The Interpretation of 7(a) and 7(b) of Title Policies Under Florida Law: Synergism Revisited
People are often mistaken about the coverage afforded by their title policies. Many believe that their policy guarantees that their title is as reflected on the policy.1 Many believe a mortgagee policy offers the same coverage as an owner’s policy.2 Others believe if a defect is found in their title which is covered by the policy, that they will be entitled to damages regardless of the title insurance company’s actions to cure the defect. It is this last misconception which is the subject of this article.
Under the American Land Title Association (ALTA) title insurance policy forms adopted in Florida with modifications, a title company is given the right to bring any action or proceeding which, in its opinion, might be necessary to establish title to the estate or interest as insured or to prevent or reduce loss or damage to the insured. The language contemplates the right of the title insurance company to bring litigation for this purpose. For an insured in this situation, the question which immediately arises is: Who will be liable for damages incurred by the insured pending a final resolution of such litigation? For example, if the insured is a land developer whose project is halted because of a title defect which the title insurance company seeks to resolve by litigation, is the title insurance company liable for the mortgage payments, redevelopment costs, lost interest, lost profit, and the like resulting from the delay—even if the title company is ultimately successful in its curing litigation?
Until this year, only two Florida district courts of appeal had addressed this issue. The Fourth DCA addressed it in the case of Lawyers Title Insurance Corporation v. Synergism, 572 So. 2d 517 (Fla. 4th DCA 1990), rev. den., 583 So. 2d 1037 (Fla. 1991), and the Second DCA in Cocoa Properties, Inc. v. Commonwealth Land Title Insurance Company, 590 So. 2d 980 (Fla. 2d DCA 1991). Since the publication of these opinions, their holdings have been adopted by the appellate court in one state and rejected by courts in three other states. Consequently, it was not certain in which direction the Fifth DCA would lean when given the opportunity to review the issue earlier this year.
This article will examine the Synergism and Cocoa Properties cases, their acceptance and rejection in foreign jurisdictions and the decision of the Fifth DCA in the case of Huntleigh Park, Inc. v. Stewart Title Guaranty Company, 717 So. 2d 1037
(Fla. 5th DCA 1998).
Synergism and
Cocoa Properties Cases
Because the published opinion in the Synergism case is fairly brief, the breadth of the decision can only be understood by examining the final judgment entered by the Palm Beach circuit court which was reversed by the Fourth DCA. In Synergism, the insured under an owner’s title policy bought a large tract of undeveloped farm land in Palm Beach County with the intention of developing it. Shortly after the purchase, the insured became aware of a claim by the adjoining property owner to a 70-foot strip along the northern boundary of the property. The insured submitted a claim under its title insurance policy to Lawyers Title Insurance Corporation, which initially commenced negotiation with the adjoining property owner to purchase the 70-foot strip. When this was unsuccessful, Lawyers Title brought a suit to quiet title in the insured to the 70-foot strip pursuant to §4 of the policy, which in part reads as follows:
4. Defense and prosecution of actions; duty of insured claimant to cooperate.
(b) The company shall have the right, at its own cost, to institute and prosecute any action or proceeding or to do any other act which in its opinion may be necessary or desirable to establish the title to the estate or interest, as insured, or to prevent or reduce loss or damage to the insured. The company may take any appropriate action under the terms of this policy, whether or not it shall be liable hereunder, and shall not thereby concede liability or waive any provision of this policy. If the company shall exercise its rights under this paragraph, it shall do so diligently.
(c) Whenever the company shall have brought an action or interposed a defense as required or permitted by the provisions of this policy, the company may pursue any litigation to final determination by a court of competent jurisdiction and expressly reserves the right, in its sole discretion, to appeal from any adverse judgment or order.
Using this right under the policy, Lawyers Title brought suit to quiet title to the 70-foot strip in the insured. During the pendency of the litigation, the insured’s damages mounted. The insured was required to return deposits to purchasers whose contracts were lost. The insured had to continue making mortgage payments on its acquisition and construction loan. The insured also incurred redevelopment costs as a result of having to reposition utility lines which had been located in the 70-foot strip. Two years and nine months after bringing the suit, Lawyers Title finally succeeded in obtaining a judgment favorable to the insured and quieting title to the insured in the 70-foot strip. The insured then demanded that Lawyers Title reimburse it for the damages it had suffered during the pendency of the action. Lawyers Title refused, citing §7 of the policy, which read as follows:
7. Limitation of Liability (a) If the company establishes the title, or removes the alleged defect, lien or encumbrance, or cures the lack of a right of access to or from the land, or cures a claim of unmarketability of title, all as insured, in a reasonably diligent manner by any method, including litigation and the completion of any appeals therefrom, it shall have fully performed its obligations with respect to that matter and shall not be liable for any loss or damage caused thereby.
(b) In the event of any litigation, including litigation by the company or with the company’s consent, the company shall have no liability for loss or damage until there has been a final determination by a court of competent jurisdiction, and disposition of all appeals therefrom, adverse to the title as insured.
Lawyers Title’s interpretation was that under §7(b), having successfully obtained a judgment in favor of the insured, it had no liability whatsoever for any loss or damage suffered by the insured. The insured, on the other hand, argued that it was unreasonable to expect that the insured would be saddled with the damages it had suffered in the interim. In the insured’s opinion, the language in §7(b) would only apply to relieve the title company from damages which would have arisen directly from an adverse judgment such as the loss of the 70-foot strip. The insured argued that §§7(a) and 7(b) had to be read together and that §7(a) required that the defect be cured within a reasonable period of time as called for in §4 of the policy. The insured argued that two years was not a reasonable time. The trial court agreed with the insured.
The Palm Beach County circuit court stated that a judicial construction of §7(a) was a case of first impression in Florida. Under such circumstances, the court stated that it must look to other jurisdictions for guidance and cited as the leading case Nebo, Inc. v. Transamerica Title Insurance Company, 12 Cal. App. 3d 222, 98 Cal. Rptr. 237 (1971). The trial court adopted the holding in Nebo that because the policy did not specify that the insurance company would not be liable for the actual damages resulting from a title defect during the litigation period, it was ambiguous. According to the trial court, the import of Nebo is that even though litigation is ongoing, a title defect still must be removed by the insurer within a reasonable time, and failure to do so renders the insurer liable for the insured’s interim or mesne consequential damages. The trial court awarded the insured a judgment for approximately $545,000.
The Fourth DCA rejected the insured’s argument and trial court’s position and reversed in favor of Lawyers Title. In the opinion of the Fourth DCA, because Lawyers Title was successful in concluding litigation to remove the title defect under §7(b) of the policy, the title company had no liability to the insured for damages. The court cites Professor Burke in defense of its position.3
The Second DCA in Cocoa Properties buttressed the Synergism holding. In a case in which the insured discovered a prior mortgage on its property and turned in a claim to Commonwealth Land Title Company, Commonwealth undertook litigation to defend the insured’s title. The ensuing litigation took two years and resulted in a final judgment of foreclosure in favor of the prior mortgage holder. Commonwealth then purchased the prior mortgage and voluntarily dismissed the foreclosure suit, clearing title for the insured. In the interim, the insured lost its purchasers for the property, suffering lost profits. The insured sued for the losses. The trial court granted a summary judgment in favor of Commonwealth.
Commonwealth had argued that because it brought litigation which ultimately terminated favorably to the insured (by purchasing the final judgment of foreclosure and then dismissing the suit), it was entitled to be free of any liability to the insured pursuant to §7(b) of the policy. The Second DCA, however, reversed the trial court and rejected Common- wealth’s argument. The court looked at §§7(a) and 7(b) and said that they were not in conflict and that the court must give effect to both paragraphs. The court further stated that had Commonwealth won the mortgage foreclosure litigation, it would agree that paragraph 7(b) of the policy would control and it would have affirmed the summary judgment in favor of Commonwealth, citing Synergism for the proposition. Paragraph 7(b) provides that a claim does not arise or is not maintainable until there is a final judicial determination adverse to the title. In this instance, however, the Second DCA said that Commonwealth had “gambled” on litigation and lost, finally clearing the title instead through a purchase. Consequently, §7(b) of the policy did not prevent recovery by the insured.
Three years later, the South Carolina Court of Appeals adopted both Synergism and Commonwealth in the case of First Federal Savings Bank of Brunswick v. Stewart Title Guaranty Company, 451 S.E.2d 916 (S.C. App. 1994). In the First Federal case an insured submitted a claim under a policy issued by Stewart Title which immediately commenced litigation to cure the title defect. Eventually, Stewart Title obtained a final judgment clearing title for the insured over two years later. The insured brought suit against Stewart Title and won because the trial court held that Stewart Title had failed to cure the title defect in a timely fashion. The trial court awarded the insured (among other damages) damages for the depreciation in value of the property during the pendency of the litigation. The South Carolina Court of Appeals reversed the trial court, citing Synergism and Cocoa Properties. The court examined the policy provisions of §§7(a) and 7(b) and found them clear and unambiguous and held that absent a finding adverse to the title, no claim arose or loss occurred for which Stewart Title could be held responsible under its policy. The court stated that it had not overlooked the trial court’s finding that Stewart Title did not timely act on the “claims” made by the insured, but held
There were, then, no claims for Stewart Title to act upon once Stewart Title elected, pursuant to the limitations contained in paragraph 7(b) and 8(b) to litigate. Indeed, to hold otherwise would rob Stewart Title of its right to institute litigation to cure a defect in a title or lien and thus would convert each policy from one that indemnifies the insured’s state of title into one that guarantees it. There were also no losses for Stewart Title to indemnify because in both instances the litigation that Stewart Title chose to bring led to favorable results.
First Federal, 451 S.E.2d at 921.
Florida Position Rejected
One year later, a Massachusetts federal court expressly rejected the holdings in Synergism and Cocoa Properties. In the case of Hatch v. First American Title Insurance Company, 895 F. Supp. 10 (D. Mass. 1995), the insured homeowners had a house for sale when they discovered a title defect. Litigation was brought by First American which lasted for five years and ultimately cured the defect. The insureds sued the title company claiming that they had lost $25,000 in interest and $136,000 in the value of their property during the lengthy litigation.
The Massachusetts court looked at §§7(a) and 7(b) of the policy and said that taken together they are ambiguous, because it is unclear whether the reasonableness standard (for the time in which the title company has to cure the defect by litigation) promulgated in §7(a) applies in §7(b). The Massachusetts court stated that the Second DCA in Cocoa Properties reached “contradictory conclusions.” The Massachusetts court then expressly rejected Synergism, Cocoa Properties, and First Federal Savings Bank of Brunswick. Instead, it held that if a title company brings litigation to cure a title defect, the curing must be done in a reasonable time in light of the insured’s circumstances. The court cited the California case of Nebo, 12 Cal. App. 3d 222, 98 Cal. Rptr. 237 (relied upon by the insured in Synergism) in support of its position.
The next year a Maryland court of appeals also rejected the Synergism and Cocoa Properties holdings without mentioning them. In the case of Stewart Title Guaranty Company v. West, 676 A.2d 953 (Md. App. 1996), the insureds submitted a claim based on their discovery of a lack of access to their property and a mistake in the legal description. The factual scenario is different in that the title company denied coverage and refused to take any action to cure the problem. Nevertheless, the Maryland court promulgated an unusual interpretation of §§7(a) and 7(b) that is antithetical to the interpretation made by the Florida courts in Synergism and Cocoa Properties. The Maryland court held that §§7(a) and 7(b) have to be applied in combination and implies that when taken together they are ambiguous. Furthermore, the court expressly rejected the exposition of Professor Burke which was cited favorably by both the Synergism and Cocoa Properties cases. The Maryland court held that if the title company admits at the time of the submission of the claim by the insured that the known title defect is “adverse to the title” (using the language in §7(b) of the policy), then the title company does not have a right to bring litigation to final judgment because it is already known that the insured’s title is defective. The qualifying phrase “adverse to the title” according to the Maryland court indicates that §7(b) only applies when the “adverse” nature of the title defect is in dispute. The implication seems to be that the Maryland court would only allow §7(b) protection to the title company (in terms of freedom from liability) in cases in which the title company and the insured agree that the defect is based on a meritless claim.
Thus by 1996, the South Carolina court had lined up with Synergism and Cocoa Properties. The courts of Maryland and Massachusetts rejected Synergism and Cocoa Properties. The stage was now set for the Fifth DCA to review the issue.
The Huntleigh Park Case
In May 1993, Huntleigh Park, Inc., a local development company, purchased a parcel of real property in Osceola County, Florida. At closing, Huntleigh Park purchased an owner’s policy from Stewart Title Guaranty Company. In October 1994, Huntleigh Park entered into a contract for the sale of the property. Subsequently, the prospective purchaser discovered a set of covenants and restrictions which encumbered the property and which were not listed as exceptions in the title policy. In November 1994, Huntleigh Park submitted a claim to Stewart Title alerting Stewart Title to the encumbrance. In January 1995, Stewart Title sent Huntleigh Park a letter indicating that Stewart Title had chosen to exercise its rights under the terms of the policy to bring a suit to remove the covenants and restrictions from the subject property.
In the meantime, Huntleigh Park feared that it would lose its buyer, who was refusing to close on the purchase of the property with the covenants and restrictions thereon. Consequently, in February 1995, after having been informed that Stewart Title would bring a class action suit to remove the covenants and restrictions, Huntleigh Park sold the property by reducing the sale price by $136,150. One month later, Huntleigh Park sent a letter to Stewart Title demanding reimbursement of that amount. Stewart Title refused, stating that it was exercising its rights under §4 of the policy to bring litigation and cure the title defect. Huntleigh Park filed suit against Stewart Title in June 1995, at which point the class action suit had not yet been filed. (It was filed in August 1995).4 After Stewart Title filed its answer and affirmative defenses, Huntleigh Park noticed the case for trial. This resulted in the entry of a January 1996 order by the trial court setting the case for jury trial in May 1996. Stewart Title responded with a motion for continuance, asking the judge to continue the trial until after its class action suit to remove the covenants and restrictions was completed, based on the title company’s rights under §7 of the policy. In April the trial court granted the motion, ordering Stewart Title to inform the court within 10 days of the entry of a final judgment in the class action suit. In January 1997, the class action suit ended in a final summary judgment removing the covenants and restrictions as an encumbrance upon the property. Huntleigh Park and Stewart Title each then filed motions for summary judgment. The trial court entered summary in favor of Stewart Title, based on Synergism and Cocoa Properties. The insured appealed.5
The Argument
Before the Fifth DCA, Huntleigh Park argued basically three points:
1) When read together, §§4, 7(a), and 7(b) of the title policy are ambiguous and contradictory;
2) Stewart Title was not entitled to use §7(b) of the policy as a stand alone defense to damages; and
3) Having waited nine months to actually file the class action suit to remove the covenants and restrictions from the property, Stewart Title had not acted in the reasonably diligent manner required by the policy provisions allowing it to bring litigation to cure the title defect.
In furtherance of its position, Huntleigh Park adopted the position of the trial court in the Synergism case (citing Nebo) and asked the Fifth DCA to take a fresh look at the interpretation of §§7(a) and 7(b) promulgated in Synergism and Cocoa Properties. Huntleigh Park argued that the Massachusetts court was correct in holding that it was simply unfair to expect an insured to stand by for several years while a title company proceeded on its right to bring litigation to cure a title defect and expect the insured to shoulder any losses or consequential damages resulting to it in the meantime. More creatively, Huntleigh Park asked the court to reconcile the Synergism and Cocoa Properties holdings with its own requested position by interpreting them in light of the Maryland court’s theory in the West case. In that regard, Huntleigh Park argued that the reason the Fourth DCA held as it did in the Synergism case was the court recognized that the claim by the adjoining property owner to the 70-foot strip of the insured’s property was not a claim adverse to the title (presumably borne out by the eventual entry of a final judgment in favor of the insured in that case). Huntleigh Park argued that the decision of the Second DCA in the Cocoa Properties case was a result of the fact that the existence of the prior mortgage on the insured’s property was a title defect acknowledged by all parties to have been “adverse to the title.” Ergo, according to Huntleigh Park, the same logic could be applied to its own situation where the covenants and restrictions were acknowledged to be a title defect adverse to the title of Huntleigh Park. Finally, Huntleigh Park argued that because §§4 and 7(a) of the policy required that any action by the title company as to the title defect be taken reasonably and diligently, a logical interpretation of §7(b) would have to infer the same reasonableness and diligence standard for any litigation brought on the part of the title company.
Stewart Title relied upon the Synergism, Cocoa Properties, and First Federal of South Carolina cases and argued that the West case was distinguishable on its face because it involved a situation in which the title company wrongfully denied coverage and refused to take any action to cure the problem.6 Stewart Title argued that the courts in Synergism and Cocoa Properties had made no comment whatsoever on the nature of the title defects involved in each case, but rather focused on the result of the litigation effort on the part of the title companies to cure them.
In the appeal, Huntleigh Park was able to point to the recent case of Hodas v. First American Title Insurance Company, 696 A.2d 1095 (Me. 1997), in which the Supreme Court of Maine adopted (without citations) the position of the Massachusetts court in Hatch and held that the title company was liable for consequential damages resulting to the insured from a title defect notwithstanding the title company’s having brought litigation successfully to cure the title. Huntleigh Park also argued that the trial court had committed reversible error in granting a summary judgment to Stewart Title because there was an issue of material fact to be determined: whether Stewart Title had brought the suit to remove the covenants and restrictions diligently and within a reasonable time after the claim was filed.
In rebuttal, Stewart Title argued that the Hodas case (like Hatch) represents the position adopted by the trial court in the Synergism case but rejected across the board by the Fourth and Second district courts. With regard to the putative issue of fact raised by Huntleigh Park, Stewart Title argued that its diligence in bringing the class action suit to remove the covenants and restrictions was moot because Huntleigh Park chose to go forward with a closing without Stewart Title’s permission in February 1995 when its damages were established by the reduction in the purchase price offered to induce the buyer to close. With the damages established, it made no difference when the suit was filed.
The Fifth DCA entered a per curiam affirmed in favor of Stewart Title on May 19, 1998.
Conclusion
The Fourth, Second, and now Fifth district courts of appeal in Florida have all agreed that a title insurance company has no liability to its insured if it successfully concludes litigation which it brings to cure a title defect on the insured’s property. If the title company “gambles” on litigation, however, and loses, then the title company will be liable for damages resulting from the defect, including damages incurred by the insured during the litigation period.
It also seems clear that the Florida courts are not going to apply a reasonableness and diligence standard in a §7(b) situation, at least involving the length of a suit once it is filed. The question remains: What if the title company, having acknowledged coverage and promised to remove the title defect by litigation, waits years to bring the suit? It is hard to believe as a practical matter that this situation could arise, but the issue is still unresolved by the Florida cases. In the Huntleigh Park case, the insured (while admittedly between a rock and a hard place, facing a possible loss of its buyer) enervated its own argument regarding the nine-month lapse between the submission of the claim and the filing of the suit to remove the covenants and restrictions by choosing to go forward to closing and reducing its purchase price without seeking the permission of Stewart Title. In the absence of this situation, however, if the title company gambles on litigation to cure its insured’s title defect and wins, it is not liable for damages to the insured arising from the defect. q
1 The policy is a contract of indemnity for damages, not a guaranty of the state of the title. See First Federal Savings & Loan v. Transamerica, 793 F. Supp. 265 (D. Colo. 1992); Stewart Title Guaranty Company v. Cheatham, 764 S.W.2d 315 (Tex. App. 1988).
2 The standard for damages is different. See CMEI v. American Title, 447 So. 2d 427 (Fla. 5th D.C.A. 1984); National Title Insurance Co. v. Safeco Title Insurance Co., 661 So. 2d 1234 (Fla. 3d D.C.A. 1995).
3 Professor D. Barlow Burke, Jr., wrote what is regarded as the original reference work on title insurance:Law on Title Insurance, 2d ed. (1993, 1997 Supplement). Both Synergism, 572 So. 2d 517, and Cocoa Properties, 590 So. 2d 980, cite §9.4.3 thereof: “The claim only lies once a court speaks, and not before, and not if the court’s judgment is favorable.”
4 The suit by Huntleigh Park was filed against Stewart Title in Orange County, where the insured’s local headquarters are located (Case No. CI-95-3647). The class action suit was brought in Osceola County, where the insured’s property was located (Case No. CI-95-0891).
5 In the case, the Stewart Title policy had renumbered the policy provisions such that the standard ALTA form §§7(a) and 7(b) were 9(a) and 9(b) in the Stewart Title policy. The Fifth D.C.A. case number is 97-02250.
6 This was illustrated by the Maryland court’s citation of Endruschat v. American Title Insurance Company, 377 So. 2d 738 (Fla. 4th D.C.A. 1979), wherein two dentists constructing their office building discovered a restriction of record not listed as an exception in the title policy. They turned in a claim, but were rebuffed by the title company, which said they had suffered no damages. The dentists filed their own successful quiet title action, and then sued the title company for damages. Not surprisingly, they won. But the Endruschat case itself lent support to Synergism and Cocoa Properties, by pointing out that §7(a) of the policy does not even concern itself with litigation. Endruschat, 377 So. 2d at 742.
Shawn G. Rader is a partner in the Orlando law firm of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. He received his bachelor’s degree from Duke University in 1974, his master’s degree from Catholic University in 1976, and his J.D. from the University of North Carolina-Chapel Hill in 1980. Mr. Rader is a member of the New York and Florida bars and is a former chair of the ABA Title Insurance Litigation Committee.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Bruce M. Stone, chair, and Brian C. Sparks and William P. Sklar, editors.
