What is the Scope of Title Insurer’s Duty to Defend a Policy Holder in California?
This issue was answered in the recent California appellate decision in Bartel v. Chicago Title Insurance Company which centered on the scope of an insurer’s duty to defend a policy holder in litigation when it is not clear whether the policy covers the underlying dispute.
Plaintiff Richard Bartel bought a property in rural Santa Cruz County to enjoy a quiet retirement. The property was so rural that no public roads connected to it.
Bartel accessed the nearest public road by using a private road that traversed the property of his neighbors to the west. Bartel believed the private road terminated at his western property line.
However, Bartel’s neighbor to the east believed he, too, had access to the private road using a route that crossed Bartel’s property.
This disagreement became acute when the property of the eastern neighbor became a site for marijuana cultivation, serviced by trucks driving through Bartel’s property during the night. Bartel installed security devices and informed his easterly neighbor that he had no right to cross Bartel’s property.
Bartel’s neighbor twice brought suit against Bartel, asserting a right to use the private road that crossed Bartel’s property. The neighbor voluntarily dismissed both suits without prejudice.
The trucks continued driving by Bartel’s house, and Bartel in turn brought suit against his neighbor to quiet title. The neighbor cross-complained, alleging a right to an easement over the private road crossing Bartel’s property.
The matter eventually went to trial, and it resulted in a judgment (affirmed on appeal in this court) that the neighbor had an express easement over the private road through Bartel’s property, based on a deed executed at the time the properties were subdivided in 1971.
Bartel largely self-funded the litigation against his neighbor using money from his retirement account. Chicago Title Insurance Company—the issuer of a title insurance policy Bartel purchased when he bought the property in 1998—rejected Bartel’s tender for defense in the suits brought by his neighbor.
Chicago Title asserted it had no duty to defend Bartel because of exclusions in his title insurance policy–one of which was general (carving out easements not recorded in a public deed) and one of which was specific (carving out claims arising from a 1970 agreement among the neighbors) between Bartel and his neighbor.
Moreover, Chicago Title asserted its duty to defend Bartel arose when the neighbor filed his cross-complaint, and it had no duty as to the earlier litigation.
Bartel denied there was a deeded easement.
Bartel disagreed with Chicago Title’s decision and continued to seek tender based on his title insurance.
Chicago Title eventually determined that it did have a duty to defend Bartel, but only after five years of litigation.
Bartel brought suit against Chicago Title for breach of contract and breach of the covenant of good faith and fair dealing. The dispute between Bartel and Chicago Title went to trial in two phases.
In the first phase, the trial court rejected Chicago Title’s statute of limitations defense and held that the insurer had a duty to defend Bartel as of his initial tender of defense.
In the second phase, the court rejected certain claims by Bartel for damages for periods outside the litigation but awarded additional damages for the diminution in value of Bartel’s property.
The court further found that although Chicago Title could have performed its duties better and more expeditiously in response to Bartel’s tender requests, it did not act in bad faith.
On appeal, Bartel challenged the trial court’s rejection of his bad faith claim and request for punitive damages, argues the court erred in denying reimbursement of his litigation costs and attorney fees for the period between actions in the underlying litigation, and asserted the court awarded inadequate prejudgment interest.
In its cross-appeal, Chicago Title asserts that the trial court erred both in finding it had a duty to defend the easement claim as of the date of Bartel’s first tender and in applying equitable tolling to reject Chicago Title’s statute of limitations defense.
The appellate agreed with Bartel that the trial court erred in its finding that Chicago Title did not act in bad faith. It rejected all other claims raised by both parties and remanded for further
proceedings.
The duty to defend is guided by several well-established principles
An insurer owes a broad duty to defend against claims that create a potential for indemnity under the insurance policy.
An insurer must defend against a suit even where the evidence suggests, but does not conclusively establish, that the loss is not covered.
Any doubt as to whether the facts give rise to a duty to defend is resolved in the insured’s
favor.
The insurer has a duty to defend the insured as to the claims that are at least potentially covered.
The determination whether the insurer owes a duty to defend usually is made in the first instance by comparing the allegations of the complaint with the terms of the policy. Facts extrinsic to
the complaint also give rise to a duty to defend when they reveal a possibility that the claim may be covered by the policy.
This includes all facts, both disputed and undisputed, that the insurer knows or becomes aware of from any source if not “at the inception of the third party lawsuit, then at the time
of tender.
The California Supreme Court has recognized that facts known to the insurer and extrinsic to the third party complaint can generate a duty to defend, even though the face of the complaint does not reflect a potential for liability under the policy.
This is so because current pleading rules liberally allow amendment; the third party plaintiff cannot be the arbiter of coverage.
Stated differently, that the precise causes of action pled by the third party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state
a covered liability.
Thus, if any facts stated or fairly inferable in the complaint, or otherwise known or discovered by the insurer, suggest a claim potentially covered by the policy, the insurer’s duty to defend arises
and is not extinguished until the insurer negates all facts suggesting
potential coverage.
To determine whether the insurer owed the insured a duty to defend, the reviewing court examines the insurance policy at issue.
Insurance policy interpretation is a question of law.
Appellate courts apply an independent standard of review to decisions interpreting, constructing, and applying insurance policies to determine the scope of actual or potential coverage.”
Bartel’s title insurance policy provides for the defense of the insured “in litigation in which any third party asserts a claim adverse to the title or interest as insured.
Applying the appellate court’s independent construction of the policy language, Composti’s claim of easement against the property—once asserted in litigation within the meaning of the policy language—would adversely affect title to the estate or interest described in the policy.
The complexity of the underlying facts does not shield the insurer from the risk of erroneously denying the tender of defense. With regard to the denials of a deeded easement, the ambiguity in the pleading of Composti I and Composti II and resulting confusion as to whether the claimed easement was subject to the exclusion from coverage based on the 1970 agreement raises considerable doubt as to the legal effect of the denials. As a consequence, Composti’s disclaimer does not eliminate the possibility of a covered claim.
While it may be true that Chicago Title was not required to speculate about unpleaded theories of easement, it wasobligated to investigate whether the extrinsic facts known to it at tender raised a possibility of liability within the scope of the policy’s coverage.
The carrier must defend a suit which potentially seeks damages within the coverage of the policy and cannot construct a formal fortress of the third party’s pleadings and retreat behind its walls. The pleadings are malleable, changeable and amendable.
The trial court’s ruling on Chicago Title’s duty to defend, based on the presence of the Boyd-Sluyter deed in the materials accompanying Bartel’s first tender of defense, is consistent with the case authority. It confirms only that an insurer’s duty to defend is based on the information known to the insurer at the time of the third party lawsuit, as distinguished from issues not litigated in that action (such as the construction of the policy language).
Bartel contends the trial court erred in finding Chicago Title not liable for bad faith based on what he characterizes as Chicago Title’s patently unreasonable treatment of his tender for defense in disregard of California law.
Bartel asserted that the court applied a legally erroneous standard in its phase II determination of bad faith by ignoring the interim judgment’s findings on the duty to defend and excusing Chicago Title’s failure to conduct a reasonable investigation or acknowledge the possibility of coverage.
Chicago Title countered that the trial court applied the correct legal standards and based its determination on substantial evidence that Chicago Title did not act unreasonably given the complexity of the fact pattern concerning the easement, the difficulty of determining which roads
were part of the 1970 agreement, and the fact that Composti specifically asserted causes of action that were excluded under the policy.
The law implies in every contract, including insurance policies, a covenant of good faith and fair dealing.
The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the agreement’s benefits.
In other words, it imposes upon each party the obligation to do everything that the contract presupposes they will do to accomplish its purpose.
An insurer is said to act in “bad faith” when it not only breaches its policy contract but also breaches its implied covenant to deal fairly and in good faith with its insured.
In this context, the term bad faith is used as a shorthand reference to a claimed breach by the insurer of the covenant of good faith and fair dealing.
An insurer’s tortious breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself.
That is, an insurer’s responsibility to act fairly and in good faith in handling an insured’s claim is not the requirement mandated by the terms of the policy itself—to defend, settle, or pay. It is the obligation under which the insurer must act fairly and in good faith in discharging its contractual responsibilities.
In simple terms, an insurer’s tortious bad faith conduct is conduct that is unreasonable.
Reasonableness is an objective standard and must be evaluated as of the time of the insurer’s decisions and actions, not in the light of subsequent events that may provide evidence of the insurer’s errors.
In sum, the undisputed facts established that Chicago Title repeatedly disregarded the California standard applicable to the duty to defend.
Chicago Title not only violated its contractual duty to defend Bartel but also its implied covenant to fairly and in good faith assess the possibility of coverage based on the available facts.
LESSONS:
1. An insurer owes a broad duty to defend against claims that create a potential for indemnity under the insurance policy.
2. An insurer must defend against a suit even where the evidence suggests, but does not conclusively establish, that the loss is not covered.
3. Any doubt as to whether the facts give rise to a duty to defend is resolved in the insured’s
favor.
4. The carrier must defend a suit which potentially seeks damages within the coverage of the policy and cannot construct a formal fortress of the third party’s pleadings and retreat behind its walls. The pleadings are malleable, changeable and amendable.
5. The law implies in every contract, including insurance policies, a covenant of good faith and fair dealing.
6. The implied promise requires each contracting party to refrain from doing anything to injure the right of the other to receive the agreement’s benefits.