Are consequential damages recoverable from title insurers or has there been "a change in policy"?

• Author: Brown, Mark A.
• Position: Florida

Title insurance plays an indispensable role in Florida's dynamic real estate industry. Yet title insurance differs fundamentally from all other forms of insurance, and its coverage is commonly misunderstood. It is fundamentally different in that unlike all other forms of insurance, which insure against future risks, a title insurance policy indemnifies the insured against past events, that is, occurrences prior to the effective date of the policy. It is commonly misunderstood that title insurance does not guaranty the insured that there are no prior defects in title. Rather it indemnifies the insured only against "loss or damage" the insured incurs if such a prior defect is later discovered.

Prior to the revisions to the Standard Conditions and Stipulations in the 1990/92 ALTA Owner's Title Insurance Policy (1992 policy), title insurance policies did not provide a means for determining what constituted "loss or damage" in the event of a partial failure of title. (2) Consequently, courts struggled to come up with an appropriate measure of such "loss or damage" and crafted a variety of different, and not necessarily consistent, methods for determining the amount recoverable by an insured where a partial failure of title had occurred. (3)

This article examines the methods Florida courts have used to measure an insured's recovery where title to the insured property has partially failed. Specifically, it analyzes whether insureds may recover consequential damages resulting from a partial failure of title under a title insurance policy or whether, pursuant to the 1992 policy, they are limited to receiving the property's diminution in value. We will first consider the existing Florida case law, then analyze the revisions to the 1992 policy and some recent case law interpreting those revisions, and, finally, conclude by considering how those revisions are impacting Florida law.

Existing Florida Case Law

Two cases in Florida have addressed the recovery of consequential damages under a title insurance policy in the context of a partial failure of title. Both suggest that an insured may be able to recover consequential damages. Those cases follow the general rule that consequential damages are recoverable for a breach of contract if they are properly pled and are not speculative. As discussed later, however, there is a strong argument that those cases do not apply to most title policies today, given the limitations on liability added to the 1992 policy.

In Safeco Title Insurance Co. v. Reynolds, 452 So. 2d 45, 47 (Fla. 2d DCA 1984), the plaintiffs sued Safeco for breach of a title insurance contract and sought the loss of market value to the insured property due to an undisclosed parking agreement and consequent "business and commercial losses." At trial, the insured's experts testified the insured had sustained a $26,000 loss in market value to the property and lost income of $57,651. The jury awarded a total of $50,000 in "loss in market value of the plaintiffs' real property caused by the existence of the encumbrances." (4)

On appeal, the district court noted that, "an insured owner may be able to recover consequential or special damages such as lost profits as damages for breach of a title insurance contract," and "may also be able to recover special damages such as lost profits in cases of tort arising from a contractual setting." (5) The Safeco court also noted that other jurisdictions measure damages to urban property as the value of the property subject to the defect "plus indemnity for the loss of use," (6) and it cited authorities in other jurisdictions that have allowed insureds to recover consequential damages. (7)

Thus, the dicta in Safeco suggests that, if properly pled, consequential damages, including lost profits, may be recovered in Florida for breach of a title insurance contract or under a tort theory.

There are, however, several aspects of Safeco that distinguish it from many partial failure of title cases that may arise today. First, the Safeco case characterized as a "breach of title insurance contract" what factually appears to be a partial failure of title, which under an insurance contract is really the occurrence of an insurable event, contemplated and covered by the policy rather than a breach of its terms. This may distinguish Safeco from instances in which an insurer acknowledges coverage and tenders the amount of the recoverable loss to its insured, as opposed to an instance in which the insurer either wrongfully denies coverage or tenders less than the full amount of the recoverable loss.

Second, the part of the Safeco decision based on a tort theory has been supplanted by subsequent Florida case law specifically holding that liability under a title policy lies in contract, not tort, (8) and, more generally, by the "economic loss rule." (9)

Third, and perhaps most importantly, Safeco was decided in 1984, prior to the addition of the limitation of liability provision in the 1992 policy. As discussed in more detail below, this revision limits the extent of liability of title insurers upon a partial failure of title. Thus, to the extent that a case involves the 1992 policy, Safeco is of doubtful continued viability. (10)

The other Florida case that should be considered is Endrushchat v. American Title Insurance Co., 377 So. 2d 738 (Fla. 4th DCA 1979). In Endrushchat, dentists contracted to purchase property to convert it into a dental clinic. Their title binder failed to include a restriction limiting the property use to residential use. The attorney for the bank providing the construction loan discovered the restriction during the closing and stopped the transaction. When the insureds made a claim on their policy, American Title denied coverage. The insureds filed a quiet title action before proceeding with construction and, on successful completion of the action, sued American Title for their fees and costs in the action, plus damages for increased building costs...