Cases uniformly hold that an insurer’s duty to defend the insured under a liability or title insurance policy is separate and apart from its duty to indemnify for any loss. In the context of title insurance, the duty to defend generally involves litigation over the quality of the policyholder’s title via actions to quiet title, for ejectment, or the like.
In such actions, the trial court’s ultimate judgment may contain both favorable and unfavorable elements. For example, a trial court may uphold the policyholder’s interest in a portion of the insured real estate, but not in another portion of it, or may recognize the policyholder’s interest in the property but subordinate it to particular claims or interests.
In those situations, a determination must be made of whether to appeal the trial court’s ruling. An appeal may be self-defeating where the appellate court is at least as likely to reverse the portions of the ruling favorable to the policyholder as to reverse the portions of the ruling unfavorable to the policyholder. In those situations, it seems to make sense to allow the title insurer to decline to appeal and to indemnify the policyholder for the loss arising from the trial court’s ruling.
A New York court appears to disagree with me. In Schneider v. Commonwealth Land Title Ins. Co., Supreme Court, Kings County, Case No. 41320/2004 (decided September 11, 2007), the court held that the title insurer was obligated to appeal a trial court’s ruling that included both favorable and unfavorable elements, notwithstanding the title insurer’s conclusion that the risks of reversal of favorable aspects of the trial court’s ruling outweighed the likelihood of an appellate reversal of the remainder of the decision.
Commonwealth had issued an owner’s policy covering certain premises. The insured’s neighbors subsequently commenced an action, claiming that they owned the insured property by adverse possession. The trial court entered a mixed decision; the adverse possessors were awarded the front portion of the land, but the insured was awarded the rear portion. Commonwealth declined to appeal but offered to pay the difference in value between the entire premises versus the value of the entire insured premises less the front parcel. Commonwealth was concerned that the appellate court was more likely to award the adverse possessors the entire parcel than to award the policyholder the entire premises. After weighing the risks and rewards, Commonwealth decided not to appeal but immediately to cover the policyholder’s insured loss.
After Commonwealth declined to authorize an appeal, the insured retained its own counsel and prosecuted the appeal. As Commonwealth feared, the appellate court found in favor of the adverse possessors on all issues and awarded them the entire property.
The policyholder then brought an action against Commonwealth seeking reimbursement for its loss of the entire property, as well as costs and expenses associated with the appeal of the underlying case. Upon various cross motions, theSchneider court held that the Schneiders’ decision to appeal was “reasonable,” which imposed a duty upon Commonwealth to prosecute the appeal. Because Commonwealth did not do so, it was liable for the loss of the entire parcel, as well as costs and expenses from the appeal.
In my view, the court is wrong. It is not at all unusual for an insurer or counsel to be faced with a choice between two or more “reasonable” alternatives. Indeed, that is the essence of practicing law and handling claims. Not all “reasonable” alternatives are equally wise. In Schneider, New York law was uncertain as to whether a claim of adverse possession had to be made “under a claim of right” or whether open and hostile possession was sufficient. If a claim of right was required, then the Schneiders may well have won their appeal, given evidence that the neighbors had been well-aware of the insured’s title. Conversely, if a claim of right was not required, the Schneiders likely would lose their appeal.
The insurer should have the authority to determine whether to cut its losses, rather than to gamble on appeal. The essence of title insurance is indemnification for the loss; the right and duty to defend is to ensure that the title insurance company can weigh the merits of the claim and the risks and rewards of further litigation. If the title insurer elects to pay the loss, it should be able to do so without risking a total loss and bearing the costs of an unwise appeal.
Granted, title insurance differs from liability insurance in the sense that the amount of the loss itself may be disputed. That is, under a commercial general liability policy, the loss usually will be the amount of an adverse judgment less any deductible. In the case of title insurance, the value of a loss of a portion of a parcel may be disputed, particularly where the loss does not proportionately affect road frontage, topography or other factors. However, whatever difficulties may apply to the evaluation of a partial loss of title does not justify a rule requiring the insurer to prosecute an appeal that it deems unwise. Indeed, the net effect of the court’s ruling is to accord property owners additional settlement leverage with the title insurer to overpay a loss to avoid expenses on appeal. The more efficient rule would be to allow the title insurer to decide whether to appeal based upon its evaluation of the merits.
Lew Hassett is a partner in the firm’s litigation group and chairs the firm’s insurance and reinsurance dispute resolution group. His practice concentrates in the areas of complex civil litigation, including insurance and reinsurance matters, business torts and insurer insolvencies. Lew received his bachelor’s degree from the University of Miami and his law degree from the University of Virginia.
