The California Court of Appeal, Second Appellate District, recently held that title insurers have no duty to defend and indemnify under an ALTA title insurance policy against a third party claim that alleges tortuous conduct in the manner in which the insured party acquired title, as opposed one which alleges an independent defect in title.
A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/B234341.PDF
In this title insurance coverage dispute, the insured entity ("Insured") challenged the title insurance company's ("Title Insurer") refusal to defend and indemnify the Insured against a certain third party lawsuit (the "Underlying Action") relating to commercial real estate (the "Property"). The Insured obtained the title insurance policy (the "Policy") when it purchased the Property from the FDIC as receiver for a failed bank, which had foreclosed on its first trust deed encumbering the Property.
The Policy consisted of the standard American Land Title Association (ALTA) owner's policy form. In pertinent part, it provided that Title Insurer insures the Insured against loss or damage resulting from "[a]ny defect in or lien or encumbrance on the title." Further, the Policy provided that Title Insurer will provide for the defense against certain third party claims adverse to the Insured's interest in the Property.
Among the Insured's owners were two individuals who were involved, through several entities under their control, in a series of transactions concerning the Property. At one point prior to the Insured's purchase, an entity controlled by the individuals conveyed to the plaintiffs in the Underlying Action a 9.5 percent interest in a promissory note and second trust deed encumbering the Property.
After the purchase, the plaintiffs in the Underlying Action sued the Insured's owners, the Insured, and several other entities, alleging that the Insured had used the entity defendants, including the Insured, to avoid their obligations and duties to the plaintiffs. After the parties settled the Underlying Action, the Insured filed this lawsuit against Title Insurer, alleging breach of its duties to defend the Underlying Action and to indemnify the Insured.
As you may recall, title insurance is a contract to indemnify against loss through defects in or encumbrances on title that may affect the title at the time that the policy was issued. Elysian Investment Group v. Stewart Title Guaranty Co., 105 Cal.App.4th 315, 320 (2002). It does not insure against future events nor does it guarantee the state of the title. Quelimane Co. v. Stewart Title Guaranty Co., 19 Cal.4th 26, 41 (1998).
However, "[i]t has long been a fundamental rule of law" that an insurer has a duty to defend an insured against a third party lawsuit pleading facts that raise the potential for coverage. Waller v. Truck Ins. Exchange Inc., 11 Cal.4th 1, 19 (1995). To determine whether an insurer owes a duty to defend, a court compares the allegations of the complaint with the terms of the policy. Id. Although the insurer's duty to defend is broad, "it is not absolute but is measured by the nature and kinds of risks covered by the policy." Rosen v. Nations Title Ins. Co., 56 Cal.App.4th 1489, 1500 (1997).
The primary issue before the California Appellate Court was whether the trial court erred in finding that Title Insurer had a duty to defend the Underlying Action. Relying heavily on the opinion in Safeco Title Ins. Co. v. Moskopoulos, 116 Cal.App.3d 658 (1981), the Court concluded that the Underlying Action did not give rise to a duty to defend.
In Moskopoulos, a case involved an insuring clause identical to the one here, there was also no duty to defend the insured. Id. at 663. Significantly, the Moskopoulos Court found that the third party claim related "not to [the insured's] title in the property, but to the manner in which he acquired title." Id. at 665. Elaborating on this, the Court explained that "intentionally tortious conduct by [the insured]" was "not a defect in  title." Id. at 666.
Here, Title Insurer argued that the Underlying Action did not allege defects in title, but instead alleged tortious conduct in the manner in which the Insured acquired title.
Although the Insured pointed to a quiet title claim in the Underlying Action as distinguishing this case from Moskopoulos, the California Appellate Court disagreed. In addition, the Court held that a quiet title claim does not always "inherently presuppose" that plaintiff has legal title to the property; for example, an exception exists "when legal title has been acquired through fraud." Warren v. Merill, 143 Cal.App.4th 96, 113 (2006). Here, according to the Court, the allegations of fraud in the Underlying Action regarding the Insured's acquisition of title "fall squarely" within the exception.
Accordingly, judgment against Title Insurer was reversed, and Appellate Court directed the lower court to enter judgment for Title Insurer.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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