The District of Columbia Court of Appeals recently held that a title insurance policy excluded coverage for defense costs relating to a separate quiet title action brought by the holder of a prior owner’s unrecorded deed of trust, who alleged that that the insured was not a bona-fide purchaser without notice.
The Court held that there was no duty to provide a defense under the “eight corners rule,” and that the title insurer did not owe the insured a fiduciary duty of disclosure based upon its agent’s examination of title.
A copy of the opinion is available at: http://www.dccourts.gov/internet/documents/13-CV-0216.pdf
The insured (“Insured”) made a commercial loan to a borrower (“Borrower”) secured by a deed of trust on Borrower’s property. Following Borrower’s default, Insured agreed to discharge the debt and pay Borrower $225,000 in exchange for the property. As a result, Insured obtained title to the property and purchased a title insurance policy insured by Title Insurer.
Another lender of Borrower (“Second Lender”) alleged that when Insured made the loan to Borrower, it too had made a loan, but that Second Lender’s deed of trust was not recorded. Settlement for the unrecorded deed of trust was handled by the same settlement agent who closed Insured’s loan to Borrower, who was also an agent of Title Insurer (“Agent”). Second Lender alleged that Insured knew of its loan, and filed a lawsuit to quiet title.
Insured made a claim under its title insurance policy. Title Insurer refused to provide defense coverage, denying the claim under Paragraph 5(a) which precluded payment for matters not insured by the policy, and Paragraph 3(b)’s exclusions of coverage. Title Insurer subsequently determined that the claim was also excluded under Paragraph 3(a). Together, those provisions exclude coverage for “defects, liens, encumbrances, adverse claims, or other matters: (a) created, suffered, assumed, or agreed to by the Insured Claimant; [or] (b) not Known to the Company, not recorded in the Public Records at Date of Policy, but Known to the Insured Claimant and not disclosed in writing to the Company by the Insured Claimant prior to the date the Insured Claimant became an Insured under this policy[.]”
In denying defense coverage, Title Insurer relied upon the “eight corners rule” set forth in Stevens v. United General Title Insurance Co., 801 A.2d 61 (D.C. 2002), which states: “[T]he duty to defend is determined generally by the terms of the insurance policy and the allegations in the complaint against the insured[.]” In applying the rule, Title Insurer asserted that Paragraphs 5(a) and 3(a) of the policy, when read against the complaint, excluded defense coverage for the quiet title action, because the quiet title action alleged that Insured had knowledge of Second Lender’s unrecorded interest in the property.
Insured retained its own counsel, and ultimately prevailed in the quiet title action. Thereafter, Insured brought suit against Title Insurer seeking damages for breach of the insurance contract and for breach of fiduciary duty because the Second Lender’s loan was settled by Agent, who was agent of Title Insurer.
The trial court granted summary judgment in favor of Title Insurer, agreeing that (i) Paragraph 3(b) of the exclusions from coverage excluded the defense of the quiet title lawsuit; and (ii) because the breach of fiduciary duty claim was not based upon the title insurance policy, it was precluded under Paragraph 15(b) which provided that “[a]ny claim of loss or damage that arises out of the status of the [t]itle or by any action asserting such claim shall be restricted to [the] policy.” Slip Op. at 6-7.
Affirming, the Court of Appeals determined that the breach of fiduciary duty claim was not based upon the title insurance contact. Insured asserted that Agent knew of Second Lender’s loan, and was authorized to issue title insurance on Insurer’s behalf, and therefore contended that Title Insurer owed Insured a fiduciary duty of disclosure beyond the terms of their contractual relationship. In rejecting this theory, the Court determined that “there is no conflict of interest when an insurer issues title insurance to different buyers of the same property. We are not persuaded that the act of issuing title insurance, and thereby entering into a contractual relationship with the insured, creates a fiduciary duty beyond the terms of the title insurance policy. Consequently, [Insured]‘s breach of fiduciary duty claim fails.” Slip Op. at 8.
As an additional note, the Court observed that Paragraph 6 of “Schedule B Exceptions from Coverage” provides that “any title search and examination conducted in connection with the issuance of a title insurance policy is solely for the benefit of [Title Insurer]. Accordingly, the title examination that Agent conducted at the time of the first sale was not for Insured ‘s benefit, and he cannot use that title examination as the factual predicate for his breach of fiduciary duty claim.” Slip Op. at 8.
The Court of Appeals also agreed that there was no duty to defend under the “eight corners rule.” As you may recall, “an insurance company‘s duty to defend depends only upon the facts as alleged to be, so that the insurer‘s obligations should be measured by comparing the policy it issued with the complaint filed in the underlying case.” Slip Op. at 10. “[T]he obligation to defend is not affected by facts ascertained before suit[,] or developed in the process of litigation[,] or by the ultimate outcome of the suit.” Id. at 10. Rather, “[i]f the facts alleged in the complaint . . . would give rise to liability under the policy if proven, the insurer must defend the insured. . . . The rule potentially allows an insurer to deny its insured a defense even if the insurer is aware of facts which, if pleaded, would entitle the insured to a defense . . . .” Id.at 11.
In applying the eight corner’s rule, the Court of Appeals rejected the factual exception test adopted in Fitzpatrick v. American Honda Motor Co., Inc., 575 N.E.2d 90, 93 (N.Y. 1991), which would require the insurer to provide a defense when it has actual knowledge of facts establishing a reasonable possibility of coverage. Slip Op. at 12. Explaining that it was wary of the potential for additional collateral proceedings, the Court of Appeals noted that the factual exception test would obligate courts to look beyond the allegations in the complaint to discover the actual facts, or at a minimum, whether the insurer knew or perhaps even should have known of such actual facts; and would place the insured in the position of dictating the theory of the action, including conceivably requiring the carrier to defend a claim the plaintiff has no intention of asserting merely because allegedly there are facts which support such a claim.
Thus, the Court of Appeals affirmed the grant of summary judgment in favor of Title Insurer.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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