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What “Loss” Does An Owner’s Policy Of Title Insurance Cover?

Lesson. Title insurance generally covers “actual losses” arising out of the existence of a title defect, not losses from the conduct of the insured or personal dealings between people.

Case cite. Hughes v. First Am. Title Ins. Co., 167 N.E.3d 765 (Ind. Ct. App. 2021)

Legal issue. What “actual loss” arose from an undisclosed easement.

Vital facts. Owners purchased real estate and obtained a policy of title insurance from Title Company. Unbeknownst to Owners, the prior owners (sellers) had granted an easement across the entire south side of the real estate. After Owners learned of the easement, they submitted a claim to the Title Company, which acknowledged coverage for the easement that Title Company had not disclosed to Owners.

The subject title insurance policy covered against "actual loss, including any costs, attorneys' fees and expenses provided under this Policy." Such loss must have resulted from one or more of the enumerated covered risks, one of which was that "[s]omeone else has an easement on the Land." Title Company obtained an appraisal of the diminution in value of the real estate caused by the existence of the easement. The appraisal assigned a loss of $3,000. Owners would not accept that amount.

Meanwhile, Owners sued the easement holder to challenge the validity of the easement or, in other words, to terminate it. Apparently things got a little contentious in that dispute as Owners used “tire poppers” to try to block use of the easement. In the end, the case turned out poorly for Owners, and the court ordered Owners to pay $61,000 in attorney fees and costs to the easement holder.

Owners then sued Title Company seeking to recover losses from both the easement and the prior lawsuit, including reimbursement of the $61,000.

Procedural history. The trial court granted Title Company’s motion for summary judgment, and Owners appealed.

Key rules. An insurance policy is a contract and is subject to the same rules of construction as other contracts. “The purpose of title insurance is to insure that title to the property is vested in the named insured, subject to the exceptions and exclusions stated in the policy.”

“Title insurance is a contract of insurance against loss or damage caused by encumbrances upon or defects in the title to real estate.” Ind. Code § 27-7-3-2(a); see also Ind. Code § 27-7-3-2(g)(2) (defining "title policy" as "a policy issued by a company that insures or indemnifies persons with an interest in real property against loss or damage caused by a lien on, an encumbrance on, a defect in, or the unmarketability of the title to the real property").

In Indiana, the measurement of damages resulting from an easement is “the difference between the value of the property with the defect and the value of the property without the defect.” In other words, "actual loss is the diminution in value of the property caused by the easement."

Importantly, title insurance “does not insure against the conduct of the insured and does not cover matters involving personal dealings between individuals.”

Holding. The Indiana Court of Appeals affirmed the summary judgment in favor of Title Company. Owners were to be reimbursed for the actual loss suffered in reliance of the title policy, limited to the diminution in value caused by the existence of the easement ($3,000).

Policy/rationale. Owners contended that “loss” included the $61,000 arising out of the judgment in the suit against the easement holder because “it was a loss that resulted from a covered risk (i.e. the easement).” The Court rejected that argument: “the actual loss of the insured [here, Owners] is the difference in value of the property with the encumbrance [here, the easement] and its value without the encumbrance.” The Court reasoned:

Only title to the parcel was insured … not any actions [Owners] took to keep the easement holder from using the easement. Stated another way, the [61k] loss was not a result of the existence of the easement; rather, the loss [Owners] seek to recover is a result of their actions concerning the easement….

Although it was not a part of the Hughes opinion, depending upon the circumstances a title insurance company might fund—on behalf of its insured—a lawsuit to challenge the validity of an easement. Evidently that did not happen in Hughes, possibly because Title Company determined the easement was in fact valid.

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Part of my practice includes litigation surround title insurance claims. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

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