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Posting for
Thursday, November 5, 1998
by: Bert Rush
brush@firstam.com
MEASURE OF DAMAGES/LOAN POLICY/WAIVER OF DEFENSE
In a case litigated for the better part of eight years, which resulted in two published court of appeal decisions, one of our competitors (who shall remain nameless) has successfully defended a $26,241 claim.
The last-reported decision is Karl v. Commonwealth Land Title Insurance Co. (1997) 60 Cal.App.4th 858, 70 Cal.Rptr. 374.
Whoops--guess the cat's outta the bag.
But, customer service aside, this case provides good authority for handling of claims under the lender's policy of title insurance.
Mr. and Mrs. Karl invested $128,000 to purchase a note (with a face value of $150,000) secured by a second deed of trust against an eighteen-unit apartment building in San Diego, CA. As part of this purchase the Karls assumed the rights of the insured under a CLTA (California Land Title Assn.) standard coverage lender's policy. (Helpfully, the Court quotes pertinent policy language which is indistinguishable from pre-EAGLE ALTA policy language.)
When the borrower became delinquent, the Karls learned for the first time of a tax lien in the amount of $26,241 which enjoyed priority over both the first and second deeds of trust. To protect its position, the holder of the first (Coast Federal Savings and Loan) paid the tax lien and added $26,241 to the balance due under its deed of trust.
Seeking to protect their position, the Karls negotiated with Coast Federal to reinstate the first deed of trust by the Karls' payment of all past-due installments and reimbursement to Coast Federal of the $26,241 paid to satisfy the tax lien.
The Karls took possession of the apartment building pending foreclosure of their second deed of trust and made repairs costing $3,090. At the same time they made a claim under their title policy to the independent agent underwritten by Commonwealth. The agent denied the claim, telling the Karls they had not yet suffered a loss due to the (covered) tax lien.
The Karls completed foreclosure and were successful bidders with a credit bid of $218,589. This amount represented the amount due on their note, plus trustee's fees, installment payments to Coast Federal and the $26,241 paid on the tax lien.
One month after they acquired the property the Karls re-sold it to McMillin Properties for a total price of $695,062. Of this amount the Karls received total consideration of $220,053, consisting of $47,576 in cash and a purchase money second deed of trust for $172,476.
The Karls re-made their title policy claim and the same was forwarded to Commonwealth. Commonwealth (apparently unaware that a re-sale was completed) denied the claim for three reasons:
"(1) Commonwealth was prejudiced by the Karls' failure to tender the claim back in August 1989 (before the Karls commenced foreclosure and took possession); (2) their payment of the tax lien without its consent was 'an unnecessary voluntary assumption of liability;' and (3) the tax lien was not a lien when the policy was issued because the tax collector had marked the taxes 'paid' after the prior owner paid the taxes with a bad check, and the tax lien was reinstated after the policy date. Commonwealth concluded the letter by stating, 'if you have any other information or authority please contact the undersigned as soon as possible so that this office may re-evaluate its position on coverage.'"
The Karls replied saying that Commonwealth's agent received the claim in August 1989, and the tax lien did exist when the policy was issued--having never really been paid. They offered to settle the claim for payment of the $26,241.
Commonwealth denied the claim again, saying that upon re-evaluation it appeared the Karls suffered no loss due to the tax lien, under the terms and conditions of the policy--since the re-sale had made them whole (ie., they recovered all of their principal, interest, and amounts advanced to protect their security interest).
The Karls sued Commonwealth for bad faith (the "insurance tort"). But soon the trial court awarded summary judgment to Commonwealth on grounds that the Karls could not show a compensable loss--having been made whole by the re-sale.
The Karls appealed, and the Court of Appeals reversed, adopting a "fair market value as of foreclosure" rule, and holding:
"(W)hen an insured secured lender claims injury from an undisclosed senior lien, and has foreclosed upon and obtained title to the security by means of a credit bid, the lender's 'loss' (if any) under a standard lender's title policy occurs on the date of foreclosure. (I)n determining whether the lender has sustained a 'loss' under the policy, the value of the acquired security is its fair market value as of the date of foreclosure, not the price realized at a later sale." (See Karl v. Commonwealth Land Title Insurance Co. [1993] 20 Cal.App.4th 972, at 983.)
At trial evidence of fair market value ranged from $600,000 to $747,000. The jury decided the value was $714,993 at the time of foreclosure. Since this exceeded the amounts secured by both deeds of trust and the tax lien (a total of $695,062), it was found the Karls suffered no compensable loss. So the Karls appealed again.
This time the Court of Appeals affirmed, first upholding the trial court's decision to measure damages based on fair market value at time of foreclosure with no deduction for estimated costs of re-sale.
The Karls argued that, like any lender, they expected their loan to be repaid in cash (not necessarily true--but we won't digress), so in order to fairly reimburse their loss the transaction costs of a re-sale should be deducted from the fair market value calculation. (In this case, the parties stipulated this transaction cost would equal 5% of the value of the property.) In support of this argument the Karls referred to provisions of the UCC (Uniform Commercial Code) concerning remedies available to sellers of goods when a buyer wrongfully rejects delivery.
But the Court rejected this analogy, and instead referred to its original holding (on the first appeal) that the measure of damages should be fair market value at date of foreclosure period. The Court said that while a lender may hope to be repaid in cash, in the event of default what the lender is entitled to is the security (here the apartment building), which may or may not be convertible to cash.
Next, the Court held that Commonwealth did not waive the right to deny coverage on grounds of "no compensable loss" by virtue of its first denial letter, which failed to raise the issue. Declining to follow a rule of "automatic waiver" when an insurer has facts available but fails to raise a defense (as recognized by a federal trial court in McLaughlin v. Connecticut General Life Ins. Co. [N.D.Cal.1983] 565 F.Supp. 434), the Court instead followed the rule announced by the California Supreme Court in Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 44 Cal.Rptr.2d 370, that an insurer "does not impliedly waive coverage defenses it fails to mention when it denies a claim."
In this connection, the Court said that the language at the end of the first denial letter (inviting the insured to submit additional information to provoke a re-evaluation) evidenced Commonwealth's intention to consider the claim "open" for consideration of new issues. Said the Court,
"A holding to the contrary would be 'inconsistent with established waiver principles by erroneously implying an intent to relinquish contract rights where no such intent existed." (Citing Waller.)
Comment: There's lots more of interest in this case which was dealt with by the Court's decision, but was excised from the version certified for publication in the official reports.
First, Commonwealth spent more than $35,000 on expert witness fees--apparently paid to its appraiser. I think in hindsight we'd all agree it's better to pay your insured than an appraiser to argue with your insured. (Although I acknowledge these things tend to creep up on one--as happened to me more than once in my claims-handling days.)
Second, it appears the Karls' case may have suffered from weak expert witness testimony. Their primary witness was a realtor, who relied on a drive-by look at the property and comparable sales information. They tried to shore up their case by offering evidence of the discounted (cash) value of their carried-back purchase money deed of trust--but all such evidence of what McMillin Properties paid for the apartment building was either excluded or rendered marginally relevant by the fair market value at time of foreclosure test. It looks like the Commonwealth appraiser made a strong impression on the jury.
Third, the trial court also refused to allow evidence of the Karls' expenditures of time and money making repairs to the property to influence the jury's decision on the measure of damages--which refusal was upheld by the Court of Appeals but not made a part of the published decision.
And, finally, how ABOUT that first denial letter?!? Not something the likes of which I'd want to see in one of our claim files. Seems to reflect little or no investigation or evaluation of the claim.
