Posting for

Thursday, October 15, 1998

by: Tim Ward

tward@firstam.com

and: Bert Rush

brush@firstam.com

MEASURE OF DAMAGES/ARBITRATION/BAD FAITH

(Tim Ward [Oakland, CA] solicits our thoughts on this new and unusual situation. The case referred to is Overholtzer v. Northern Counties Title Ins. Co. [1953] 116 C.A.2d 113, 253 P.2d 116--the landmark CA case holding that the measure of damages under a title policy is diminution in value of the property, or difference in value of property with and without the title defect.)

We missed a Bay Area Rapid Transit (BART) tunnel easement for its main line which runs under our insured's building located in Berkeley, CA.

When the insured discovered the easement the property was being used as a two story office/retail building with parking. The appraiser we retained applied Overholtzer measuring the loss based upon that specific use of the property. The insured's appraiser measured the loss based upon the highest and best use. We eventually paid the higher amount in what we believed to be a settlement of the insured's claim.

Subsequently the insured filed suit against FA. In the complaint he alleges the typical breach of contract and bad faith. Additionally the Plaintiff alleges that we violated the unfair competition law by misapplying the holding in Over holtzer which deprives our insureds of the benefit of the policy. The Plaintiff is seeking an injunction against FA. We think this cause of action was a tactic to avoid the arbitration clause in the policy.

Any thoughts on this one?

Also, I am looking for any printed material from non FA sources that summarizes the holding in Overholtzer.

Reply to Tim: First of all, I think your reliance and interpretation of Overholter was correct. I don't think it's appropriate to apply a "highest and best use" appraisal analysis to improved property, in most cases, because its too speculative for an appraiser to opine about what a future owner might consider highest and best use--after the useful life of present improvements.

Second, you did the reasonable and fair thing in giving the insured the benefit of the doubt--and paying the amount of damages shown in the higher appraisal.

Third, I can't understand why an insured would have a cause of action against his insurer for unfair competition in connection with handling of a claim--where's his standing? This doesn't rule out his standing to allege causes of action for breach of contract and bad faith--but I agree that alleging unfair competition and seeking injunctive relief may be a tactic to avoid arbitration.

Now, there are to schools of thought on arbitration: Some claims folk think it's a great means to quickly and inexpensively resolve disputed claims--such as this one where the real issue was and still is the proper measure of damages. But others disapprove of it as allowing virtually no right of appeal from a bad decision, allowing virtually no opportunities for discovery or to subpoena witnesses, and exposing the Company to liability from runaway, extra-contractual damages. The latter concern is especially weighty when one of the issues to be arbitrated is a claim of "bad faith"--and don't think you can necessarily keep that issue out of arbitration if it's been alleged.

Still, in this case, I'd probably respond to the complaint by filing a petition to compel arbitration right out of the box. If this should fail (and I can't see why it would), I might even appeal the denial of the petition. I say this because it sounds as though your case is clearly winnable--and the plaintiff is hoping to get his case before a jury, perhaps thinking that ALL jurors hate insurance companies.

For other printed material on Overholtzer, the usual sources come to mind: Miller and Starr's California Real Estate, 2d; Powell on Real Property; and the CEB's California Title Insurance Practice.

Savants: Your thoughts???

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Following Thursday's posting Roger Therien (Riverside, CA) writes:

This is in regard to the measure of damages discussed in the Overholtzer case. In 1993, Fidelity Title litigated the same issue in a case called Anderson v. Fidelity Nat. Title Ins. Co. The appellate court read Overholtzer narrowly, and ruled that the measure of damages for a missed easement was the diminution in value based on the highest and best use at the date of discovery of the defect in title. The appellate court decision was originally published; but the opinion was decertified when a rehearing was granted. Fidelity then settled with the insured and we are left with an unpublished case and maybe a good lesson about litigating this issue.

I think the Overholtzer case is extremely useful to 1) use the date of discovery for the date of valuation and 2) limit damages to diminution in value and keep out other claims of consequential damage. But it is difficult to convince a court that the property should be valued other than according to its highest and best use. For one thing, appraisers have a hard time grasping the concept, even though they nod their heads in apparent understanding. They are usually not trained to do anything other than determine highest and best use values.

Another problem is that very often the price the insured paid for the property reflects its highest and best use. For example, if a property is being used as a run-down, single family rental in the middle of downtown Los Angeles, the seller can command a sales price that refects its actual highest and best use as a skyscraper. Courts and juries have a tough time using a diminution in value figure that does not seem to take economic realities into consideration. On the other hand, I have to admit that Overholtzer clearly refers to "the use to which the property was then devoted".

Keith Pearson (Glendale/L.A.) writes:

Aside from disgust the comment that if the judge does not throw this case out on demurrer, they ought to be flogged. If I read your facts correctly, we used the INSURED's measure of damages in settling the claim. I say this in light of the language in Overholtzer that says "It seems quite apparent to us that liability should be measured by dimunition in value of the property caused by the defect in title as of the date of discovery of the defect, MEASURED BY THE USE TO WHICH THE PROPERTY IS THEN BEING DEVOTED.", Empasis added. This is notwithstanding the language in the policy of title insurance to this effect. This holding was reaffirmed in the case of Anderson v. Fidelity National Title Ins. Co. of Cal. 93 Daily Journal D.A.R. 3578--which specifically cited the language mentioned above from the Overholtzer case. An additional question comes to mind. Did we settle with or without a settlement agreement that releases FA from liability. If we had a settlement agreement, why are these people suing us?

Reply: I'm guessing that we didn't have a settlement agreement--which, if such is the case, would be consistent with advice I've given to our claims handlers since the 1980's. Once our claims handler determines an amount which an insured is entitled to as a policy benefit, then we should pay that amount to the insured with no strings attached. If they are willing to sign a settlement agreement, or release, that's fine too. But I don't think we should withhold any policy benefit--acknowledged to be due--by requiring as a condition to payment that the insured sign a release. See today's posting about "Claims"--Bill Pettersen used to argue with me about this at CLTA Claims Counsel meetings. (By the way, I always liked Bill--smart guy and a gentleman.)

Anyway, after this posting ("Measure of Damages") I've had further thoughts and revelations about where this cause of action against us for unfair competition is coming from. It has roots in the class action filed against Old Republic in San Francisco--reported some weeks ago in LandSakes--and a recent decision of the California Supreme Court. I am going to the Philippines tomorrow (on business)--but I'll try to write more about this, from there, next week. Pray for connectivity!

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Following up on last Thursday's posting Jamin Hawks (San Francisco) writes:

In response to your request for non-FA commentary on Overholtzer, take a look at Nielsen, "Title & Escrow Claims Guide," which I believe you have in the Santa Ana office, at Sections 3.2.1 et seq (and Supp). Nielsen refers to Overholtzer as the "seminal modern case." Also: Note that the opinion after rehearing in Andersen v. Fidelity was not published, so the case is not citable.

Reply: Good! Nielsen's book is relatively recent and very comprehensive. Also I forgot to mention that if Tim (or anyone) would like copies of references to Overholtzer in the texts being referred to, please let me know and we'll try to compile them for you--but you probably have your own access to Powell and Nielsen if you handle claims.

Tim Ward (Oakland) follows up:

We would greatly appreciate your thoughts on the unfair competition law. There is a possibility that the court could issue an injunction.

Keith Pearson asked whether there was a settlement agreement in our Berkeley BART easement claim. We attempted to arbitrate the dispute over the appraisals. However, we decided that it would be more economical to settle. We agreed to pay the higher amount of diminution and to sue the seller who had granted the easement to BART in full settlement of the claim. The seller retained an aggresive attorney.

Consequently, we decided not to sue based upon the anticipated costs to prosecute the action. We waived and reassigned our rights of subrogation. Our insured claims that we breached the settlement agreement even though we had total control over the litigation.

About a month or so later the statute of limitations ran to file suit against the seller. We checked the court dockets and found no action. Either there is a tolling agreement, or we're the deep pocket.

Our attorney is looking for publications that address the application of Overholtzer in relation to diminution claims. We are very aware of Anderson. The Anderson decision is based in part on the title company's pre-close constructive knowledge of the buyer's development plans. If anyone has other information that may be useful, please contact me.

Reply to Tim: California's Unfair Competition Law (Business and Professions Code sections 17200, et seq.) has been involved in at least two noteworthy lawsuits recently--getting the attention of the press and enterprising lawyers.

First, remember the qui tam and class action lawsuits filed against Old Republic in San Francisco recently (and the subject of a LandSakes posting for 8/12/98 titled "Trust Accounts")? The qui tam lawsuit was filed on behalf of the City and County of San Francisco in part under the Unfair Competition Law ("UCL")--which I think some have referred to as the "private attorney general" law.

Anyway, the UCL permits "any person (including a corporation, etc.) acting for the interests of itself, its members or the general public" (sec. 17204) to file suit for damages and/or injunctive relief (sec. 17203) against a person or business entity who has engaged in "any unlawful, unfair or fraudulent business act or practice (or) unfair, deceptive untrue or misleading advertising...." (Sec. 17200.)

The law permits plaintiffs to pursue actions on behalf of the general public--even where the plaintiff has not personally suffered damages. Some call this a "psuedo" class action--without the judicial safeguards found in a court-supervised class action. With the UCL, all plaintiff's counsel has to do is allege bad business practices affecting the general public--and he (or she) has themself a lawsuit. This is a bad law insofar as it promotes litigation over issues no one really cares about--interesting only plaintiffs' counsel who seek large fee awards and/or "nuisance" settlements.

The UCL has most recently come to our attention as part of the decision of the California Supreme Court in Quelimane Co. v. Stewart Title Guaranty Co., 19 Cal.4th 26, 77 Cal.Rptr.2d 709 (Aug. 27, 1998). In Quelimane, the Court holds that the plaintiff companies, which are engaged in purchasing, selling and financing real properties, may state a cause of action against title companies for conspiring to refuse to insure properties out of tax sales--under authority of the UCL. This is an important, and strange, case--so I'm planning a separate posting on it. But--if you read the case--note how careful the Supreme Court is to acknowledge reservations about the UCL in its majority opinion, and how the dissent, by Justice Brown, cities numerous cases where actions based on the UCL have been dismissed as "innappropriate" to achieve any legitimate purpose in terms of regulating business practices.

In your case I think the point needs to be made that title company conduct in handling "measure of damage" disputes is already strongly regulated by the California Unfair Claims Settlement Practices Act (Insurance Code sec. 790.03--and most other states have almost identical law by statute or regulation). This form of regulation has real teeth--violation of the statute may not only bring upon the insurer an investigation and possible administrative action by the Dept. of Insurance, but it may also form the basis for a "bad faith" lawsuit (a/k/a the "insurance tort")--exposing the insurer to damages including emotional distress, attorneys' fees, and punitive damages, far in excess of the policy amount.

And, the title policy itself contains a self-regulatory device --the arbitration provision. The main purpose of allowing arbitration--which in most cases an insured can compel over the insurer's objection--is to give the insured a fast and economical means of resolving disputes such as this one, essentially over whose appraiser is to be relied upon.

You might also argue that incidence of situations such as occured in your case is so rare that it's handling cannot reasonably be termed part of a "business practice." Sure, you try to apply the principles of Overholtzer the same way each time it comes into play--but how often does it come into play? A claims-handling approach which may be involved in connection with less than 1/10,000th of 1% of the policies we issue should not be considered a "business practice." (The 1/10,000th figure is obviously a guess--but I'd bet the actual figure would be less if we could generate it.) Anyhow, point is, this case you're faced with doesn't seem to promote any significant benefit to the general public.

And, please, no one need reply to suggest we ought to file our own UCL lawsuit against plaintiffs' counsel or class action lawyers in general....to free up the courts and save taxpayer money.

But a question for you, Tim, what is the plaintiff trying to enjoin us from doing, exactly? Enjoin us from relying on Overholtzer?

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Following up on last Thursday's (10/15) posting, Tim Ward (Oakland) writes:

We asked for a draft of the injunction. The Plaintiff's counsel referred to the complaint which recites: " First American should be enjoined from obtaining invalid appraisals, from forcing its insureds to pay for valid appraisals, from forcing its insureds into positions of third party recovery in order to collect first party insurance benefits due and payable, from pursuing purported subrogation rights prior to payment of claims, and from otherwise disregarding and interfering with the rights of its insureds under this and similar policies."

We obtained an appraisal instructing the appraiser to apply the holding in Overholtzer; our insured obtained another appraisal without the limitation. We attempted to bring the seller, (the guy who failed to tell the insured about the easement he granted to BART), into the arbitration proceeding which the insured opposed, and reassigned our subrogation rights to the insured.

Laurie Grushen has been very helpful and is monitoring the claim for Home Office.

Reply: Frankly, I don't see much of substance in the proposed injunction language. It looks like pleading overkill. Do they really think a judge is going to be inclined to oversee our selection of appraisers--what?

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Following up on our posting for Thursday October 15 (in which Tim Ward of Oakland reported paying a claim relying on a 'high' appraisal obtained by the insured--only to get sued) Bob Duffin (Bolingbrook/Chicago) writes:

As I understood the situation originally presented First American had procured an appraisal which met with the generally understood measure of damages (with and without). Rather than litigate, we chose to accept a higher appraisal based upon highest and best use. Under these circumstances, if the insured is obtaining the insurance (benefit) he, she or it feels is the correct measure we should be entitled to a settlement agreement.

Recently, we had a claim based on a missed easement. The in-house appraiser of the insured calculated highest and best use to be $300,000.00+. Our appraiser, astute appraiser that he is, calculated with and without to be $34,500. After some discussion, which included litigation threats, settlement was reached at $45,000.00 with a release of liability and endorsement to the policy decreasing the coverage. A settlement above the figure set by your own appraiser should be premised on an agreement and to settle at the limit of the insured's demand would make an agreement more appropriate. Yes Bert, we did pay a claim in Illinois.

Reply: Did I say anything?

Meanwhile, Dave Westcott (Sacramento) writes:

Re: Settlement Release. I agree with no requirement of a Release when we pay the amount we acknowledge owing (though I still usually ask for and obtain one) but in this case we went farther and paid the amount of the insureds' higher appraisal at which point I believe we are entitled to a Release in return for the extra consideration being paid.

To Tim Ward: Please let us know what happens when the lawsuit is resolved.