Stewart Title Guaranty Co. v. West

HOLLANDER, Judge. This appeal arises out of a claim by Thomas W. West and his wife, Dawn K. West, appellees, against Stewart Title Guaranty Company (“Stewart Title”), appellant, for breach of a title insurance policy. When the Wests purchased real property in New Windsor, Maryland in 1987, they obtained a title insurance policy issued by Stewart Title. In 1990, they filed suit in the Circuit Court for Carroll County against several defendants, including appellant, alleging that the land that, they received was not what they had been promised in their contract, that their property lacked access to any public rights of way, and that defects in the title rendered the property unmarketable.

The circuit court entered summary judgment against Stewart Title on the ground that the Wests’ property was unmarketable. It awarded damages, prejudgment interest, and attorneys’ fees in the total amount of $272,978.68. Aggrieved ¹¹⁹ by this decision, Stewart Title now appeals and presents multiple issues for our consideration: I. Did the lower court err in entering summary judgment against Stewart Title in the absence of an affidavit or any other competent evidence demonstrating that Stewart Title breached the policy?

II

Did the lower court err in entering summary judgment against Stewart Title in light of the provision which limits claims against the insurer in the event of litigation until there has been a final determination by a court of competent jurisdiction adverse to the title?

III

Did the lower court err in entering summary judgment against Stewart Title in the absence of certain necessary parties?

IV

Did the lower court err in awarding Appellees damages in excess of the face amount of the title policy? V. Did the lower court err in awarding Appellees damages in excess of their actual loss?

VI

Did the lower court err in awarding Appellees attorney’s fees and pre-judgment interest? For the reasons discussed below, we conclude that summary judgment was improper. Therefore, we shall vacate summary judgment and remand for further proceedings. FACTUAL BACKGROUND This case involves a long and complex factual and procedural history.

We have gleaned the following summary of facts from the record. In 1986, the Wests searched for property on which to build a home; they were particularly interested in land that was suitable for raising horses. In December of 1986, a real estate agent, Joseph M. DeChiara, showed them an unimproved 3.3658 acre parcel in Carroll County (“the Property”), owned by Adele Building & Supply Company (“Adele”). According to a plat of the land that DeChiara showed them, the Property was to have separate means of access to two nearby public ¹²⁰ roads: Springdale Road to the west and Rowe Road to the south.

On June 6, 1987, the Wests signed a New Home Sales Agreement with Adele to purchase the Property, on which Adele was to construct a house. A plat of the Property, which was prepared by Sylvia Gorman, Adele’s listing agent, was attached to the agreement. The plat, like the one that De-Chiara previously had shown to the Wests, showed that a .4 acre triangular parcel of land in the northeast corner of the Property (“the triangular parcel”) was included in the Property. In addition, the plat indicated that, although the Property would be almost completely surrounded by adjacent properties, the Wests would have access to Springdale Road by means of a “panhandle strip” that they would own in fee simple, and they would also have use of a right-of-way to Rowe Road (“the right-of-way”).

Attached to the agreement was a “Right-of-Way Agreement and Declaration of Maintenance Obligations” for the common use of the right-of-way. After the house was constructed, the Wests hired Land Title Research of Maryland, Inc. (“Land Title”) as their settlement agent. At settlement on June 26, 1987 in Land Title’s offices, the Wests purchased two title insurance policies issued by Stewart Title. The first policy was an “owner’s policy” (“the Policy”) insuring the Wests, with a coverage limit of $112,640.00.

The second policy was a “lender’s policy.” 1 The owner’s policy stated, in part, as follows: SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS CONTAINED IN. SCHEDULE B AND THE PROVISIONS OF THE CONDITIONS AND STIPULATIONS HEREOF, STEWART TITLE GUARANTY COMPANY, a corporation of Galveston, Texas, herein called the Company, insures, as of Date of Policy shown in Schedule A, against loss or damage, not exceeding the ¹²¹ amount of insurance stated in Schedule A, and costs, attorneys’ fees and expenses which the Company may become obligated to pay hereunder, sustained or incurred by the insured by reason of: 1. Title to the estate or interest described in Schedule A being vested otherwise than as stated therein; 2. Any defect in or lien or encumbrance on such title; 3.

Lack of a right of access to and from the land; or 4. Unmarketability of such title. (Capitalization in original.) At settlement, the Wests also obtained the deed to the Property, which contained a metes and bounds description of the Property. Unknown to them at the time, however, the deed did not convey either the triangular parcel or the panhandle strip.

As the Policy contained the same erroneous Property description, it did not include the triangular parcel or the panhandle strip. The Wests did not learn of any problems with the title to their Property until the spring of 1988, when Mr. West was clearing shrubs in the triangular parcel. Lawrence E. Peach, who, along with his wife, Deborah A. Peach, owned the immediately contiguous parcel of land, approached Mr. West and told him that he believed Adele had sold the triangular parcel to him, and that he would look into the matter. After the Wests heard nothing from Peach for several weeks, they decided to look into the matter themselves.

Mr. West obtained a copy of his deed and “plat plan” 2 and took them to a surveyor, Daniel Staley, who earlier had prepared a survey of the Property that the Wests ordered for settlement but, apparently, never received. After Staley compared the deed and his survey of the Property, he advised the Wests of several problems with their title. First, neither the triangular parcel nor the panhandle ¹²² strip was conveyed to the Wests. Second, the Wests were “landlocked,” because their Property had no access to any public roads.

Moreover, in what both Stewart Title and the Wests agree was a mistake, the instrument by which Adele had previously created the right-of-way actually identified the Peaches’ lot, and not the Wests’ lot, as one of the properties benefited by the right-of-way. Accordingly, the Wests were not entitled to use the right-of-way. In fact, in 1990, Donald A. Dustin, the owner of the property that the right-of-way crossed, hired an attorney who sent the Wests a letter instructing them not to use the right-of-way across his property. Dustin also erected cattle fencing and a barricade that substantially narrowed the right-of-way and made it difficult for the Wests to drive their horse trailers on it, although the right-of-way was not completely blocked.

Thereafter, in the summer of 1988, the Wests contacted Joseph Goldberg, the president of Land Title. Goldberg examined the Wests’ deed, their “plat plan,” and Staley’s survey and agreed that the Wests were landlocked. Goldberg told the Wests not to contact anyone about the problems, and that he would take care of everything. Apparently, Goldberg made several attempts to contact Adele about the Wests’ difficulties, but he ultimately was unsuccessful in resolving the problems.

In December 1988, Ms. West contacted Goldberg about his progress. Goldberg advised her that, although he could resolve the problems involving access to Rowe and Springdale roads, he could not resolve the problem involving the triangular parcel because that parcel was not covered by. the Wests’ Policy. He advised Ms. West that she and her husband should hire an attorney. At some point during this time period, the Wests discovered an additional problem with their title; Adele had left two unreleased mortgages on their Property.

The parties agree, however, that, shortly after the Wests filed suit, Land Title was able to procure the release of both liens. The problems with their title caused the Wests to have difficulty obtaining a second mortgage and re-financing for ¹²³ their Property. In 1990, they obtained a $34,000.00 second mortgage from Atlantic Federal Savings Bank, but at an interest rate of 13%, which was higher than the rate generally available. 3 In 1992, Atlantic Federal offered its employees an opportunity to obtain financing on their homes at the reduced rate of 7 1/2%. The Wests wanted to re-finance and consolidate their two mortgages at that time, but their application was denied because of the unmarketable status of their Property.

On June 22, 1990, the Wests filed a multi-count complaint in the Circuit Court for Carroll County against Adele, Robert L. Thomas (Adele’s president), Land Title, Goldberg, Gorman, Long and Foster Real Estate, Inc. (Gorman’s employer and the listing broker for the Property), DiChiara (alleged to be the “selling agent” for the Property), Coldwell Banker Residential Real Estate, Inc. (DiChiara’s employer), and Stewart Title. As to Stewart Title, appellees asserted a breach of contract and a negligence claim. They alleged, inter alia, that “the Plaintiffs purchased a policy of title insurance from Stewart Title ... whereby Stewart agreed to insure against defects or unmarketability of the title to the property and to insure a right of access to and from the land,” that “there are defects in the title, the title is unmarketable and the Plantiffs’ [sic] lack a right of access to and from the land,” and that “Stewart has failed to provide good and marketable title and access to and from the land and [in] breach of its agreement to insure same.... ” In their negligence claim, appellees alleged that appellant breached its “duty of care to the Plaintiffs to adequately supervise Stewart’s agents____” After suit was filed, settlement negotiations occdrred among the parties and the Wests’ neighbors. Several proposals were made that included various confirmatory or corrective conveyances to resolve the Wests’ title problems.

But these negotia ¹²⁴ tions were unsuccessful and, on October 6, 1992, the Wests filed a second amended complaint, adding two new counts and several new defendants (the Peaches, Dustin, and Leonard and Deborah Crunkilton, who owned the other parcel of land benefited by the right-of-way). The Wests asked for a declaratory judgment or the appointment of trustees to execute confirmatory deeds, or both, to establish the following: the Wests, and not the Peaches, were entitled to use the Rówe Road right-of-way; the Wests were the owners of the panhandle strip; Dustin did not have a right to use the right-of-way to Springdale Road. At the same time that they filed their second amended complaint, the Wests filed a motion for summary judgment against Stewart Title, Land Title, and Goldberg. The motion asserted that these three defendants had issued to the Wests a title insurance policy from Stewart Title, that title to the Property “is defective, Plaintiffs lack access to and from the land and title is unmarketable,” and that the defendants “have failed and refused to pay the Plaintiffs’ loss” or costs and “have failed and refused to take the actions necessary to cure said defects.” It added that the defendants had “failed and refused to take any action whatsoever regarding these claims as a result of which the Plaintiffs have been forced to file this litigation.” Attached to the motion was a copy of a portion of the Policy, but no affidavit was attached to the motion.

On December 30, 1992, Stewart Title filed both a response to the Wests’ motion and a cross-claim seeking the same relief with respect to the right-of-way that the Wests had sought in their second amended complaint. In its response to the Wests’ motion, Stewart Title asserted that, since neither the triangular parcel nor the panhandle strip was included in the description of the Property insured by its Policy, “any alleged defects which arise with respect to these areas and which may affect marketability or access are not covered by the Policy.” Stewart Title asserted that the Wests’ second amended complaint and its own cross-claim constituted “litigation” about this title defect, and Paragraph 7(b) of the Policy precluded ¹²⁵ the Wests from pursuing their claim against Stewart Title until the litigation reached a final conclusion. A hearing was held on the motion, at which the Wests’ counsel outlined the problems "with his clients’ title associated with the triangular parcel, the panhandle strip, and the right-of-way. The Wests argued that they were entitled to collect under their Policy under any of three provisions: (1) the provision insuring against “unmarketability” of their title; (2) the provision insuring against “lack of a right of access” to and from their land; or (3) the provision insuring against defects in the title.

The circuit court granted the motion in a written opinion, dated May 18, 1993. After reviewing the conveyances in the Wests’ subdivision, the court stated: [A] rudimentary examination of the public record reveals the serious title defects of which the plaintiffs now complain. It is, therefore, apparent that Goldberg and Land Title conducted settlement on this land without examining the source of Adele’s title and without properly examining the public record to determine what real property Adele owned. The court recited the following problems with the Wests’ property: 1.

The Property “has no express access to Rowe Road.” 2. The Wests “lack fee simple access to a public right of way.” 3. They “may or may not be benefitted by a right of way to Springdale Road.” 4. The “property is burdened by two liens which they did not create, having an aggregate principal amount of $101,-200.00.” 4 5. “Separate from and in addition to [the Wests’] lack of access problems,” there was the problem that their Property “may be burdened by an unrecorded right of way” between ¹²⁶ Dustin’s lot and the Peaches’ lot.

The court cited the fact that Dustin received in his deed a right-of-way over the Peaches’ land to Springdale Road, while the Peaches’ deed (as a result of the mistake discussed earlier) granted them a right-of-way over Dustin’s land to Rowe Road. But since the Wests’ land is between Dustin’s and the Peaches’ lots, the Wests’ Property “could be subject to an unrecorded right of way in favor of the Peach and Dustin lots.” From the foregoing, the court concluded that the Property was “unmarketable” and entered summary judgment in favor of the Wests and against Goldberg, Land Title, and Stewart Title. The court also instructed the clerk to set a date for an inquisition on the Wests’ damages. The inquisition was held on September 30, 1994.

After the inquisition, the circuit court assessed damages against Stewart Title, Land Title, and Goldberg, jointly and severally, in the amount of $272,978.68. This figure consisted of $175,000.00 for the value of the Property, $2,000.00 for the value, of the triangular parcel, 5 $650.00 in appraisal fees, attorneys’ fees in the amount of $18,195.68, and $77,133.00 in prejudgment interest. The court also assessed additional damages of $66,275.00 against Land Title and Goldberg, as compensation for the Wests’ “having to live with this mess.” Stewart Title subsequently filed a motion to alter or amend the damages award or, alternatively, for reconsideration. At the hearing, Stewart Title’s counsel stated to the court that “almost 90%” of the defects with the Wests’ title had been resolved.

He asserted that the Wests had already received both the triangular parcel and the panhandle strip, and he expected that a “confirmatory right-of-way agreement” would be signed by the Crunkiltons and the Peaches shortly. The Wests’ counsel did not dispute that almost ninety percent of the problems had been resolved, although he asserted that the ¹²⁷ resolution had occurred through the Wests’ efforts. At the conclusion of the hearing, the court denied Stewart Title’s motions. With respect to the motion to alter and amend, the court stated: By the terms of the title insurance policy ...

Stewart had two choices upon notice that the title defects existed. One was to correct the defects in the title—all defects, or two, pay the Plaintiffs the face amount of the policy, $112,640.00. Stewart failed to do either, and having failed to perform their obligations under the policy, Stewart breached the contract with the Plaintiffs. Accordingly, the Court has determined ... to deny the Motion to Alter or Amend.

I don’t feel that you can breach a contract and then attempt to rely on the protections of the contract. At the request of both parties, the court certified the judgment against Stewart Title as final under Rule 2-602(b). We agree that this certification was appropriate under the rule and applicable case law. Stewart Title noted a timely appeal. 6 DISCUSSION I. Stewart Title contends that the circuit court erred in entering summary judgment against it, because there were disputed issues of material fact.

It also complains that the court’s written opinion does not contain a “finding” that it breached its insurance contract, but instead only concluded that the Wests’ Property was “unmarketable.” Appellant objects to the trial court’s statement some two years later, at the hearing on its motion to alter or amend, that it had “breached” the Policy. Appellant argues that “[f]or the lower court to state for the first time two years after the issuance of its May 18, ¹²⁸ 1993 Memorandum Opinion that Stewart Title breached the Policy ... violates every fundamental concept of fairness and due process.” It further asserts that there is no evidence to support the court’s conclusion that it breached the Policy. In order for us to examine these issues, we begin with a review of the fundamental principles of title insurance. A title insurance policy protects the insured against loss or damage as a result of defects in or the unmarketability of the insured’s title to real property. 7 Powell on Real Property ¶ 1029 at 92-5 (1995); John Alan Appleman & Jean Appleman, Insurance Law and Practice § 5201 at 2 (1981); Walters v. Marler, 83 Cal.App.3d 1, 18 , 147 Cal.Rptr. 655, 665 (1978).

Its purpose is to safeguard a transferee of real estate from the possibility of a loss through defects that may cloud the title. Appleman, Insurance Law and Practice, § 5201 at 8; McLaughlin v. Attorneys’ Title Guaranty Fund, 61 Ill. App.3d 911 , 18 Ill.Dec. 891, 895 , 378 N.E.2d 355, 359 (1978). Ordinarily, there are three components of title insurance.

D. Barlow Burke, Jr., Real Estate Transactions: Examples and Explanations 185 (1993). First, it is an indemnity agreement to reimburse the insured for loss or damage resulting from title problems. Id. Second, it is “litigation insurance,” by which the insurer is required to defend the insured in the event the insured’s title is attacked by a third party.

Id. Finally, and “perhaps above all, it involves the hiring of experts in title matters.” Id. The predominant view today is that title insurance—at least as to its first-party aspect—is a contract of indemnity, and not a contract of guaranty or warranty. See First Federal Savings and Loan Ass’n of Fargo, N.D. v. Transamerica Title Insurance Co., 19 F.3d 528, 530 (10th Cir.1994); Chicago Title Insurance Co. v. McDaniel, 875 S.W.2d 310, 311 (Tex. 1994); Karl v. Commonwealth Land Title Insurance Co., 20 Cal.App.4th 972, 978 , 24 Cal.Rptr.2d 912, 915 (1993), rev. denied (March 17,1994); Gibraltar Savings v. Commonwealth Land Title Insurance Co., 905 F.2d 1203, 1205 (8th Cir.1990); Willow Ridge Limited Partnership v. Stewart Title Guaranty ¹²⁹ Co., 706 F.Supp. 477, 480 (S.D.Miss.1988), aff'd without opinion, 866 F.2d 1419 (5th Cir.1989); Green v. Evesham Corp., 179 N.J.Super. 105 , 430 A.2d 944, 946 , cert. denied sub nom.

Midatlantic Nat’l Bank v. Chicago Title Insurance Co., 87 N.J. 422 , 434 A.2d 1095 (1981). See also Appleman, Insurance Law and Practice, supra, § 5201; 13A Couch on Insurance § 48:111 (Mark S. Rhodes rev. ed.1983). Consequently, a title insurer does not “guarantee” the status of the grantor’s title. Falmouth National Bank v. Ticor Title Insurance Co., 920 F.2d 1058,1062 (1st Cir.1990).

As an indemnity agreement, the insurer agrees to reimburse the insured for loss or damage sustained as a result of title problems, as long as coverage for the damages incurred is not excluded from the policy. First Federal Savings & Loan Ass’n of Fargo, supra, 19 F.3d at 530 ; Focus Investment Associates, Inc. v. American Title Insurance Co., 992 F.2d 1231, 1237 (1st Cir.1993); Lawrence v. Chicago Title Insurance Co., 192 Cal.App.3d 70, 74-75 , 237 Cal.Rptr. 264, 266 (1987). We recognize, however, that there are cases that suggest that a title insurance policy constitutes a guaranty or warranty of title. See Zions First National Bank v. National American Title Insurance Co., 749 P.2d 651, 653 (Utah 1988) (“title insurance is in the nature of a warranty”); Drilling Service Co. v. Baebler, 484 S.W.2d 1, 18 (Mo.1972); Lawyers Title Insurance Corp. v. Research Loan & Investment Corp., 361 F.2d 764, 767 (8th Cir.1966); Luboff v. Security Title & Guaranty Co., 46 Misc.2d 599 , 260 N.Y.S.2d 279, 283 (N.Y.Sup.

Ct.1965). When an insured notifies an insurer of a title problem, the insurer .ordinarily has three choices. It may either (1) pay the insured for the loss up to the amount of the coverage limits of the policy, see 15A Couch on Insurance § 57:172; (2) clear the title defect within a reasonable time, see Appleman, Insurance Law and Practice § 5214; or (3) show that the alleged unmarketability or other title problems do not really exist, and thus there is no way in which the insured could sustain any loss. See 15A Couch on Insurance § 57:177. ¹³⁰ In cases such as this one, a critical issue is when a title insurer may be deemed to have “breached” its insurance contract.

Some authorities take the position that, when title is defective at the time the policy is delivered, the policy is breached and the insurer is immediately liable to the insured, even though the exact amount of legal loss would not necessarily be definitively ascertained at that juncture. See Walker v. Transamerica Title Insurance Co., 65 Wash.App. 399 , 828 P.2d 621 , 624 n. 4 (1992); Peoples Downtown National Bank v. Lawyers’ Title Guaranty Fund, 334 So.2d 105, 107 (Fla. Dist.Ct.App.1976); In re Gordon, 317 Pa. 161 , 176 A. 494, 495 (1935); Couch on Insurance 2d, supra, § 48:113 at 109. Other authorities, however, take the position that an insurer is not immediately in breach simply because title is defective on the day the policy is issued.

Appleman, Insurance Law and Practice, supra, § 5214 at 86; Couch on Insurance 2d, supra, § 57:172. Instead, their position is that, if defects are' discovered, the insurer may comply with its obligations under the contract if it clears the title defects within a reasonable time. See Appleman, § 5214 at 86. For example, in Sala v. Security Title Insurance & Guarantee Co., 27 Cal.App.2d 693 , 81 P.2d 578 (1938), the court stated: The theory of the trial court, and the contention of respondents as well, fails to take into account the contract in its entirety, and by thus disregarding the rights of the title company under the terms of the contract, assumes that the title company breached the contract as of the day the insurance policy was issued and that therefore on said date was liable in damages....

Such a theory is obviously unsound for the reason that it forecloses the title company, if it elects so to do, from exercising its right, according to the terms of the policy, to clear the title. Manifestly, the insurance policy must be construed in its entirety, and it was as much the right of the insurance company to perform the contract according to its terms as it was the right of the assured to expect payment in the event of a failure upon the part of the title company so to do. ¹³¹ Id., 81 P.2d at 583 . See also George K. Baum Properties, Inc. v. Columbian National Title Insurance Co., 763 S.W.2d 194, 201-02 (Mo.Ct.App.1988) (insurer’s mere failure to pay claim does not, in and of itself, constitute a breach, when insurer has other options under the policy, including instituting suit or other actions deemed necessary or desirable in order to establish title in the insured). We conclude that the latter view of what constitutes a “breach”—that the insurer is not immediately in breach simply because title is defective on the day the policy is issued—is more in line with both title insurance law and the standard form title insurance policy that we have before us.

As we have observed, a title insurer does not guarantee the state of the title. Instead, a title insurance policy is a contract of indemnity. The view that a title insurer is in breach simply because there are defects in the title at the time the policy is issued would turn the title insurer into the guarantor of the grantee’s title. Other courts that have construed standard form title insurance policies have held that a title insurer is not automatically in breach simply because the insured property is conveyed in an unmarketable state or with title defects; “the mere existence of a defect covered by the policy in and of itself is not sufficient to justify recovery.” Falmouth National Bank, supra, 920 F.2d at 1063 .

Paragraph 5 of the Policy is titled “Options to pay or otherwise settle claims.” It states: The Company shall have the option to pay or otherwise settle for or in the name of the insured claimant any claim insured against or to terminate all liability of the Company hereunder by paying or tendering payment of the amount of insurance under this policy together with any costs, attorneys’ fees and expenses incurred up to the time of such payment or tender of payment, by the insured claimant and authorized by the Company. Moreover, Paragraph 7(a) of the Policy provides Stewart Title with the option to clear a title defect in accordance with its contractual obligations. It states: ¹³² No claim shall arise or be maintainable under this policy ... if the Company, after having received notice of an alleged defect, lien or encumbrance insured against