Does a Title Insurance Entitle Owners to Reimbursement for Diminution in Value?

In the recent case of Tait v. Commonwealth Land Title Insurance Company, Plaintiffs Martin Tait, Jane Tait, and Bry-Mart, LLC (collectively, the Taits) sued Commonwealth Land Title Insurance Company (Commonwealth) for breach of a title insurance policy and alleged that Commonwealth failed to pay the full amount by which their property’s value was diminished due to an undisclosed easement.

The trial court granted Commonwealth’s motion for summary judgment, ruling that the policy required Commonwealth to compensate the Taits only for the value of their actual use of the property as a vacant residential lot suitable for only one home rather than its highest and best use as a subdividable lot.

The appellate court agreed with the Taits that the policy entitles them to reimbursement for the diminution in value of their property based on its highest and best use.

As a result, the Taits’ evidence of the likelihood of subdivision and the value of a subdividable lot created a triable issue of fact regarding the amount of the Taits’ loss under the policy, thereby precluding summary judgment.

In 2016, the Taits purchased a residential property in Danville for $1.25 million. Commonwealth issued the Taits an American Land Title Association (ALTA) Homeowner’s Policy of Title Insurance for the property.

The policy insured the Taits against “actual loss” arising from certain defined covered risks, which include someone else having an easement on the property.

The policy limited Commonwealth’s liability for an unknown easement to the lesser of the Taits “actual loss” or the policy limit of $1.25 million. The policy did not define “actual loss.”

The policy excepted from coverage certain building and subdivision restrictions recorded by the Town of Danville (town) and a recorded irrevocable offer of dedication of a drainage easement.

The building restrictions prohibit further subdivision of the property and the construction of any building within the area of the offered drainage easement.

As they had intended upon purchasing the property, the Taits proceeded with plans to subdivide the property into two lots. Between May 2016 and February 2017, the Taits engaged in informal talks with the town’s development services coordinator about their proposed subdivision.

The town’s staff were supportive of the Taits’ subdivision plan. Staff support is not a guarantee that an application will be approved, but if the Taits had submitted an application, the town most likely would have approved the subdivision.

At the end of 2016, the Taits had a complete application for a tentative map, ready for submission. But the Taits never submitted a formal subdivision or tentative map application.

On February 10, 2017, the Taits learned about a separate 1988 maintenance easement covering the same area as the drainage easement. The Taits believed the maintenance easement would impact the marketability and value of property and interfere with its potential development, so they tendered a claim on the policy to Commonwealth. Commonwealth accepted coverage.

Commonwealth obtained an appraisal from AGI Valuations to calculate the property’s diminution in value resulting from the maintenance easement. AGI Valuations stated that it applied the standard in Overholtzer v. Northern Counties Title Ins. Co. and analyzed the highest and best use of the property on the date of loss.

This appraisal assumed that it was reasonably likely the town would extinguish the building restrictions and the offer of dedication of the drainage easement. It also assumed that the maintenance easement prohibited development within its area.

AGI Valuations determined that the value of the property without the maintenance easement was $1.3 million, and with it was $1.1 million, for a diminution in value of $200,000.

Commonwealth asked AGI Valuations to revise the appraisal by omitting the assumptions that the town would extinguish the offer of dedication of the drainage easement and the building restrictions and that the maintenance easement prohibited development within its area.

AGI Valuations prepared a revised appraisal stating, as it had before, that it applied the Overholtzer standard and omitting those assumptions.

AGI Valuations’ second appraisal concluded the value of the property without the maintenance easement as of February 10, 2017, was $1.3 million, and with it was $1,256,500 million, for a diminution in value of $43,500. Commonwealth sent the Taits a check for $43,500.

The Taits obtained their own appraisal from Valbridge Property Advisors. Like both of AGI Valuations’ appraisals, Valbridge said it computed the property’s diminution in value pursuant to Overholtzer.

Valbridge said there was a high probability that without the maintenance easement the Taits could expunge the building restrictions and offer of  dedication of the flood control easement and could subdivide the property into two developable lots.

Valbridge therefore valued the property without the maintenance easement as two separate developable parcels.

With the maintenance easement, the property could not be subdivided into two developable lots, so Valbridge valued it as a single parcel.

Valbridge determined that the value of the property without the maintenance easement as of February 10, 2017, was $2.08 million, and with it was $1.38 million, for a diminution in value of $700,000.

The Taits provided Commonwealth a copy of the Valbridge appraisal and requested that it pay the $656,500 difference between Valbridge’s calculation of diminution in value and the $43,500 Commonwealth had already sent. Commonwealth denied their request.

The Taits filed suit, and their operative complaint alleged a single cause of action for breach of contract.

The trial court granted Commonwealth’s motion for summary judgment, ruling, as relevant here, that there was no triable issue of material fact about whether Commonwealth breached the policy by paying the Taits the $43,500.

The court reasoned that the legal standard for title insurance losses did not permit consideration of a property’s highest and best use, only its actual use as vacant residential land.

The trial court therefore disregarded the Taits’ appraisal based on the property’s highest and best use and found Commonwealth’s appraisal was the only evidence of the Taits’ losses. The trial court entered judgment for Commonwealth.

Title insurance is a customary incident of practically every California real estate transaction, including a sale or refinancing. 

Title insurers insure the record title of real property for persons with some interest in the estate, including owners, occupiers, and lenders.  A title insurance policy is not a guarantee as to the state of the property’s title. It instead offers indemnification to the insured against many losses arising from title defects not disclosed in the title policy or report, as well as errors by the entity performing the title search. 

Title insurance differs in some respects from other forms of insurance.

While most other forms of insurance provide protection against future loss, title insurance instead relates to the past; it protects against undisclosed encumbrances and defects in title that exist at the time the policy is issued.

Thus, rather than requiring periodic, ongoing premiums to obtain continuing future coverage, title insurance requires a one-time payment compensating for the risk assumed and the services rendered in connection with researching and preparing the policy.

The trial court ruled there was not a triable issue of material fact about whether Commonwealth’s $43,500 payment completely discharged its duty under the policy to indemnify the Taits for their losses on the property.

The propriety of this ruling hinges, in the first instance, on what losses the policy covers. The Taits’ policy requires Commonwealth to indemnify them for their “actual loss” resulting from a covered risk, up to the policy limit of $1.25 million.

The policy does not define “actual loss,” but the Taits and Commonwealth agree that Overholtzer established that an owner’s actual loss when there is a cloud on title is measured by the diminution in market value caused by the existence of the cloud.

However, they disagree over what Overholtzer has to say about how to calculate the depreciation in market value.

The plaintiffs in Overholtzer bought a property and obtained a title insurance policy protecting them against “all loss or damage” that they might sustain by reason of “any defect in, lien or encumbrance on” the title to the property.

The maximum benefit under the policy was $3,000, the amount the plaintiffs paid for the property.  When they bought it, the property was agricultural land. The plaintiffs built a lumber mill on the insured property. The policy failed to note a water pipe easement on the property. 

The Court of Appeal stated that the measure of damages was the depreciation in market value caused by the existence of the easement.

The trial court here, at Commonwealth’s urging, read Overholtzer as requiring it to assess the diminution in value of the Taits’ property measured by the property’s use on the date the Taits discovered the easement, which was vacant residential land suitable for only one home.

The Taits argue that Overholtzer established only that the measure of damages is the depreciation in market value caused by the defect in title, and then addressed the date on which that depreciation should be determined, selecting the date of discovery of the title defect.

According to the Taits, Overholtzer did not address how to determine a property’s market value, so the market value must be determined based on a standard appraisal that considers the property’s highest and best use, meaning the most profitable use to which the property might be put in the reasonably near future.

We agree with the Taits that Overholtzer does not address how to calculate a property’s market value and does not foreclose the use of the highest and best use standard.

The 2021 revision of the ALTA form title insurance policy now specifies, consistent with Overholtzer, that an insured’s losses will generally be calculated as of the date of discovery of the title defect.

Overholtzer’s language merges two separate valuation concepts, the date of valuation and the use being valued. This appears to have been a function of the facts of the case. When the title defect was discovered, the plaintiffs were already using the property at the higher level, as a lumber mill.

Our determination that Overholtzer is not dispositive here still leaves us with the question of whether the Taits’ “actual loss” under their title insurance policy should be measured based on the value of their property’s highest and best use or merely its current use.

The principles governing the interpretation of insurance policies in California are well settled.

Our goal in construing insurance contracts, as with contracts generally, is to give effect to the parties’ mutual intentions.  If contractual language is clear and explicit, it governs.

If the terms are ambiguous (i.e., susceptible of more than one reasonable interpretation), we interpret them to protect the objectively reasonable expectations of the insured.

Only if these rules do not resolve a claimed ambiguity do we resort to the rule that ambiguities are to be resolved against the insurer.

Again, the title insurance policy is of little help because it does not define “actual loss.” Commonwealth’s and the Taits’ two different approaches to measuring the diminution in a property’s value are reasonable, so the term “actual loss,” even as construed in Overholtzer, is ambiguous.

The court must therefore interpret it in line with the Taits’ objectively reasonable expectations.

The appellate court agreed with the Taits that a property’s market value is generally based on its highest and best use, as is established in eminent domain law.

When the government takes private property, the fair market value of the property taken is the highest price on the date of valuation that would be agreed to by a seller, being willing to sell but under no particular or urgent necessity for so doing, nor obliged to sell, and a buyer, being ready, willing, and able to buy but under no particular necessity for so doing, each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available.

As this definition indicates, the fair market value of property taken has not been limited to the value of the property as used at the time of the taking, but has long taken into account the highest and most profitable use to which the property might be put in the reasonably near future, to the extent that the probability of such a prospective use affects the market value.

Putting aside Overholtzer’s loose language, that decision’s reasoning and outcome are consistent with considering a property’s highest and best use.

Overholtzer’s rationale for valuing a property as of the date of discovery was that title insurance by its nature protects against future losses and owners should be reimbursed for additional losses they suffer in reliance on the policy after it took effect.

Overholtzer’s concern with future losses based on existing title defects applies just as much to the loss of the ability to develop after the date of the policy as to the loss of an actual development.

And a property owner who pays a premium for a developable property has invested money in reliance on the title insurance policy, regardless of whether the owner intends to develop the property personally or merely buys the property with the expectation that the development potential will cause the property value to increase over time.

The loss of the potential to achieve a property’s highest and best use presents a smaller magnitude of loss than a completed building or other improvement like in Overholtzer, but the nature of the insured’s expectations and reliance interests is similar.

Valuing a property based on highest and best use does not compensate an owner for the value of a property in the future; the highest and best use is to be considered “ ‘to the extent that the probability of such a prospective use affects the market value.’

Thus, valuing a property based on highest and best use compensates the owner only for the value of the property’s potential, not as if the property had already been improved. Also, defining the highest and best use as a use “to which the property might be put in the reasonably near future” grounds the inquiry and avoids the need to speculate about distant future development possibilities.

In short, if the highest and best use is sufficiently definite to make it just for a government entity to compensate a property owner for its loss, it is sufficiently definite to constitute a basis for determining the “actual loss” under a title insurance policy.

It further states, “Generally accepted appraisal standards require an appraiser to establish fair market value according to the property’s highest and best use.”

In the absence of any language in the policy to the contrary, the measure of a property owner’s loss from a cloud on title is the diminution of a property’s value caused by the title defect on the date the insured discovers it, measured according to the property’s highest and best use.

Commonwealth maintained that, regardless of whether the value of a property can be based on its highest and best use, the trial court properly granted summary judgment because the Taits did not provide competent evidence that subdivision into two separate parcels was the highest and best use of their property.

Commonwealth’s position was that the Valbridge appraisal’s assumption that the property could be subdivided was speculative and contrary to the actual facts because the building restrictions and offer of dedication of a drainage easement precluded such subdivision.

LESSONS:

1.         Title insurance is a customary incident of practically every California real estate transaction, including a sale or refinancing. 

2.         Title insurers insure the record title of real property for persons with some interest in the estate, including owners, occupiers, and lenders. 

3.         A title insurance policy is not a guarantee as to the state of the property’s title. It instead offers indemnification to the insured against many losses arising from title defects not disclosed in the title policy or report, as well as errors by the entity performing the title search. 

4.         While most other forms of insurance provide protection against future loss, title insurance instead relates to the past; it protects against undisclosed encumbrances and defects in title that exist at the time the policy is issued.

5.         The 2021 revision of the ALTA form title insurance policy now specifies, consistent with Overholtzer, that an insured’s losses will generally be calculated as of the date of discovery of the title defect.