Posting for

Monday, August 10, 1998

by Doug Heumann

dheumann@firstam.com

DUTY TO DEFEND/RIGHT TO PAY OR SETTLE/TORT OF INSURED

(Intro by Bert Rush: Doug Heumann is our in-house counsel in San Diego. Doug has asked that we consider a pending claim situation--as follows.)

          I have an interesting issue I'd like your input on. First American issued an ALTA '92 policy of title insurance on a property containing an office medical building. A parking easement for 7 parking spaces in the parking lot of the next door medical building was included in the Schedule A legal description. First American missed a quitclaim deed from the prior owner of our Insured's property to the servient tenement for the parking space easement. This document appeared in the chain of title to our Insured's property. We had an appraisal of the diminution in value because of the loss of the easement. The appraisal showed the diminution in value to be $35,000. First American issued a check to our Insured for that amount and First American received a release from liability over the dispute in the loss of value to our Insured's property.

          Thereafter, our Insured proceed with a cause of action to declare the quitclaim deed releasing any interest in the parking space easement void. In that lawsuit, the defendant/ servient tenement filed a cross complaint with the following causes of action:

          1.        A cause of action seeking declaratory relief against our Insured to determine whether an easement for parking spaces exists;

          2.        A cause of action to quiet title to property over which an easement is alleged; and

          3.        A cause of action for trespass to land against our Insured for his use and his tenants' use of the parking space easement.

Our Insured tendered defense to First American. We fulfilled our obligation under the policy with regard to the first two causes of action (payment of diminution in value). The third cause of action for the intentional tort of trespass is the subject of this e-mail.

I would like some input as to the potential arguments in favor of coverage and those against. Also, does anyone know of any cases on point, either reported or unreported. Please e-mail me your responses.

Reply to Doug: The first question that comes to my mind is what are the merits of the insured's claim to the easement area? If we've investigated, researched and concluded that title as insured is indefensible, then I'd say we should get an appraisal and pay the diminution in value--as you've done. I strongly believe that a title insurer is not obligated to pursue non-meritorious lawsuits on behalf of an insured, nor should we be obligated to defend the insured's trespass without any colorable claim of right.

This is the position we've taken in the Washington, D.C. claim featured in Claims Chronicles 8--but the insured has continued to sue First American for tendering $27,500 and withdrawing from providing further legal representation for his battle with his neighbor. But I think we're right in that case.

Two other experiences come to mind. Years ago I handled a St. Paul Title claim where my predecessor claims handler had decided an insured was asking them to pursue a losing case--so St. Paul tendered diminution in value and withdrew. The insured went to court against his neighbor and won! Then the insured sued St. Paul for bad faith. A serious problem.

Moral: If you pay and withdraw you have to be right--even in hindsight.

The second case involved a missed easement over our insured's rural land. We thought we couldn't defeat the neighbor's use of the easement to access his farm--so we paid diminution in value (which was much less than the policy amount) and withdrew. The insured sued us for bad faith, saying that not only was the neighbor using the easement for access--he was over-burdening the easement by starting a sod farm business and driving trucks up and down the road all hours (and all speeds). The insured said our payment did not fulfill our obligations, because we should continue to pay his legal bills to fight the overburdening issue. We got an opinion from outside counsel--to get back on board with the insured--which we did.

If the insured has any reasonable basis to fight for the easement, then I think our payment of a policy benefit less than the policy amount may not terminate our duty to provide legal representation. And, under the recent Buss decision in California, if we are obligated to pay for any part of the insured's defense we may have to advance payment for all of it--at least until the case is resolved. Then we might pursue the insured for reimbursement. I hope someone more familiar with Buss than I am will weigh in here...are we taking the position, contrary to Buss but consistent with standard title policy language, that we are only obligated to pay for defense of matters covered by our policy?

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           Following Monday's posting Jim Dondero (Grand Rapids, MI) writes:

One could undoubtedly make legal arguments on both sides of this issue with supporting authority. But most of these arguments (and court decisions in support) will turn on one or more key FACTS of the case.

Let's not ignore the rip-roaring facts in our favor here: 1. The Insured had voluntarily accepted First American's check in settlement of its claim based on the independent appraisal, 2. in exchange therefor, RELEASED First American from further liability, and then 3. apparently without the knowledge or consent of First American, initiated its OWN legal action to recover title to that which First American had already paid for. Realistically, I don't think that even a California court would hold against us on these facts!!!

Concurring with the writer, I am not aware that the law in ANY state requires insurers to prosecute or defend non-meritorious lawsuits on behalf of its insureds, although the same cannot be said of those states that require insurers to defend those causes of action "related" to the covered claim(s) (e.g. perhaps the count releting to the Insured's alleged "trespass" in the instant litigation but, again, I think the fact that the Insured initiated this action after settling with First American clearly relieves us of any such duty).

Reply to Jim: I can tell this'll surprise you--we probably did not require a release as a condition to payment to the insured of their policy benefit. I know some claims handlers do, but I've always believed it's better practice not to...reason being that once the insurer has investigated and determined the insured is entitled to some certain amount under the terms of the policy, the insurer has the obligation to pay at least that amount--with no strings attached--even if the insured protests and demands more.

We saw Stewart Title go to trial in San Diego years ago in a case where they clearly owed their insured about $7,000, but before they paid anything the insured got p.o.'d and sued them for bad faith. So they shipped the file to outside counsel and litigaged it out. At trial--before a jury--the CEO of Stewart was on the witness stand and was asked why the insureds had not at least been paid the undisputed $7,000. Duh. Jury awarded the insureds both punitive damages and damages for emotional distress--total award right around $1 million...on a $7,000 claim.

Another thing: In California an insured who sues an insurer under a policy is not entitled to recover attorneys' fees except, to the extent the same were incurred to recover the insured's basic policy benefit. So if the policy benefit has been paid you (hopefully) avoid possible liability for the insured's legal expenses. I also believe once the policy benefit is paid many of these plaintiffs' counsel loss their incentive to pursue the insurer for extra-contractual damages. Many plaintiffs' counsel take these cases on a contingent fee basis--and if the policy benefit is already paid they can see they can't get a percentage of the "easy money," and the other issues of bad faith and emotional distress will be harder to prove. So there you are.

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      While out of the office last week I learned (with considerable frustration) that our "remote connectivity" capability was down‑‑so I couldn't use my computer.  We did manage to get out a posting for Thursday but weren't able to post further replies to last Monday's posting (Doug Heumann's San Diego claim) til now.  Here is Jim Dondero's follow‑up reply to mine on paying claims without requiring a release:

Check again, Bert - Doug said we received a release of liability in exchange for our check in payment of the appraised value of this loss. I hear you, though, with respect to the insurer's obligation to fairly quickly establish and pay an insured's loss in order to avoid the added expense and potential liability for "bad faith" and tort claims.

Meanwhile, Keith Pearson (Glendale/L.A.) writes

The trespass causes of action would seem to be not a covered matter since we conceded that the insured had no right to use the easement and paid dimunition in value, the insured's tort would seem to be a matter created, suffered or assumed by the insured, and it would seem that our settlement would operate to estop the insured from making a claim on the exact same matter.

Regarding the Buss decision, I respectfully disagree that we have a duty to pay for all of the causes of action and then seek reimbursement. Buss interpreted a CGL policy which does not have the limiting language that a title policy does regarding the scope of the defense obligation. The Buss case specifically interpreted the CGL policy and did not appear to be making a policy decision applicable to all lines of insurance. The first sentence of the opinion is "We granted review to resolve certain issues relating to standard commercial general liability insurance policies ..." The dissent even recognized that a title policy limitation of defense to only covered causes of action would operate to limit the scope of the defense obligation, and that there was no such limitation in the CGL policy in question. The policy in question provided that the insurer has a duty to defend the insured in any action brought against the insured seeking damages for any covered claim.

I do recognize that there is some powerful language in the Buss opinion regarding the duty to defend but the other premise of the case set out in the second paragraph is the insurer's right to reimbursement for defense of non-covered claims.

My understanding is that Chicago is of the opinion that title insurance policies are governed by Buss and Fidelity is of the opposite opinion that Buss does not govern title policies. I do not know about any of the other majors and these opinions were expressed many months ago and may have changed. Hope this is helpful.

Ben Knittel (Houston) writes:

Doug:

A couple of thoughts on the tender of defense:

If I understood your story correctly, you have paid the insured for loss in value based on the loss of the parking easement, and you have a release from the Insured. Wouldn't your response be to indignantly point to the terms of the release? Obviously, I haven't seen the Release instrument, but if it contains a general release of liability as to the easement, wouldn't this cover the trespass claim? When doing this sort of release, I usually have the settlement agreement provide that Schedule A will be amended to delete the disputed parcel, and have them surrender the policy so that I can note on the face of it that Schedule A has been amended by Endorsement dated ____________, etc., and then issue an endorsement deleting the parcel. How can we possibly be liable for claims of any sort related to property that we didn't insure, or in your case, property as to which we have received a general release from liability?

Also, Paragraph 6 (b) of the Conditions and Stipulations provides that upon exercise of the right to settle with the insured based on diminution in value, the duty to defend terminates.

Finally, how about just referring to the insuring clauses of the policy, and noting that there is no insuring clause providing coverage for intentional torts (particularly as they relate to property no longer insured by the policy).

By the way, I agree with Bert that we are not obligated to carry on litigation regarding matters where the economics don't justify it - either because the value of the rights in question is low, or because we see little likelihood of prevailing.

Onward...Cliff Morgan (Santa Ana) writes:

If you check with Tim Sullivan I believe you will find we follow the dissent in the Buss decision, meaning we only defend those causes of action which fall within the coverage of the policy. With respect to Doug's concern about the trespass cause of action, that matter should be tendered to our insured's public liability carrier (their homeowners policy carrier). Trespass is covered by those types of policies. I have had personal experience with this type of a claim through a neighbor of mine. That should get us off the hook.