This month we look again at the doctrine of Insurable Title and how damages are calculated and paid when title losses occur.

Jimmy Homeowner and his wife Rebecca thought they had found the perfect home after months of looking.  It was on a nicely landscaped lot with several shade trees in the back that made a nice border between their house and the houses behind them.  His realtor even told him she could save them a great deal of money by using “her” attorney who could “tack onto” an existing title policy.  Not only would the Homeowners be able to close quickly they would save a lot of money by not having to pay for a full title search. 

The couple closed on the home and lived blissfully for a few years until Jimmy came home from work one afternoon to discover survey stakes in his back yard that came almost to the edge of the patio. 

He called his neighbor who lived behind him to see if he knew anything about why the stakes were in his yard and was informed that the neighbor was selling his home and moving away.  The new buyers had gotten a survey as required by the bank.  Jimmy called the attorney who had closed his purchase and was advised he had title insurance and should file a claim with them.   Jimmy promptly did so and the title company hired an attorney to examine the title.  The title examination disclosed an error in a deed a couple of links back in the chain of title.  In that deed the grantors purportedly conveyed a tract of land they had conveyed earlier and had forgotten about.  Unfortunately for Jimmy that tract comprised most of his back yard.

The title company wrote Jimmy a check for $15,000 and told him the claim was settled.  Jimmy told him he wanted them to try to do something to get his land back and if they couldn’t do that, the money they tendered was not sufficient to cover his loss.  After all, he had lost most of his back yard and on a $300,00.00 purchase the amount they were offering wasn’t sufficient.  And he had used most of his vacation in dealing with this problem and he wanted to be compensated for that too.

Should the title insurer have tried to defend the title to the property Jimmy lost?  And is there anything he can do about the amount of damages they paid him?  To find the answer to these questions we must look at well established law in these areas.  Item 6 of the ALTA Policy (10-17-92) summarizes the Company’s options with respect to the insured in the event a loss has been determined to be compensable.  The first is to pay the amount of the insured’s loss.  The second, is to elect to defend against pending litigation and upon losing, pay the amount of the loss plus litigation costs.  The third option is to settle with the insured or with parties other than the insured.  The fourth is to take some affirmative action to clear the title defect.  The fifth course of action is to purchase an indebtedness or judgment affecting the insured property. 

            The courts have held that if an insurer follows one of the above courses of action they have satisfied their legal obligation to the insured and they cannot be required to do anything further.  Martinka v. Commonwealth Land Title Insurance Company 836 S.W. 2nd 773 (1992).

Under the terms of the title policy the Company clearly had the right to settle and pay for the loss as opposed to filing an action to quiet title. 

The next question to consider is if the title company chooses to settle the loss as opposed to defending title what measure of damages should be applied?  According to A.J. Appleman, Insurance Law and Practice, §5201 a policy of title insurance is an agreement to indemnify against actual monetary loss or damage suffered by the insured.  It is not a covenant against encumbrances or defects (emphasis added).  In order to be compensable, the loss or damage must arise from a risk insured against under the terms of the policy. The question then becomes how are those monetary losses calculated?  Burke Law of Title Insurance, §13.3 (1986) states “the liability of the Company where there has been a total failure of title is the lesser of the fair market value of the insured property or the face amount of the policy”. This principle has also been adopted by the courts in determining the measure of damages to apply where there has been a partial failure of title.   Allison v. Ticor Title Ins. Co., 907 F2d 645 (7th Cir. 1990).

Under the term’s of the standard ALTA title insurance policy and existing title insurance law it was the title company’s prerogative to choose to pay monetary damages rather than quieting title for the Homeowners’.  And although the measure of damages they calculated may not have met the insured’s expectations, it nevertheless was a proper application under current title insurance policy law. 

This example illustrates another shortcoming of relying upon insurable title and one of the inherent risks in tacking onto existing title policies.  Remember, title insurance is not a covenant against title, but merely a contract of indemnity.  It does not cover incidental damages or losses the insured may suffer, nor may it fully compensate the insured for loss due to the manner in which losses may be calculated under the policy.