Martin Tait, Jane Tait, and Bry-Mart LLC purchased real estate in 2016 for $1.25 million. Commonwealth Land Title Insurance Company issued an Owner Policy of Title Insurance, insuring the Taits against “actual loss” from various risks, to a limit of $1.25 million. The policy does not define “actual loss.”
Insured risks include someone else having an easement on the property. Excluded from coverage are recorded building restrictions and a drainage easement.
As they had intended when they contracted to purchase the property, the Taits proceeded with plans to subdivide the property into two lots, and started informal talks with the City’s development services coordinator. The City’s staff was supportive, and suggested that both the drainage easement and building restrictions could be either eliminated or modified to permit the subdivision. However, after their purchase, the Taits learned about a separate 1988 maintenance easement covering the same area as the drainage easement.
The 1988 maintenance easement was not excluded from coverage in the Owner Policy. Believing that the maintenance easement would impact the value of the property and interfere with development, the Taits tendered a claim to Commonwealth.
Commonwealth obtained an appraisal. The appraiser analyzed the highest and best use of the property on the date of loss. Making the assumption that the City would extinguish the building restrictions and drainage easement, but also assuming the maintenance easement would prohibit development, the appraiser concluded that the valuation of the property without the maintenance easement was $1.3 million. The valuation of the property with the maintenance easement in place was $1.1 million.
And consequently, the Taits suffered a diminution in value of $200,000.
Displeased with this result, Commonwealth asked the same appraiser to revise the appraisal by omitting the assumption that the City would eliminate the drainage easement and building restrictions which were in place when the Taits purchased the property. And also assuming that the newly discovered maintenance easement would indeed prohibit development.
The appraiser’s second effort concluded that the Taits would suffer a loss of $43,500. Not $200,000. Commonwealth sent the Taits a check for $43,500.
Taking a different approach, the Taits obtained their own appraisal. Their appraiser determined that the Taits could likely succeed in removing the building restrictions and drainage easement, but for the existence of the newly discovered 1988 maintenance easement. The second appraiser valued the property without the maintenance easement as two separate, developable parcels.
With the maintenance easement in place, the property could not be subdivided into two developable lots, so the Taits’ appraiser valued it as a single parcel. Consequently, the Taits’ appraiser concluded that the value of the property without the maintenance agreement was $2.08 million, and with it was $1.38 million, resulting in a total diminution in value of $700,000.
The Taits furnished Commonwealth the new appraisal and requested a total payment of $700,000. When Commonwealth refused, the Taits filed a lawsuit.
The trial court granted Commonwealth’s motion for summary judgment, reasoning that the legal standard for title insurance losses did not permit consideration of a property’s highest and best use, but only its actual use. Which was vacant land at the time of purchase. Disregarding the Taits’ appraisal, the trial court determined that Commonwealth had already paid all that was owing.
The Taits appealed.
The Court of Appeals decided initially that a property’s value for any given use can change over time, sometimes dramatically over a short period, due to external market factors such as financing costs, supply of similar properties, and changes in demand.
What remains is the question of whether the Taits’ “actual loss” under their title insurance policy should be measured based on the value of their property’s highest and best use, or merely its current use at the date of purchase. Finding that the title policy is ambiguous regarding the computation of “actual loss,” the Court used recent case authority to determine that all ambiguities will be resolved against the insurer.
The Court concluded that title insurance protects against future losses, and owners should be reimbursed for additional losses they suffer in reliance on the policy after it was purchased.
Valuing a property based on the highest and best use in the reasonably near future affords fair compensation to an owner and avoids the need to speculate about distant future development possibilities. Accordingly, since there is no language in the title policy to the contrary, the measure of a property owner’s loss is the diminution in value caused by a title defect on the date of discovery, measured according to the property’s highest and best use.
Judgment for Commonwealth is reversed; the Taits win and Commonwealth loses. See Tait v. Commonwealth Land Title Insurance Company; Case A166676; California Court of Appeals, 1st District, Division Four, June 28, 2024: https://cases.justia.com/california/court-of-appeal/2024-a166676.pdf?ts=1719615677.
Questions / Issues / Comments:
1. Is this holding fair to insurance companies? How can underwriters anticipate the development possibility of each insured parcel, particularly when title insurance has no time limit and no expiration date?
2. Based on this new case, how many insured owners will now submit claims if they are struggling with development?
3.
Are
those who write title insurance policies (and the State agencies that approve them)
now rushing to limit losses by revising owner policy forms?
Stuart A. Lautin, Esq.*
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
