The United States Court of Appeals for the First Circuit has upheld a court’s decision protecting a title insurer from what appeared to be a conscious effort to withhold relevant information. See Commonwealth Land Title Insurance Company v. IDC Properties, Inc., Case No. 08-1130 (1st Cir., November 5, 2008). The facts of the case are complicated. Essentially, a developer owned 23 acres of land on Goat Island in Newport, Rhode Island, which it intended to develop into a condominium. The property was divided into six parcels, including three existing residential complexes and three undeveloped parcels. Each parcel had its own association.
The problem was that, although the condominium declaration allowed it to be amended with the approval of 67 percent of the voting interests, the Rhode Island Condominium Act requires unanimous consent to amendments that “create or increase special declarant rights, increase the number the units, change the boundary of any units, the allocated interest of any unit, or the uses to which any unit is restricted.” R.I. Gen. Laws, Section 34-36.1-2.17(d). The inconsistency between Rhode Island statute and the condominium declaration with respect to the consent needed to amend the declaration came to a head in 1994. At that time, the developer was facing a deadline for its right to develop a parcel known as the “Reserve Area.” The developer then promulgated amendments that granted it an additional sixteen years to develop those parcels. Although the amendments were approved by more than 67 percent of the voting interests, they were not approved by all the individual unit owners. The developer recognized the risk that the amendments could be declared invalid, but noted that the unanimous consent of all unit owners was “impossible to obtain.” Id. at 2. Therefore, the developer decided to assume an “aggressive posture.” Id.
On October 21, 1994, the developer obtained a $10 million dollar owner’s title insurance policy from Chicago Title. However, the policy did not cover the Reserve Area. “Both Chicago Title and [the developer’s counsel] recognized that the …purported extension of [the developer’s] time to exercise its development rights might be invalid because it was not approved by all individual unit owners.” Id.
Thereafter, the condominium associations of the three developed parcels and several individual unit owners challenged the developer’s right to develop the Reserve Areas, claiming that the time to exercise the development rights had expired and that the purported extensions of time were invalid. The developer’s counsel expressed to the developer his concerns that the extension of time was invalid.
Meanwhile, the developer was attempting to persuade Chicago Title or Commonwealth Title to issue a policy covering the Reserve Area. To encourage Commonwealth to issue a policy, the developer sent Commonwealth copies of the declaration, the amendments, the earlier Chicago Title Policy and a memorandum dated November 17, 1997, stating two theories upon which the developer’s rights in the Reserve Area were based. One of the theories was that, even if unanimous consent had been required, any claim was barred by a one year period of limitations. The November 17 memorandum failed to mention that one of the executive board members of the America Condominium objected to amending the declaration and had abstained from voting on what he considered an illegal proceeding. Similarly, the memorandum did not refer to the threat of litigation from the condominium associations or the individual unit owners. Moreover, the developer had negotiated a tolling agreement with the prospective plaintiffs to delay the litigation. “At no time did [the developer] disclose to Commonwealth that individual condominium owners [had] threatened a suit challenging [the developer’s] development rights or that there was a tolling agreement extending the time for bringing such a suit.” Id. at 3.
Shortly thereafter, Chicago Title declined to issue the requested title insurance policy. In a rejection memorandum, Chicago Title stated that it was aware of threatened litigation and discerned a substantial risk of litigation. The developer did not provide Commonwealth with a copy of Chicago Title’s memorandum or disclose Chicago Title’s stated reasons for declining to issue a policy. On January 13, 1998, Commonwealth issued a $7 million dollar title insurance policy, which was increased to $12 million dollars approximately one month later.
The associations sued the developer on May 29, 1999. The court found against the developer, which was affirmed on appeal. Meanwhile, Commonwealth sought a declaratory judgment that coverage was barred by the developer’s failure to disclose material facts. The District Court ruled in favor of Commonwealth, finding that the developer “knowingly failed to disclose” that litigation has been threatened, that the developer had entered into a tolling agreement and that the threat of litigation was cited by Chicago Title as a reason for declining coverage.
On appeal, the developer argued that, because the District Court did not find fraud, the developer had no obligation to disclose information to a prospective insurer unless specially asked questions on point. The Court of Appeals held that it need not decide whether the developer had an affirmative duty to disclose the information at issue, because a half-truth or failure to speak when necessary to qualify misleading prior statements amounts to a misrepresentation. Id. at 6. The Court of Appeals concluded that by articulating its theories about the basis for development rights, while excluding information about threats of litigation and the tolling agreement, the developer had made a misrepresentation. The Court also cited the developer’s decision to send Commonwealth the earlier Chicago Title Policy without disclosing that Chicago Title had declined to issue the subsequent policy. “A prospective insured cannot select and present only favorable information on a subject and delete less favorable information on the same point, even if no follow-up questions are asked.”
The Court of Appeals is correct. A title insurer should not be required to ask questions about material submitted by the insured. If the insured elects to submit materials, it should be required to disclose both favorable and unfavorable information.
Lew Hassett is Co-Chairman of the firm’s Insurance and Reinsurance Practice. 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.
