Will a title insurance policy cover actions based on the fraudulent manner in which title was acquired?

Facts: Multiple owners held title to a commercial property. The property was later foreclosed and reacquired by some of the original owners. A title insurance company issued a new title insurance policy to the owners, covering defense for actions against recorded defects and liens or encumbrances on title. The policy excluded coverage of claims arising from defects created, assumed or agreed to by the owner. After the title policy was originated, the former owners sought to establish an unrecorded interest in title, claiming the current owners obtained title through fraudulent means. The owners tendered the defense costs to the insurance company which were denied. The owners settled the case and maintained complete ownership.

Claim: The owners sought damages from the title company for the denial of defense costs, claiming the title insurance company breached the terms of the insurance policy by denying their duty to defend since the action against the owner implied a defect in title.

Counter claim: The title insurance company claimed it had no duty to defend under the policy since the policy only pertained to defects in title on record at the time of issuance, and the action against the owners was in regards to allegedly unrecorded fraudulent actions taken to obtain title, not against defects in the title itself.

Holding: A California Appeals Court held the title insurance company has no duty to defend since the policy did not cover an action against the owners which was based on the allegedly unrecorded, fraudulent manner in which title was acquired, not a defect in title. [Liberty National Enterprises, L.P. v. Chicago Title Insurance Company (2013) __ CA2d __]

 

Editor’s note – A title insurance protects the title holder against any defects in the record title, liens or encumbrances that may affect the title when the policy is taken out. [Elysian Investment Group v. Stewart Title Guaranty Co. (2002) 105 CA4th 315]

Moreover, title insurance does not protect against changes in title after the policy is issued. [Rosen v. Nations Title Ins. Co. (1997) 56 CA4th 1489]

Essentially, title insurance only protects the title holder from negative differences between what is recorded and what actually exists at the time the policy is issued. It does not anticipate future defects, liens or encumbrances, only those that exist at the time of issuance.

In this case, the original claim against the owner did not entail a defect in title, but against the allegedly fraudulent means by which the title was acquired, called tortious conduct. Though the former title owner sought a percentage of the insured title, its claim was not based on a defect in the title, but a “defect” in the method the title was acquired.

 

For additional reading, current students and subscribers can read Legal Aspects, Chapter 29: Title Insurance.