The recent decision in Chicago Title Insurance Company v. Runkel Abstract & Title Company addressed whether a title insurer lost its right to indemnification when it agreed with a third-party to resolve a title insurance dispute by binding appraisal, prior to tendering formal notice to the indemnitor of the claim and its expectation for reimbursement. No. 08-cv-341, 2009 WL 921159 (W.D. Wis. Apr. 6, 2009). The court ruled in favor of the title insurer.
Runkel Abstract & Title Company (“Runkel”) was a title agency with authority to issue title insurance policies for Chicago Title Insurance Company (“Chicago Title”). Id. at *1. Pursuant to an agency agreement, Runkel promised to indemnify Chicago Title for “errors and/or omissions in the abstracting or examination of title.” Id. The agency agreement did not expressly require Chicago Title to notify Runkel of adverse claims. Id. at *4.
On December 6, 2005, Runkel issued a Chicago Title owner’s title insurance policy to a developer (the “Policy”). Id. at *2. The Policy failed to exempt from coverage a restrictive covenant limiting 33.33 acres of the insured property to single family residential or agricultural use. Id. Upon receiving notice of the covenant from the developer, Runkel admitted that the covenant should have been exempted from the coverage provided in the Policy. Id.
The developer initiated a claim against Chicago Title for the decrease in the value of the property attributable to the defect and threatened to sue Chicago Title if it failed to resolve the claim. Id. On October 10, 2006, Chicago Title and the developer entered into an agreement whereby the claim would be resolved and quantified by a binding appraisal performed in accordance with a “joint instruction letter.” Id. Around that time, Chicago Title asked Marvin Pilgrim (“Pilgrim”), a Runkel employee, to recommend an appraiser and provided Pilgrim with a draft copy of the joint instruction letter that it sent to the developer. Id. Ultimately, Chicago Title and the developer negotiated the contents of the joint instruction letter and the appraiser recommended by Pilgrim declined to assess the property. Id.
On January 5, 2007, a different appraiser issued a report setting the diminished value of the 33.33 acres at $833,250. Id. at *3. While the appraiser was completing his report, Chicago Title notified Pilgrim about the settlement negotiations, explained that it would expect Runkel to pay for the loss, and instructed Pilgrim to notify Runkel’s errors and omissions insurance carrier. Id. Chicago Title also apprised Runkel of the status of the claim and provided copies of draft appraisal agreements, but Runkel did not attempt to control or otherwise involve itself in the pending litigation. Id. On January 22, 2007, Chicago Title formally notified Pilgrim (in writing) of the indemnity provision and its expectation that Runkel would indemnify Chicago Title for its losses in connection with the title defect. Id. Subsequently, Chicago Title settled with the developer for the amount of the appraised diminution in value, $833,250. Id.
Following the settlement, Chicago Title filed suit against Runkel for breach of the agency agreement and sought indemnification for the amount of the settlement and attorneys’ fees. Id. at *1. Chicago Title then moved for partial summary judgment on the issue of liability. Id. In its cross motion for summary judgment, Runkel admitted to breaching the agency agreement, but maintained that Chicago Title forfeited its right to indemnity by failing to provide Runkel with reasonable notice of the claim. Id.
The district court granted Chicago Title’s motion and denied Runkel’s. Id. at *6. The court ruled that even though the indemnification clause did not contain an express provision requiring notice of a potential indemnification action, the duty of good faith and fair dealing implicit in every contract obligated Chicago Title to provide reasonable notice and allow Runkel an opportunity to protect its interests. Id. at * 4-5. The court found, however, that Chicago Title fulfilled its good-faith duty because Runkel had at least constructive notice of the claim. Id. at *5. The court found that despite the delayed formal notice, Runkel was aware of the claim because it admitted its abstracting mistake to the developer; its employee, Pilgrim, recommended an appraiser to help settle the matter; and Chicago Title sent Pilgrim a draft of the joint instruction letter at the time it sent the letter to the developer, apprised Runkel of the status of the claim, and provided copies of draft appraisal agreements. Id. The court also found that Chicago Title did not act in bad faith by agreeing to the binding appraisal. Id. Ultimately, the court faulted Runkel for not availing itself of its rights under the agency agreement, such as hiring its own counsel, demanding more information from Chicago Title, or advising Chicago Title of its position with respect to settlement of the claim. Id.
The court’s decision is consistent with prior decisions outside the context of title insurance. Where an indemnity clause does not contain a specific notice provision, courts have consistently found an implied obligation to provide reasonable notice. West Bend Co. v. Chiaphua Industries, Inc., 112 F.Supp.2d 816, 826 (E.D. Wis. 2000). The implied reasonable notice requirement was originally derived from cases that involved the indemnitor’s duty to defend, rather than the duty to indemnify. See Cochrane Roofing & Metal Co., Inc v. Callahan, 472 So.2d 1005, 1007-08 (Ala. 1985) (holding that indemnitee failed to provide reasonable notice for indemnitor to investigate the claim and prepare a defense); Town of Fairfield v. D’Addario, 179 A.2d 826, 828-29 (Conn. 1962) (same). In both the duty to defend and duty to indemnify context, the indemnitee must provide reasonable notice to allow the indemnitor to perform its corresponding obligations.Cochrane, 472 So.2d at 1008; D’Addario, 179 A.2d at 829.
What constitutes reasonable notice in a given case is a factual determination, largely dependant on the contractual indemnity provision the indemnitee is seeking to enforce. Where the indemnitor is called upon to defend the indemnitee against a claim, the indemnitee must provide actual notice sufficient to allow the indemnitor the opportunity to research the claim, interview witnesses, and participate in the litigation. Id. Runkel indicates that where an indemnitee invokes a duty to indemnify, it is entitled to reimbursement of a claim if it provides the indemnitor with at least constructive knowledge of the claim and the its expectation for reimbursement. Runkel, 2009 WL 921159, at *5. An agent ignores such constructive notice at its peril.
Brian J. Levy is an Associate in the firm’s Insurance and Reinsurance and Litigation Practices. Mr. Levy received his bachelor’s degree from the University of Virginia and his law degree from William and Mary School of Law.