Now or then? The time of loss in title insurance.

• Author: Lucas, Matthew C.

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Title insurance may be the least understood form of insurance in the public market. For most, it probably connotes little more than a vague recollection of a charge on a closing statement when buying or selling a home. Even for those who make it a habit of reviewing their insurance policies' terms, a title policy will likely pose something of a comprehensive challenge. It would seem to function contrary to almost every other means of insuring against risk, and, in fact, that is precisely how it operates, because the risks title insurance covers are those accruing from the past, not in the future. (1) This distinction colors a number of unique aspects of title insurance claims arising from a defect or cloud in title and the measure of benefits a policyholder is entitled to under a title policy. It also raises a particularly interesting question concerning valuation. What happens when an insured owner (2) discovers after the purchase of a home that he or she does not own the front 30 feet of the property because it had been previously conveyed to neighbors? If the loss is covered and his or her title insurer elects to pay damages, what operative date should be used to measure the claim: When he or she purchased the property and the title policy was issued; when the title problem was created; or when he or she first became aware of the defect? Land valuation, as we have all seen in recent years, is subject to wild vacillations. (3) Even a modest span in time could yield a markedly different measurement of benefits for the insured.

Of course, there are a host of variables that necessarily shape a title insurance claim: whether a loss has truly occurred; whether it is covered or excluded; what limits are imposed under the policy, for example, are all subjects of frequent dispute. (4) Assuming, however, these issues are resolved so that the partial loss of title is both real and covered under the policy, there remains the problem of measuring the insured's loss for purposes of a title claim. Pinpointing the extent of an owner's actual loss can prove especially elusive when there are wide swings in property values over time. This article explores the law that exists on that issue and highlights some of the competing interests that may weigh in its consideration. (5) Before proceeding further, it may be helpful to review how title insurance operates and how it came to be a staple component of the vast majority of land transactions in Florida and throughout the United States.

History and Overview of Title Insurance

The 19th century's aggressive expansion of the American frontiers left a bevy of legal work in its wake. While the federal government had undertaken the laudable task of surveying and describing the physical description of our growing nation's lands, legal title to all that property was, in many places, something of a morass. (6) Mass commoditization of vacant land, wild speculation, squatters, forged deeds, varying and Byzantine distinctions between recognized ownership interests, and fraudulent conveyances on an "epidemic" scale left a mobile population to wonder who really owned the land they were settling (7)--all of which spawned lawsuits, occasionally epic lawsuits, for the states' nascent legal sysems. (8) As one writer observed, "[s]ome of the greatest American trials, in terms of cost, time, and acrimony, have been trials over title to land." (9) Thus, the need for some means of protection and a way of mitigating the risk of becoming ensnared in litigation was readily apparent by the latter half of the 19th century. (10) To that end, title insurance came into the industry of real estate transactions both to provide assurance to those acquiring or selling property and to foster greater stability in the field of property law in general. (11)

Today, title insurance generally indemnifies a policy holder of loss from unknown defects in title, as well as against undisclosed liens or claims appearing in the public record. (12) Its purpose is, as one court colloquially put it, "to protect a purchaser of real estate against title surprises." (13) A prospective buyer obtains a title commitment that describes the results from a title search performed on the property, pays a one-time premium, and, as part of the closing, will be issued a title insurance policy, often one patterned after a form promulgated by the title insurance industry's national trade organization, the American Land Title Association (ALTA), with standardized terms of coverage, exceptions, and exclusions. (14) When a potential title issue arises--for instance, the lost 30-foot frontage scenario described previously--the landowner submits the claim of loss to his or her insurer, which then investigates the claim and issues a coverage decision. (15)

Assuming the defect or cloud is a covered loss that has resulted in damages to the claimant, under most ALTA owner's policies, the title insurer is typically afforded the option of either: 1) tendering the policy's limits to the insured; 2) curing the defect by negotiating with third parties to clear the cloud in title (i.e., buying the strip of land from the neighbor and conveying it back to the insured); 3) instituting litigation on the insured's behalf to remove the defect (i.e., suing the neighbor in the insured's name to recover the frontage); or 4) paying the insured the "actual loss" resulting from the defect (i.e., the loss in value attributable to the lost 30 feet). (16) The standard verbiage of this final option typically runs along the following lines: "The liability of the [c]ompany under this policy shall not exceed ... the difference between the value of the insured estate or interest as insured and the value of the insured estate or interest subject to the defect, lien or encumbrance insured against by this policy." Measuring the extent of our hypothetical insured's actual loss under this policy option would require some means of comparing what the property was worth with the 30 feet of frontage versus its value without it.

This may seem relatively straightforward, but it can become complicated in application. Ascribing monetary value to any real estate calls for some measure of prediction, one that requires an amalgam of statistics, economics, and a practiced evaluation of real estate data. (17) Appraising land values is not ad hoc guesswork, nor is it an exact science, but something more akin to a developed art. (18) Apart from this inherent indeterminacy, temporally speaking, an appraisal might determine a current value for a tract of land, or it may look to measure the property's value on a particular date in the past. Which date should control when measuring a title claimant's "actual loss" under a policy? Most title policies are silent on this issue. (19) The standard ALTA policy calls for a comparison of land values, but does not state when those values should be made. General appraisal standards do not supply an answer to the question either. (20) Nor, as it turns out, has the law reached a firm consensus as to which date ought to determine the extent of a covered title loss.

The Three Potential Dates of Measurement

Courts throughout the United States have generally identified three points in time to use to measure damages within a title policy's limits in connection with an owner's loss of title: the date of purchase of the property, the date the title defect was created, and the date the defect was first discovered. An overview of each of these approaches and their merits will be considered below.

* Date of Purchase--A minority of courts have applied the date of purchase (or, as it is sometimes characterized, the date the policy was issued) to measure an owner's loss under a title policy, although it is somewhat unclear what the underlying rationale for doing so has been. (21)

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