptcy, the title agent may be liable as an abstractor of title who has provided false information justifiably relied on by the insured. U.S. Bank, N.A. v. Integrity Land Title Corp., 929 N.E.2d 742 (Ind. 2010).

SCOPE OF THE DUTY TO DEFEND. A.

Policy Provisions. In Section 4 of the Conditions in the ALTA 1992 Owner’s Policy and Section 5 of the Conditions in the ALTA 2006 Owner’s Policy, the title insurer is obligated to “provide for the defense of an insured in litigation in which any third party asserts a claim” adverse to the insured and covered by the policy. In addition, under Section 4(b) of the Conditions in the ALTA 1992 Owner’s Policy and Section 5(b) of the Conditions in the ALTA 2006 Owner’s Policy, the title insurer has the right, “at its own cost, to institute and prosecute any action or proceeding or to do any other act which in its opinion may be necessary or desirable to establish” the title.

B.

Caselaw. Generally the duty to defend is determined by the pleadings filed in the lawsuit. Most courts refer to this as the “eight corners rule,” comparing the “four corners” of the complaint with the “four corners” of the policy. “Under [the eight corners rule], an insurer’s duty to defend is determined by comparing the complaint…with the policy. If the facts alleged in the complaint…would give rise to liability under the policy if proven, the insurer must defend the insured.” Top 10 Issues in Making or Defending Title Insurance Claims

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Richmond, Reimbursing Insurers’ Defense Costs: Restitution and Mixed Actions, 35 San Diego L. Rev. 457, 461-468 (1988). Thus, the issue is not whether the allegations are true or false, but whether the insurer would be obligated under the policy assuming that the allegations are true. If the allegations in the pleadings are ambiguous, the duty to defend will arise if they reasonably may be interpreted to give rise to a challenge to the title of the insured. See, e.g., Sims v. Sperry, 835 P.2d 565 (Colo. App. 1992). C.

VI.

Practice. If the allegations in the pleadings clearly fall within exclusions or exceptions in the title insurance policy, most courts hold that the insurer has no duty to defend. But in this situation, the insurer has the burden to prove that the allegations fall within the policy’s exclusions or exceptions. In this situation, insurers sometimes assume defense, but at the same time commence a separate declaratory judgment action seeking a court determination about whether the insurer has a duty to defend.

CHOICE OF COUNSEL AND RESERVATIONS OF RIGHTS: WHAT SHOULD THE TENDERING ATTORNEY DO WHEN CLAIM ACCEPTED UNDER A RESERVATION OF RIGHTS? A.

Choice of Counsel Generally. Title policies provide that when the title company provides a defense to an insured, it will have the right to hire counsel of its choice to defend the insured. This right is set out in paragraph 4(a) of the Conditions & Stipulations in the 1992 policy and paragraph 5(a) of the Conditions in the 2006 policy. Paragraph 5 of the Conditions of the Residential policy and paragraph 5(d) of the Homeowner’s policy contain the same statement. “[A]n attorney is retained by an insurer to defend its insured, as long as he represents the insured, is under the same obligations of fidelity and good faith as if the insured had retained the attorney personally. The relationship of client and attorney exists the same in one case as in the other.” Crum v. Anchor Cas. Co., 264 Minn. 378, 392, 119 N.W.2d 703, 712 (1963). The right of the insurer to select counsel exists so long as there is no actual conflict of interest for the attorney retained to represent the insured. Mutual Service Cas. Ins. Co. v. Luetmer, 474 N.W.2d 365 (Minn.Ct.App. 1991). Where there is no conflict of interest, an attorney may represent both the insured and the insurer provided the insured has consulted with an attorney who explains the implications of dual representation and the advantages and risks involved and the insured has expressly consented to the dual representation after the consultation. Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 2011 WL 2519203 (Minn.Ct.App. 2011). The mere fact that an insurer has taken a reservation of rights, asked to be kept apprised of the status of the action, and started a separate declaratory judgment action to determine coverage does not, by itself, establish a conflict of interest. Of course, the attorney selected to represent the insured in the underlying action Top 10 Issues in Making or Defending Title Insurance Claims

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cannot be the same attorney that represents the insurance company in the declaratory judgment action. Mutual Service Cas. Ins. Co. v. Luetmer, 474 N.W.2d 365 (Minn. App. 1991). B.

Insured as Client and Tripartite Relationship. When an attorney for the insured is selected and paid by the insurer, that attorney’s client is the insured, not the insurer. An attorney in that situation owes the client exactly the same undeviating and single allegiance as if he or she were selected and paid by the insured. Pine Island Farmers Coop v. Erstad & Riemer, P.A. 649 N.W.2d 444 (Minn. 2002); Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982). The insurer and the retained counsel should make it clear to the insured that, even though the insurer is paying the attorney, the insured is the client, not the insurer. However, an attorney in this situation is not entirely without obligation to the insurance company. The attorney owes at least a fiduciary duty to the insurer to use the funds of the company prudently and only as authorized by the company. Bogard v. Employers Casualty Co., 164 Cal. App. 3d 602,219 Cal.Rptr. 578 (1985). In addition, the title company has the right to be kept informed of the status of the litigation, even when it has taken a reservation of rights. Mutual Service Cas. Ins. Co. v. Luetmer, 474 N.W. 2d 365 (Minn.Ct.App. 1991). The tripartite relationship between an insured, an insurer and the attorney hired by the insurer to represent the insured is complex. Little clear-cut guidance exists in either the ethical standards or the case law to help an attorney navigate through some of the gray areas which can and do arise.

C.

Reservation of Rights. An insurer may accept the defense of an insured but reserve the right not to pay a judgment against an insured where there may be a coverage defense. This ability stems from the precept that the duty to defend is broader than the duty to indemnify. Westfield Ins. Co. v. Kroiss, 694 N.W.2d 102 (Minn. App. 2005); Metro. Prop. & Cas. Ins. Co. v. Miller, 589 N.W.2d 297 (Minn. 1999) (the duty to defend arises when any part of a cause of action is arguably within the scope of coverage under the policy.) If the facts suggest a defense at an early enough stage, this reservation is often made in the insurer’s acceptance of the defense. 1.

Timing of reservation of rights. “If an insurer, with full knowledge of the facts of a claim, defends its insured without reserving its rights to deny coverage, the insurer may be estopped later to deny coverage.” Mutual Service Cas. Ins. Co. v. Luetmer, 474 N.W.2d 365, 368 (Minn.Ct.App. 1991). If a reservation of rights is to be made, it should be made promptly otherwise the estoppel to deny coverage may be applied. Britamco Underwriters, Inc. v. A & A Liquors of St. Cloud, Inc., 2001 WL 379028 (Minn.App. 2001) (unpublished) (citing Meirthew v. Last, 135 N.W.2d 353, 355 (Mich. 1965). The Britamco court held that a reservation of rights was too late and the insurer was estoppel to deny coverage when the reservation was made almost eight months after the filing of the answer and cross-claim in the underlying matter. Id. Top 10 Issues in Making or Defending Title Insurance Claims

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D.

Working with Insurers Under a Reservation of Rights. If the title insurer agrees to defend under a reservation of rights, the attorney tendering the claim has a number of options including trying to get the title company to change its mind, monitoring the case, or participating in settlement discussions. It may be advisable to start a declaratory judgment action under Minn. Stat. Ch. 555 to determine coverage. This type of separate lawsuit is started in order to see if the claim is in fact covered. Such an action can typically occur during or after the underlying litigation. However, a recent federal case for the district of Minnesota determined that a lawsuit by the insured demanding the insurer withdraw its reservation of rights was prematurely filed because the insurer was still defending the insured against adverse liens and had a basis for its reservation. See Minnwest Bank, M.V. v. Chicago Title Ins. Co., 2010 WL 4791428 (D.Minn.). The attorney who represented the insured in the underlying litigation is usually not involved because to do so would be a conflict of interest. See Pine Island Farmers Coop v. Erstad & Riemer, P.A., 649 N.W.2d 444, 451-52 (Minn. 2002) for an interesting discussion of the role of counsel retained by an insurer to represent its insured.

E.

Declaratory Judgment. Minnesota has adopted a form of the Uniform Declaratory Judgments Act as Minn. Stat. Ch. 555. Under Chapter 555, either the insured or the insurer may commence an action to have any provision of the title insurance policy construed. The most common issues for the court in such cases are coverage questions involving the duty to indemnify or the duty to defend, however any questions regarding the construction of the policy may also be determined in a declaratory judgment action. Declaratory judgment cases involving coverage questions usually arise after there has been a denial of coverage, or an acceptance of coverage under a reservation of rights. 1.

Action by insurer. The title insurer may bring a declaratory judgment action to determine coverage. The Minnesota Supreme Court has advised this approach. See Jostens, Inc v. Mission Ins. Co., 387 N.W.2d 161 (Minn. 1986). If the title company does bring a declaratory judgment action to determine coverage it should do so using counsel other than that selected to defend the insured in the underlying action. Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982); but see American States Ins. Co. v. Ankrum, 651 N.W.2d 513, (Minn.App. 2002) (if a liability insurer faithfully fulfills its duty to defend its insured and also brings a declaratory judgment action to determine insurance coverage, then there will be no breach of the duty to defend, and the insured is not entitled to attorney fees and costs for the declaratory judgment action to determine coverage; attorney fees and costs are only awarded for the declaratory judgment action if there was a breach of the duty to defend in the underlying action). Top 10 Issues in Making or Defending Title Insurance Claims

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If the title company wins its declaratory judgment action, it may be entitled to a refund of the defense costs it incurred in defending the insured if it notified the insured that it intended to seek recovery of its fees. Knapp v. Commonwealth Land Title Insurance Co., 932 F. Supp. 1169 (D. Minn. 1996). F.

Reimbursement of fees and costs. A right to reimbursement of fees and costs incurred by a title insurer in defending under a reservation of rights exists under Minnesota law in some circumstances. In Knapp v. Commonwealth Title Insurance Co., the United States District Court for the District of Minnesota addressed the duty to defend and reservation of rights under Minnesota law and in the context of title insurance. 932 F.Supp. 1169 (D.Minn. 1996). In Knapp, the insured’s title was contested and the insurer agreed to defend against the claims prefacing the defense with a reservation of rights letter specifically reserving the insurer’s right to later seek attorneys’ fees and costs if it was later found that the claims were not covered. Id. at 1170. The insurer defended the insured, the insured lost the underlying case and title to part of his land, and after motions for summary judgment, the court determined that there was no coverage for the claim. Id. The court stated the following: It is established law in Minnesota that an insurer has a duty to defend where only part of a claim is arguably within the scope of a policy’s coverage. United States Liability Insurance Company v. Johnson & Lindberg, P.A., 617 F.Supp. 968, 972 (Minn. 1985), (citing, Prahm v. Rupp Construction Co., 277 N.W.2d 389, 390 (Minn.1982)). Minnesota courts have further established that the duty to defend is broader than the duty to indemnify and that “[i]f any part of the claim is arguably within the scope of coverage afforded by the policy, the insurer should defend and reserve its rights to contest coverage based on facts developed at trial.” Brown v. State Automobile & Casualty Underwriters, 293 N.W.2d 822, 825–26 (Minn.1980), citation omitted. When facts extrinsic to the complaint establish that the policy does not provide coverage, however, the insurer will not be required to defend the action. Lanoue v. Fireman’s Fund American Insurance Companies, 278 N.W.2d 49, 52 (Minn.1979). Id. at 1171. The court went on to hold that the insurer did not have a duty to defend and that while a lack of duty to defend will not alone create a right to reimbursement, the reservation of rights in the form of a letter is sufficient. Id. at 1171-72. Noting the absence of Minnesota caselaw on reservation of rights and reimbursement following a lack of coverage determination, the court cited the following California and federal cases in support of its conclusions and holding: Walbrook Insurance Co. Ltd. v. Goshgarian & Goshgarian, 726 F.Supp. 777 (C.D.Cal.1989); First Federal Savings and Loan v. Transamerica Title, 793 F.Supp. 265 (D.Colo.1992), aff’d 19 F.3d 528 (10th Cir.1994); Gossard v. Ohio Casualty Group of Insurance Companies, 39 Cal.App.4th 450, 35 Cal.Rptr.2d 190 Top 10 Issues in Making or Defending Title Insurance Claims

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(6th Dist.1994) (citing Val’s Painting & Drywall, Inc. v. Allstate Ins. Co., 53 Cal.App.3d 576, 585, 126 Cal.Rptr. 267 (1975); Richardson v. State Farm Fire and Casualty Company, 32 Cal.App.4th 1, 37 Cal.Rptr.2d 824 (1995). Id. The Knapp court quoted at length from a California decision finding the existence of a right to reimbursement even where the insured communicated an objection to the reservation of rights letter but accepted the insurer’s defense. See Walbrook Insurance Co. Ltd. v. Goshgarian & Goshgarian, 726 F.Supp. 777, 782-84 (C.D.Cal.1989). However, the Eighth Circuit declined to follow this approach (which it refers to as the “Majority Rule”) in a case involving an insured who objected to a reservation of rights under a directors and officers coverage of business and management indemnity liability insurance policy. Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707 (8th Cir. 2009). Again noting the lack of Minnesota caselaw on the issue of reimbursement, the Westchester court distinguished Knapp stating that the insured in Knapp did not object to the reservation of rights and accepted the insurer’s defense creating an implied agreement to reimburse while the insured in the case before the court objected and created a new contract on the insured’s terms which was accepted by the insurer. Id. at 717. The Westchester court concluded that “an insurer is not entitled to the reimbursement of defense costs expended prior to the determination of coverage, unless specifically provided for in the insurance policy.” Id. at 718. After distinguishing Knapp, the court gave additional reasoning for its conclusion: Finally, although Minnesota appellate courts have not announced whether they would permit a right of reimbursement, we find the most recent state and federal court decisions’ adoption of the minority position more persuasive. Here, Westchester could have included in the policy an express provision for such reimbursement. Westchester cannot now unilaterally amend the policy by including the right to reimbursement in its reservation-of-rights letter. Id. at 719. As stated above, it is not yet clear whether Minnesota state courts will follow Westchester and the minority view or adopt the majority rule expressed in Knapp and other national decisions. VII.

THE AVAILABILITY OF CONSEQUENTIAL DAMAGES. A.

Policy Provisions. Under Section 9 of the Conditions in both the ALTA 1992 Owner’s Policy and the ALTA 2006 Owner’s Policy, the liability of the title insurer does not exceed the lesser of (i) the amount of the title insurance policy, or (ii) the difference between the value of the insured property and the value of the insured property subject to the title defect or insured risk. Thus, by definition, consequential damages are not allowed under either the ALTA 1992 Owner’s Policy or ALTA 2006 Owner’s Policy.

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B.

Title Insurer’s Breach. An issue that sometimes arises, however, is what is the appropriate measure of liability in a situation where the insurer breaches the title insurance policy, for example, by failing to indemnify or act to defend or clear title according to the policy terms. In this situation, an insured will argue that the policy provisions limiting liability are inapplicable, and therefore consequential damages should be recoverable. See, e.g., La Minnesota Riviera, LLC v. Lawyers Title Inc. Corp., 2007 WL 3024242 (M.D. Fla. 2007). Title insurers will, however, argue that, notwithstanding the breach of contract, the policy terms should limit their liability obligation. See, e.g., Brown’s Tie & Lumber Co. v. Chicago Title Co. of Idaho, 115 Idaho 56, 764 P.2d 423 (1988). In Mattson Ridge, LLC v. Clear Rock Title, LLP and Ticor Title Insurance Co., 2011 WL 2175832 (Minn. Ct. App. July 6, 2011), the Minnesota Court of Appeals held that, where the title insurer breaches the title insurance policy, the amount of damages to which the insured is entitled is not subject to the title insurance policy limitations. Thus, the Court of Appeals awarded the insured $1.9 million even though the policy limit in the applicable title insurance policy was $1,286,000. The court in Mattson Ridge held that under a casualty policy, the insured is not limited to the policy limits and “[l]ost profits may be recovered if they are a natural and proximate result of the breach and are proved with reasonable, although not absolute, certainty.” Olson v. Rugloski, 277 N.W.2d 385 (Minn. 1979). The Supreme Court has granted the title insurer’s petition for review in the Mattson Ridge case. 2011 Minn. App. Unpub. LEXIS 539 (Minn. Ct. App. June 6, 2011). Oral argument in the Supreme Court occurred on December 5, 2011. To date, the Supreme Court has not decided the case.

VIII. CONTINUATION OF COVERAGE AFTER FORECLOSURE A.

Loan Policy “Insured.” The loan policy states that the holder of the mortgage debt is the insured. Thus, mortgage assignees become successor insureds when the debt is purchased with the mortgage.

B.

Continuation Provisions. Although the loan policy typically terminates when the debt is fully paid, coverage continues where the lender takes title to the property. See also Hodas v. First American, Title Ins. Co., 696 A.2d 1095 (Maine 1997); J. Bushnell Nielsen, Title & Escrow Claims Guide, Ch. 7. In the 2006 loan policy, paragraph 2 of the Conditions states: coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured… This policy shall not continue in force in favor of any purchaser from the Insured of either (i) an estate or interest in the Land… The same paragraph in the 1992 loan policy states: (a) After Acquisition of Title. The coverage of this policy shall continue in force as of Date of Policy in favor of (i) an insured who acquires all or any Top 10 Issues in Making or Defending Title Insurance Claims

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part of the estate or interest in the land by foreclosure, trustee’s sale, conveyance in lieu of foreclosure, or other legal manner which discharges the lien of the insured mortgage… Where the insured conveys the property but retains an interest in the property or makes warranties in the conveying deed, coverage continues in a manner similar to that of an owner’s policy as discussed above. C.

Problems with Foreclosure and Coverage. Because foreclosure extinguishes the debt, no further successor insureds can exist following a foreclosure. Rather, coverage continues only in favor the insured who has taken title. Thus, where a party other than the insured takes title to the property, the policy terminates. Where an insured lender intended to assign the loan to a related entity but had not done so at the time of the foreclosure, the policy was terminated because the related entity was not the insured at the time of the foreclosure and thus was not an insured taking title as required by the policy’s continuation provisions. Property Asset Management, Inc. v. Chicago Title Ins. Co., 173 F.3d 84 (2nd Cir. N.Y. 1999). Likewise, a mortgage lender who takes and keeps title following foreclosure cannot assign the mortgage loan to another party to make them the insured and allow that party to make a claim under the policy. Id.

IX.

MATTERS CREATED, SUFFERED, ASSUMED OR AGREED TO. A.

Policy Provisions. Section 3 of the Exclusions from Coverage in both the ALTA 1992 Owner’s Policy and the ALTA 2006 Owner’s Policy provide an exclusion from coverage for “[d]efects, liens, encumbrances, adverse claims, or other matters: (a) created, suffered, assumed or agreed to” by the insured. This exclusion is one of the most commonly litigated clauses in title insurance litigation. One commentator described the exclusion as excluding matters that are the insured’s “own darn fault.” Beasley, Highlights of Commercial Coverage, in A.B.A. Real Prop. Prob. & Tr. L. Sec., Attorneys’ Role in Title Insurance B, 10 (1990).

B.

Matters Created by the Insured. Courts have generally construed the word “create” in this exclusion to require an affirmative act of the insured. See, e.g., Joyce Palomar, TITLE INSURANCE LAW, Ch. 6, § 6:11. Courts apply three different standards of what intent is required of the insured in performing the act to trigger this exclusion. Id. The first standard, the strictest construction of this exclusion, requires “intentional misconduct by the insured.” See, e.g., Brown v. St. Paul Title Ins. Corp., 634 F.2d 1103, 1107 n. 8 (8th Cir. 1980). This exclusion would therefore deny coverage where the insured was found to have committed fraud, participated in an illegal or inequitable scheme, or committed forgery. Another standard sometimes used by courts is to apply the exclusion where the insured conscientiously intended the actual change or defect in title. As described by a California court in Safeco Title Ins. Co. v. Moskopoulos, 116 Cal. App. 3d Top 10 Issues in Making or Defending Title Insurance Claims

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658, 172 Cal. Rptr. 248, 253, 18 A.L.R.4th 1301 (2d Dist. 1981); quoting Hansen v. Western Title Ins. Co., 220 Cal. App. 2d 531, 535 to 536, 33 Cal. Rptr. 668, 98 A.L.R.2d 550 (1st Dist. 1963): “We believe the word created means conscious, deliberate causation, and that if the word is also susceptible of the significance of bringing about a result inadvertently or negligently, we should accept the interpretation which is more favorable to insured.” In the instant case the interpretation most favorable to the insured is “conscious, deliberate causation” on the part of the insured. The third standard that courts sometimes apply is that the insured must merely have intended the act that caused the title defect, even though the insured was unaware that the act might cause a title defect. E.g., Transamerica Title Ins. Co. v. Alaska Federal Sav. and Loan Ass’n of Juneau, 833 F.2d 775 (9th Cir. 1987). From the title insurer’s perspective, this is the easiest test to satisfy. C.

Matters “suffered” by the Insured. One court has noted that “where ‘create’ entails an affirmative action, ‘suffer’ would seem to entail a failure to act to prevent the claim.” Mid-South Title Ins. Corp. v. Resolution Trust Corp., 840 F. Supp. 522, 529 (W.D. Tenn. 1993). Thus, this exclusion applies when an insured has failed to take action to prevent a defect, lien, encumbrance, adverse claim or other matters.

D.

Assumed by the Insured. Courts have held that, for the “assumed by the insured” exclusion to apply, the insured must have both knowledge and intent to assume the specific title defect assumed. Mid-South Title Ins. Corp. v. Resolution Trust Corp., 840 F. Supp. 522, 529 (W.D. Tenn. 1993). Thus, it is not enough for the insured to agree to take the property “subject to” title matters. Instead, the title defect assumed must be specifically identified. Id.

E.

Agreed to by the Insured. For the “agreed to by the insured” exclusion to apply, courts have held that the insured must have contracted to accept a particular title defect or encumbrance with knowledge of its extent and amount. First Nat. Bank of Minneapolis vs. Fidelity Nat. Title Ins. Co., 572 F.2d 155 (8th Cir. 1978). As to this exclusion generally, courts look to language in the insured’s purchase agreement suggesting that the insured know of and intended to take title subject to a specific lien, encumbrance or other title defect or whether the insured contractually assumed an obligation to perform some act and then failed to do so. Ellis, Title Insurance Law Handbook, 335 (1987). Examples of the kinds of transactions to which these exclusions would apply are equitable mortgages, transactions involving fraudulent conveyances. See, generally, Joyce Palomar, TITLE INSURANCE LAW, Ch. 6, § 6:13.

F.

Practice. Except in the clearest cases, a title insurer will usually accept defense of a claim that but for this exclusion, would be covered by the title insurance policy,

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and at the same time, commence a declaratory judgment action to determine whether the exclusion applies. X.

TERMINATION OF OWNERS COVERAGE UPON TRANSFER. A.

Transfer to Purchaser. Termination of coverage under and owner’s policy differs depending on the type of policy. See J. Bushnell Nielsen, Title & Escrow Claims Guide, Ch. 7. Paragraph 2 of the Conditions and Stipulations of the ALTA owner’s policy states regarding continuation and termination of coverage: The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title. This policy shall not continue in force in favor of any purchaser from the Insured of either (i) an estate or interest in the Land, or (ii) an obligation secured by a purchase money Mortgage given to the Insured. Thus, coverage does not continue when an insured owner sells the property without retaining any interest, as is the case with most sales of property. As confirmed in a recent case, foreclosure terminates owner’s policy coverage and former owners are not third party beneficiaries under the loan policy. See Gumapac v. Deutsche Bank Nat’l Trust Co., 2012 WL 3150657 (C.D.Cal.) (unpublished). Unlike the language of the owner’s policy, paragraph 2(a) of Conditions in ALTA Homeowner’s Policy states: “This Policy insures You forever, even after You no longer have Your Title.” However, once an insured ceases to have an interest in the property, the necessity of coverage is questionable. One recent case under this Homeowner’s policy did award damages to an owner who contributed the property to LLC after he bought it where an unexpected deed of trust was discovered resulting in the loss of the property and the LLC debiting the former owner’s capital account. CSK Investments LLC v. Select Portfolio Servicing, Inc., 2012 WL 135762 (D.Ariz.) (permanent citation not yet available). It should also be noted that a voluntary transfer following the submission of a title insurance claim has been held to terminate coverage under the policy. See Gebhardt Family Investment, L.L.C. v. Nations Title Ins. Co. of New York, Inc., 132 Md.App. 457, 752 A.2d 1222 (Md.App. 2000). Courts have reached different conclusions as to whether coverage is revived where the insured reacquires an interest in the property following a transfer. See Stevens v. Dakota Title and Escrow Co., 2004 WL 2381386 (Neb.App.) (unpublished) (no revival); Gray v. First American Title Ins. Co., 2003 WL 220606 (Cal.App. 2 Dist.) (unpublished) (no revival); Sandler v. New Jersey Realty Title Ins. Co., 36 N.J. 471, 178 A.2d 1 (1962) (revival).

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B.

1.

Mortgages and deeds of trusts. As stated above, policy coverage continues under an owner’s policy where the insured retains an interest in the property. The policy explicitly states that mortgages taken back by sellers are retained interests allowing coverage to continue.

2.

Warranties. The policy also states that coverage continues to protect the insured who makes warranties in conveying title to the property. This provision indemnifies the insured from liability incurred as a result of such warranties.

3.

No retention of interest. Many transfers leave insureds without any retained interest in the property and terminate coverage. Gebhardt Family Investment, L.L.C. v. Nations Title Ins. Co. of New York, Inc., 132 Md.App. 457, 752 A.2d 1222 (Md.App. 2000) (conveyance to family limited liability company); Gray v. First American Title Ins. Co., 2003 WL 220606 (Cal.App. 2 Dist.) (unpublished) (conveyance to partnership by members); Butera v. Attorneys’ Title Guar. Fund, Inc., 321 Ill.App.3d 601, 704 N.E.2d 949, 254 Ill.Dec. 537 (Ill.App. 1 Dist. 2001) (conveyance from trust to corporation run by trustees which conveyed to beneficiaries); Kwok v. Transnation Title Ins. Co., 170 Cal.App. 4th 1562, 89 Cal.Rptr.3d 141 (Cal.App. 2 Dist. 2009) (conveyance from limited liability company to members as trustees of revocable trust).

Transfer to Non-”Insured.” As set out above, the owner’s policy terminates where the property is transferred to a purchaser but continues where the insured does retain an interest. The term “insured” includes not only the named but those who take title “by operation of law.” Thus, some transfers, transfers by operation of law, do not terminate coverage while others made to non-insureds will result in termination. 1.

“Insured” defined. The 1992 owner’s policy defines “insured” as the named insured and “those who succeed to the interest of such insured by operation of law as distinguished from purchasers including but not limited to, heirs, distributees, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors.” Under this version of the policy, various transfers cause a termination. See Historic Smithville Development Co. v. Chelsea Title & Guar. Co., 184 N.J.Super. 282, 445 A.2d 1174 (Ch. 1981), aff’d in part, rev’d in part, 190 N.J.Super. 567, 464 A.2d 1177 (App.Div. 1983) (voluntary dissolution of insured is not by operation of law, may terminate policy); Fairway Development Co. v. Title Ins. Co. of Minn., 621 F.Supp. 120 (N.D. Ohio 1985) (voluntary dissolution of partnership terminates policy, new partnership not insured); Gebhardt Family Investment, L.L.C. v. Nations Title Ins. Co. of New York, Inc., 132 Md.App. 457, 752 A.2d 1222 (Md.App. 2000) (transfer for no consideration other than limited liability corporate form terminated policy).

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2.

“By operation of law” narrowly defined. “By operation of law” has been narrowly defined with the result that purchases terminating coverage include not only arm’s-length sales for full value but all other transfers not clearly by operation of law. See Kwok v. Transnation Title Ins. Co., 170 Cal.App. 4th 1562, 89 Cal.Rptr.3d 141 (Cal.App. 2 Dist. 2009); Butera v. Attorneys’ Title Guar. Fund, Inc., 321 Ill.App.3d 601, 704 N.E.2d 949, 254 Ill.Dec. 537 (Ill.App. 1 Dist. 2001) (purchase terminating policy is any acquisition of title by voluntary act of parties).

3.

Broadening coverage. Some jurisdictions have endorsements extending coverage to successor insureds by either expanding the definition of “insured” or naming the grantee as an insured after a transfer. The ALTA Homeowner’s Policy expands the list of successor insureds to include trustees under living or testamentary trusts or spouses receiving title to property as part of a divorce. The 2006 ALTA owners policies further expand this list to include new entities created in the change of corporate form and purchasers under deeds without actual valuable consideration.

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