Posting for

Friday, November 20, 1998

by: Frank Melchior

fmelchior@firstam.com

and: Bert Rush

brush@firstam.com

MARKETABILITY/ENCUMBRANCES/TITLE DEFECTS

Frank Melchior (Iselin, NJ) writes:

Our outside counsel, Dennis Gonski, is defending a case wherein the following occurred: We insured (standard, not Eagle policy) an owner without exception to the following: There is an underground pipe (with NOone claiming any rights thereto or any easement relating thereto) under the foundation of the house; the pipe collapsed causing severe structural damage to the house.

We denied coverage as this was not a title matter. We then were sued because the title is allegedly unmarketable because of the foregoing. My contention is that this does not affect marketability but only merchantability.

Dennis will send you, by snail mail, a work up on this matter.

Do you have any case law in various jurisdictions on this type of situation. If so, it would be most helpful to him.

Reply: I now have the work-up from Dennis, and can add some additional facts. This appears to be an abandoned storm drain. We have checked with various local government agencies, and none has any record of this storm drain. There appears to be nothing in the public records to disclose the existence of the storm drain.

Two lines of cases come to mind. First, I'd analogize your case to a policy claim based on discovery of contamination of the land with hazardous material. As you'll remember this was a hot issue several years ago, until two appeals court decisions came down holding that off-record contamination was not a risk covered by the insuring provisions of the standard title insurance policy. Specifically, contamination was not a "defect, lien or encumbrance," and was not a matter affecting marketability of title. The two cases are Chicago Title Insurance Company v. Kumar (1987) 24 Mass. App. 53, 506 N.E.2d 154; and Lick Mill Creek Apartments v. Chicago Title Insurance Company (1991) 231 Cal.App. 1654, 283 Cal.Rptr. 231.

Second, there are a few cases dealing with undisclosed and off-record subterranean easements and/or encroachments. The main case that comes to mind is KayFirst Corporation v. Washington Terminal Co. (D.C. 1993) 813 F.Supp. 67.

KayFirst was the owner of a parcel in downtown Washington, D.C., which it purchased for a major commercial development to include underground parking.

When KayFirst began excavation they encountered a concrete footing--four feet underground--for a retaining wall on adjacent property, which footing encroached about seven feet into KayFirst's property. The adjacent property was owned by the Washington Metropolitan Area Transit Authority--and the Transit Authority objected to any tampering with the footing.

KayFirst made a claim under their title insurance policy--to Chicago Title. The claim was denied as Chicago Title characterized the problem as a trespass on the part of the Transit Authority--not based on any claim of legal right. So KayFirst sued the Transit Authority for trespass, and Chicago Title for breach of contract.

On cross-motions for summary judgment, the trial court awarded summary judgment in favor of KayFirst and against the Transit Authority on the trespass count, and against Chicago Title on the breach of contract count.

It turned out the Transit Authority did assert a legal right to maintain the location of the footing--on grounds that (1) KayFirst had some sort of record notice of the footing as an appurtenant easement, (2) an easement by necessity was created when the footing was built (between 1903 and 1907), and (3) a prescriptive easement arose by adverse possession fifteen years after the footing was built. The trial court rejected all these arguments and found a trespass. The trial court also said that it didn't matter whether this was a "continuing trespass" or a "permanent trespass," the statute of limitations had not expired in either case.

In ruling against Chicago Title, the trial court held that the footing was an encumbrance on KayFirst's title, because it perceived the encroachment of the footing as "substantial" and as interfering "with the free development of the subject parcel." (See KayFirst, supra, at p. 76, and cases cited.) Likewise, the Court found the title unmarketable, "both because of the encroachment's substantial nature and because it has forced KayFirst--and would force a subsequent buyer--to purchase a lawsuit to protect its interest...."

The KayFirst decision string-cites a number of encroachment/marketability cases--which I haven't read. But I think your case is distinguishable from all such cases holding title unmarketable because in your case there's no adverse claimant and no need for a lawsuit to quiet title. Your case involves the condition of the land, plain and simple.

Questions, comment, argument? Just press the "reply" button and send your thoughts to LandSakes.

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Following last Friday's posting Jim Dondero (Grand Rapids, MI) writes:

I have denied coverage in many instances for the trespassory acts of adjacent owners, or for physical conditions that might exist upon or with respect to the land. But I always qualify it by ending my letter with a statement to the effect that should the insured be served with Summons and Complaint, Counter-Claim or other relevant pleadings IN A LEGAL PROCEEDING, they should immediately send me copies with a written request for a further determination of rights pursuant to the provisions of their policy. This practice has always worked to avoid having to "take up the charge" on the "marketability" claim, or suffer any adverse ruling (or even an action against us) based on breach of contract or bad faith.

One caveat: it doesn't always work in denying a general access claim where the insured's access route is being physically obstructed by an irrascible neighbor!!!

Reply: I handled these as you describe, too, in my claims-handling days. You really can't tell if the neighbor is a trespasser or the proud holder of a right until you see the pleadings--and even then sometimes you need to read between the lines. And I wouldn't hesitate to contact the adverse claimant or their counsel directly. Never rely on the insured to relate to you what his or her adverse claimant is saying--if they get it wrong you will probably suffer.

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Following up on Friday's posting, Rich Angelo (Valley Forge/Philadelphia) writes:

A little old lady (really!) in West Virginia decided one day that the joint driveway to her property and the one next door belonged solely to her. So she got out her trusty rifle, which was taller than she was, and sat in her high back rocker chair in the middle of the driveway. My first contact with this "claim" was a call I received from the local sheriff's office. I tried to explain to the sheriff and the insured that there was nothing we could do until the little old lady filed suit against the insured. There were no title problems with the joint driveway. The problem went on for about 6 months, and I was kept up to date by our local agent. Newspaper articles, pictures and phone calls arrived on my desk daily. The little old lady was so old (how old was she?) that the sheriff would not arrest her, even after she fired her rifle a couple of times (into the air). The insureds had to literally sneak into their home. The problem was eventually solved when the little old lady died after about six months of rocking in the driveway. So I guess its true that title insurance does not cover every problem, and that claimants eventually may go away.

Reply: Not so fast. It's rumored that Cliff Morgan and Paul Hammann are working on "armed grandma" coverage for the third-generation EAGLE policy.