By Charles L. Stern, Jr.
Title insurance is ubiquitous in the American real estate market. Lenders generally require mortgagee’s title insurance as a condition before closing on a loan secured by immovable property. Many owners, including most commercial real estate investors and developers, purchase owner’s title insurance to protect their investments.
Title insurance in Louisiana, as in most states, is typically issued using forms drafted by the American Land Title Association (ALTA). While in our experience, most title policy holders have a reasonably good sense of the types of title matters that are covered under a standard ALTA policy, they often understand far less about the measure of compensable loss to which they are entitled in the event of a title defect that cannot be cured.
The Origin of Title Insurance and Its Measure of Loss
Title insurance is a 19th century American innovation. It was invented to protect buyers and lenders from significant title-related losses to which they were exposed under the closing procedures in effect at the time.
Prior to the invention of title insurance, purchasers and lenders had to rely on attorney title opinions, and the attorneys in turn had to rely on abstracts, prepared either by them or by a professional abstractor. An owner or lender who discovered a title problem after a transaction had been closed could pursue recovery of the resultant damages from the lawyer or abstractor, but only if the lawyer or abstractor had been negligent in his (and, in the 19th century, it was always “his”) title work. If the attorney or abstractor had been negligent, then the courts could award damages as in any other case of negligence. Those damages might include the loss of property value due to the title defect, as well as other consequential damages, such as lost profits or rents, additional carrying costs such as taxes, property insurance, and taxes, costs to remove, redesign, or relocate improvements, and even emotional distress.
But there were two holes in this system. First, even when negligence on the part of the attorney or abstractor could be proven, those professionals did not necessarily have the means to pay the full measure of loss suffered by the owner or lender due to the undisclosed title defect, particularly in an age in which professional liability insurance was far from widespread. Second, and more importantly for 21st century purposes, sometimes a title defect might arise when no one had been negligent—that is, the attorney and the abstractor had done their jobs competently, but despite their best efforts, it turned out that the property was burdened by a title defect.
This is precisely what happened in an 1868 Pennsylvania case called Watson v. Muirhead, 57 Pa. 161 (1868), in which the purchaser suffered a complete loss of his investment in a piece of immovable property, but had no recourse against anyone. In reaction to Watson, the Pennsylvania legislature authorized the issuance of title insurance through a statute enacted in the early 1870’s, and the American title insurance industry proceeded from there.
Title insurance has the obvious advantage that it is a contract of indemnity that does not require the policy holder to prove fault. In return, however, title insurance does not provide compensation for every loss that might stem from an insured title defect that cannot be cured. Rather, the standard ALTA title insurance policy indemnifies the insured for the loss of property value attributable to the title defect, but not for other forms of damage. This is a limitation of which many policy holders are unaware unless and until they make a claim.
The Measure of Loss in a Standard ALTA Policy
Under the current 2006 ALTA owner’s and mortgagee’s policies of title insurance, the insurer has several options when the insured makes a claim. If the claim is covered, then under paragraph 7 of the policy’s Conditions, the insurer can (a) pay the amount of the insurance policy to the insured, (b) settle with the adverse claimant and so vindicate the insured’s title, or (c) pay the insured “the loss or damage provided for under this policy.”
Further, before the insurer exercises any of these options, it has the right under paragraph 5 of the Conditions to defend the insured against any litigation brought by an adverse claimant, as well as the right to pursue curative action on behalf of the insured. And even if the insurer’s defense of the insured’s title is ultimately unsuccessful, the policy provides at paragraph 9(b) of the Conditions that the insurer “shall have no liability for loss or damage” until there has been a final determination by the courts adverse to the title as insured.
Let’s assume that the insurer has attempted unsuccessfully to defeat an adverse title claimant in litigation and then chooses option (c)—that is, it decides that it will pay the insured “the loss or damage provided for under this policy.” What is that measure of loss? The measure is established by paragraph 8(a) of the Conditions of the 2006 ALTA policy forms. Under paragraph 8(a), the insurer’s liability “shall not exceed the lesser of” the policy limits or “the difference between the value of the Title as insured and the value of the Title subject to the risk insured against by this policy.” In other words, the measure of indemnity due to the insured is the loss in property value attributable to the covered title defect.
In practice, that means that if the defect results in a complete loss of the insured’s title to the insured property, the compensable loss is simply the fair market value of the property. If the defect results in a partial loss—which could be either the loss of title to a portion of the insured property or an encumbrance, such as a lien or servitude, affecting the insured property—then the loss is measured by valuing the property as insured (that is, as if there were no defect) and the property with the defect, with the difference being the measure of loss. That sounds simple enough, although in practice, there can be disputes about valuation under the policy’s loss formula.
But what about other types of loss that might stem from the title defect? Suppose, for example, that the insured lost a highly profitable sale due to the title defect or that the pendency of litigation over the title delayed the start of construction on a large commercial development. In general, unless there is a way to fold those losses somehow into the value differential calculation under Section 8(a), they will be viewed as consequential damages that are not recoverable under the title policy.
An example of such a holding is First American Bank v. First American Transportation Title Ins. Co., 585 F. 3d 833, 838-39 (5th Cir. 2009), in which the Fifth Circuit, applying Louisiana law, held that consequential loss or damage is not recoverable under a standard title insurance policy. In addition, the policy does not cover additional costs or damage due to litigation delay stemming from efforts by the insurer to defend the insured title, so long as the insured has proceeded in a “reasonably diligent” manner. See Lawyers Title Ins. Co. v. Synergism One Corp, 572 So. 2d 517 (Fla. Dist. Ct. App. 4th Dist. 1990) (title insurer not liable for lost profits resulting from 33-month construction delay during pendency of litigation).
These limitations on the measure of loss compensable under a title insurance policy sometimes come as a surprise to insureds. But they are baked into both the language and history of the ALTA policy form. In return for broad coverage for title defects, title insurers have limited the measure of loss to the value differential resulting from the title defect. Other forms of damage, particularly consequential losses, are not covered under the policy.
When Might a Title Insurer be Responsible for Consequential Damages?
There are nonetheless some limited instances in which a title insurer might be liable for consequential damages. Such liability stems not from the terms and conditions of the title policy, but from breach of contract or breach of other duties owed by the insurer to the insured. If a title insurer breaches the insurance contract, then it can be held responsible for all damages generally allowable for breach of contract, including consequential damages.
For example, if an insurer improperly denies coverage altogether, even if its rationale might be reasonable, then it is liable for all the foreseeable consequences of its breach. Policy limitations do not apply. E.g., Home Fed. Sav. Bank v. Ticor Title Ins. Co., 695 F. 3d 725 (7th Cir. 2012); Mattson Ridge v. Clear Rock Title, LLP, 824 N.W. 2d 622, 630 (Minn. 2012). The insurer also exposes itself to consequential damages if it fails to pursue curative litigation “in a reasonably diligent manner” as required by Section 9(a) of the Conditions of the standard ALTA policy. If curative action has not been pursued diligently, then the insurer can be exposed to damages for the resulting delay. E.g., Premier Tierra Holdings v. Ticor Title Ins. Co. of Fla., 2011 U.S. Dist. LEXIS 61781 (S.D. Tex. 2011).
Some insureds also have brought extra-contractual claims against title insurers based on breach of an alleged duty to search title fully and disclose all defects. Such claims are typically asserted by insureds to circumvent the measure of loss in the title policy. Whether such claims are viable is a controversial topic that is beyond the scope of this short piece.
Suffice it to say that there is a wide split among the states on whether a title insurer owes its insureds any duties beyond the obligations expressly assumed in the contract of insurance. To the best of this writer’s knowledge, there are no reported decisions on this topic applying Louisiana law.
Conclusion – It’s Important to Understand the Fine Print of a Title Insurance Policy
As is true with insurance of all types, the fine print of a title insurance policy is important for insureds to understand. Understanding how title policies measure compensable loss can guide insureds in navigating the title claims process. In the end, it is to the advantage of both insurers and insureds that they work cooperatively when adverse claims do arise. That becomes easier to do when insureds understand from the outset exactly what the measure of loss will be if the adverse claim cannot be defeated or settled.
 The ALTA mortgagee’s policy further limits the loss so that it cannot exceed the amount of the secured debt.
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