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

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 occasioned by the delay. (11)

The trial court never reached the issue of damages, finding that American Title had no liability because the insureds voluntarily quieted title. The appellate court disagreed, finding there was coverage and allowing the claim as to the attorneys' fees and costs. The court noted that the claim for damages due to increased costs of construction might be "problematical, depending perhaps on whether or not the dentists could have reneged on the purchase had they been aware of the restriction prior to closing." (12) Thus, while Endrushchat allowed recovery only for the fees and costs of pursuing the quiet title action, the court's language suggests that consequential damages might be recoverable but for the particular facts of that case.

Another case worth noting is Shada v. Title & Trust Co. of Florida, 457 So. 2d 553, 556 (Fla. 4th DCA 1984), which cites to Endrushchat to support its ruling that, where the title company refuses to cure a defect and the insured takes action to cure the defect on its own in advance of any adverse claim, the insured has sustained an "actual loss" under the policy. In Shada, the title company did not exclude certain redemptive rights in the insured property from coverage. (13) When Shada went to sell, the purchaser objected to these rights and refused to close. Shada made a claim, and the title company offered to insure the purchaser but refused to take action to eliminate the defect. Shada brought a quiet title action, quieted title, and completed its sale. It then sued the title company alleging breach of contract and negligence. The trial court granted Shada's motion for summary judgment and the title company appealed. (14)

Focusing on the policy provision that the company insured "against loss or damage ... sustained or incurred by the insured by reason of [a]ny defect in or lien or encumbrance on such title," the Shada court held that the title company's offer to insure the purchaser did not satisfy its obligation to indemnify the insured for the defects. (15) Shada then held that the title company was required to remove the title defect without insisting upon an "actual loss," an "unworkable term" according to the New Jersey opinion cited by the court. (16) Shada also approvingly cited to the New Jersey opinion for the proposition that when "faced with the enforcement of title insurance obligations, [courts] speak of indemnification but act in broader terms." Thus, Shada demonstrates the extent of the confusion created by the "loss or damage" language in the policy when courts read that provision standing alone without guidance from other policy provisions as to the proper method of determining the loss. (17)

Interestingly, however, Safeco, Endrushchat, and Shada do not represent a uniform approach to what damages are recoverable upon a partial defect in title in Florida prior to the 1992 policy. In the context of a loan title policy for example, the court in Goode v. Federal Title Insurance Corp., 162 So. 2d 269, 270 (Fla. 2nd DCA 1964) (quoting 60 A.L.R.2d at 975-76), observed that most cases agree that a mortgagee's loss is limited to the "difference between the value of the mortgage subject to the defect and what its value would have been had the defect not existed."

Thus, as these cases show, the case law in Florida on the appropriate measure of damages in the event of a partial failure of title is not entirely uniform. Nevertheless, Safeco and Endrushchat, and to some degree Shada, while neither definitive nor entirely clear, indicate consequential damages are likely recoverable for partial failures of title in Florida in those cases where the 1992 policy revisions are not before the court.

Revisions in the 1992 Policy

Both the 1970 and the 1970/84 ALTA Owner's Title Insurance Policies (collectively 1970 policy) contain the same standard provision limiting the liability of the insurer. This provision limits the liability of the insurer to the least of "(i) the actual loss of the insured claimant; or (ii) the amount of insurance stated in Schedule A." The 1970 policy, however, gives little guidance on what "actual loss" is and what it may include. It is into this vacuum of uncertainty under the 1970 policy that the Safeco and Endrushchat decisions injected their dicta, strongly suggesting that consequential damages may be recoverable upon a partial failure of title.

The 1992 policy significantly revised the 1970 policy's "actual loss" provision in paragraph 7 of the Standard Conditions and Stipulations. The 1992 policy provides the method of "Determination, Extent of Liability and Coinsurance" as follows:

This policy is a contract of indemnity against actual monetary loss or damage sustained or incurred by the insured claimant who has suffered loss or damage by reason of matters insured against by this policy and only to the extent herein described.

(a) The liability of the insurer under this policy shall not exceed the least of:

(i) the Amount of Insurance stated in Schedule A; or,

(ii) 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. (Emphasis added.)

(Paragraph 7(a)(ii) is hereinafter referred to as the "diminution provision.")

While there do not appear to be any Florida appellate cases interpreting the diminution provision, two courts in other jurisdictions have interpreted it and have enforced it as written, to the exclusion of consequential damages.

In Bender v. Kansas Secured Title and Abstract Co. Inc., 119 P.3d 670, 673-74 (Kan. Ct. App. 2005), Bender sued the title company when he discovered an easement covering his entire property, which had been missed in the title search. Dissatisfied with the title company's proposed solution of obtaining a partial release of the easement, Bender sued based on theories of contract and negligence, requesting $167,500 (the amount he had originally paid for the property) plus interest and costs and taking the position that so long as he was precluded from using the property as intended, he was entitled to a return of the full purchase price or the amount of the insurance. (18) The title company responded that Bender was limited under the language of the policy to actual damages sustained by reason of the easement and that damages were limited to the diminution in value of the property. (19) The trial court agreed. (20)

Bender appealed and the appellate court held that despite "being a contract of adhesion, an insurance contract must be construed consistent with its plain and ordinary meaning in the absence of unconscionability or ambiguity." (21) It went on to hold: "Here we conclude that there is neither unconscionability or ambiguity in the policy provisions restricting damages.... We believe the language limiting damages is not capable of more than one meaning: the liability of the insurer shall not exceed the lesser of the amount of insurance or the diminution in value suffered by reason the title defect." (22)

The court in Miller v. Ticor Title Insurance Co., 93 P.3d 88 (Or. Ct. App. 2004), also addressed the diminution provision. In that case, the Millers bought the insured property and subsequently learned that a neighbor claimed a portion of the property, cutting off at least some of the Millers' river access. (23) After a quiet title action that resulted in a stipulated judgment, the court granted the Millers fee title, subject to certain restrictive covenants in favor of the neighbor. (24)

The Millers then sued Ticor seeking the loss of value to the property due to the restrictive covenants and loss of use of the property during the time its claim was unresolved. (25) Ticor paid the loss of value and moved for summary judgment on the loss of use, arguing the Millers had been paid all they were entitled to under the limits of the policy. The Millers argued that the loss of use was covered under the policy. The trial court granted summary judgment, reasoning that the Millers' "claim for additional damages fails as a matter of law because the limits of the policy have been paid." (26)

On appeal, the Miller court cited the diminution provision and held that it placed important limits on the policy's coverage:

Under the first provision the policy insures against "loss or damage" arising from the enumerated kinds of defects or deficiencies in the title. But Ticor's liability for such loss or damage is not boundless. Rather, by force of the second provision, Ticor's liability for covered losses is capped at either the $660,000 (the amount of insurance in Schedule A) or the difference between the value of the property as insured and the value of the property subject to a defect covered by the policy, whichever is less. In other words, no matter the extent of actual monetary damages the Millers might have incurred due to an insured loss, Ticor is not obligated to indemnify them beyond those monetary limits. (27)

The court then held the amount Ticor paid for the loss of value represented the "difference in value 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 [the] policy" and that this amount was the extent of Ticor's liability against monetary loss. (28)

The Bender and Miller decisions, thus, both hold that the 1992 policy revisions place significant limitations on an insurer's liability and exclude consequential damages for a partial failure of title to the extent such damages are not calculated as part of the diminution in value.

One secondary commentator has questioned the efficacy of the 1992 policy revisions and argued that consequential damages may still be recoverable in spite of the revisions. Professor Barlow Burke in Law of Title Insurance notes that the revision in the 1992 policy to the "actual loss" provision in the 1970 policy was most likely intended to preclude consequential damages. (29) Nevertheless, Burke argues that the diminution provision still accommodates economic losses because "the 'value of the insured estate or interest as insured' can reasonably include any economic losses and, similarly, the 'value of the insured estate or interest subject to the defect' may decrease what was insured by the value of such losses." (30)

Despite Burke's argument that the intent of the revisions to the 1992 policy should not be honored and the revisions are ineffective to exclude consequential damages, Florida courts appear to be adopting the better-reasoned analysis contained in Bender and Miller that the 1992 policy revisions are clear and effective to exclude consequential damages.

In Hynes Properties LLC v. Attorneys' Title Insurance Fund, Inc., Case No. 05-2002-CA-011345, 1 (Fla. 18th Judicial Circuit 2006, J. Harris) (Order Granting Partial Summary Judgment), Hynes Properties sued The Fund for a breach of the title policy due to a title defect. The Fund sought a declaration that its liability was "strictly limited per the terms of paragraph 7 of its title insurance policy [the Diminution Provision]." (31) Relying on the Safeco decision, Hynes Properties argued that special damages were recoverable. (32)

Judge Harris observed that Safeco states that special damages may be recoverable from an insurer in a breach of contract claim. (33) Judge Harris readily distinguished Safeco from the facts of the Hynes Properties case, however, because the Safeco court "did not address the availability of special damages in a case when the insurer's liability is expressly limited by the terms of the contract." (34) Noting that there did not appear to be any Florida cases on point, Judge Harris cited Bender as authority and held that "the policy language limiting damages is not capable of more than one meaning--the defendant's liability, as to this specific claim, shall not exceed the lesser of the amount of insurance or the diminution in value suffered by reason of the title defect." (35) Judge Harris went on to note that courts may not, under the guise of interpretation, rewrite a contract and that interpreting the diminution provision to allow Hynes Properties to recover "special damages" would violate this principle. (36)

Judge Harris' order, adopting the reasoning of Bender and Miller, thus, gives effect to the long held proposition that when the policy provides the means of calculating an insured's loss, the provisions of the policy will control (37) and presents a cogent analysis as to why consequential damages should be excluded under the revised diminution provision. Other Florida courts should follow Judge Harris' lead.

Another independent reason that Florida courts should adopt Judge Harris' position is that in Florida there are strong public policy reasons why consequential damages should not be recoverable where the insurance policy clearly limits the extent of damages.

In Florida, the standard terms of all title insurance policies, including the diminution provision, are established by the state. (38) Unlike most states, Florida also sets the rates that a title insurer must charge for title insurance policies. (39) This state control of what risks will be assumed under title insurance policies and what rates will be charged for those title insurance policies is part of Florida's comprehensive regulatory scheme under which the state balances a number of important interests: a) keeping title insurance rates reasonably low for the benefit of consumers; b) attracting title insurers to do business in the state by assuring them a reasonable rate of return on their investment; and c) protecting the solvency of the title insurance industry so consumers will be certain to be reimbursed in the event a defect in title occurs. (40)

If Florida courts were to allow insureds to collect for consequential damages under a standard form title insurance policy that was specifically intended to exclude such risks to insurers, such action would result in title insurers paying for risks that the state consciously excluded when setting the rates that must be charged for such insurance. Ultimately, such judicial action would a) lead to increases in title insurance rates; b) act as a disincentive to title insurers from operating in Florida; and c) put title insurers' solvency at risk. Put another way, if courts allowed insureds to recover damages beyond those intended by the title policy, Florida's legislative intent in regulating the title insurance industry in the manner it believes best serves the interests of all Floridians would be undermined and usurped by the courts.

Accordingly, given the revisions to the 1992 policy, its adoption by the State of Florida, and the well-reasoned interpretation of the diminution provision by Bender, Miller, and Judge Harris' order, the Safeco and Endrushchat decisions should have no application to the 1992 policy and insureds under the 1992 policy should have no claim for consequential damages upon a partial failure of title.

(1) This article is based on a prior article published in two parts in the Florida edition of THE FUND CONCEPT.

(2) Courts have generally held that the measure of damages for a complete failure of title is the value of the property within the policy limit. See, e.g., Miebach v. Safeco Title Ins. Co., 743 P.2d 845, 847, n. 2 (Wash. App. 1987).

(3) See, e.g., 60 A.L.R. 972 ("A partial loss ... has been subject to three different measurements, dependent upon the nature of the encumbrance and whether it could be removed: 1) the difference in value of the property with the encumbrance or encroachment and its value had such encumbrance or encroachment not existed; 2) the amount necessary to remove the existing encumbrance or lien; and 3) upon a distinction made between rural land used for agricultural purposes and urban land used for building or commercial purposes, the value of urban land subject to an easement plus indemnity for loss of its use.").

(4) Safeco, 452 So. 2d at 47.

(5) Id. at 48-49. Shada ultimately held that the plaintiffs were not entitled to consequential or special damages because they failed to properly plead them.

(6) Id. (citing 60 A.L.R.2d 972).

(7) See id.; 60 A.L.R.2d 972; Burks v. Louisville Title Ins. Co., 121 N.E.2d 94, 97 (Ohio Ct. App. 1953) (insurer liable for consequential damages where insurer knew insured purchased property to build a home but refused to do anything about a defect in title); Buquo v. Title Guar. & Trust Co., 100 S.W. 2d 997, 1000 (Tenn. Ct. App. 1936) ("measure of damages for loss of the use of part of the premises ... is reimbursement for the loss sustained, which ... in the case of city property, used for building purposes, is the value plus any additional expenditures rendered necessary by the defect").

(8) First Nat. Bank of Lake Park, N.A. v. Attorneys' Title Ins. Fund, Inc., 620 So. 2d 263, 264 (Fla. 4th D.C.A. 1993). See also Erskine Florida Properties, Inc. v. First American Title Ins. Co. of St. Lucie County, Inc., 557 So. 2d 859, 860 (Fla. 1990).

(9) See, e.g., Indemnity Ins. Co. of North America v. American Aviation, Inc., 891 So. 2d 532, 536 (Fla. 2004); Behrman v Allstate Life Ins. Co., 388 F. Supp. 2d1346, 1349 (S.D. Fla. 2005), aff'd 2006 WL 561207 (11th Cir. 2006) (unpublished opinion).

(10) Since the adoption of the 1992 policy, secondary authority, while acknowledging the limitation of liability provision in the 1992 policy, continues to cite to the Safeco decision as an authority on the methods for measuring an insured owner's partial loss under a policy. See, e.g., Homer Duvall, Title Insurance, FLORIDA REAL PROPERTY TITLE EXAMINATION AND INSURANCE 4-32 (5th ed. 2006); BARLOW BURKE, LAW OF TITLE INSURANCE, (3d ed. 2005). These treatises discuss the 1992 policy revisions, but nevertheless continue to recognize Safeco as a continuing, viable precedent for determining the measure of a partial loss in Florida.

(11) Endrushchat, 377 So. 2d at 740.

(12) Id. at 743.

(13) Shada, 457 So. 2d at 554-55.

(14) Id. at 555.

(15) Id. at 555-56.

(16) Id. at 556 (citing to Summonte v. First American Title Ins. Co., 436 S.2d 110 (N.J. App. 1982)).

(17) To the extent Shada also suggested there may be a claim of negligence based on the title company's failure to identify the defect in title to its insured, as described above, such holding has been superseded by the economic loss rule.

(18) Bender, 119 P.3d at 676.

(19) Id. at 674.

(20) Id.

(21) Id. at 675.

(22) Bender,119 P. 3d at 675-76 (citations omitted).

(23) Miller, 93 P. 3d at 89.

(24) Id.

(25) Id.

(26) Id. at 90.

(27) Id. at 91 (emphasis added).

(28) Id.

(29) BARLOW BURKE, LAW OF TITLE INSURANCE, 7.01 (3d ed. 2005).

(30) Id. Burke does not cite to Bender and cites to Miller only in a footnote that does not specifically address the Miller court's detailed discussion of the diminution provision.

(31) Hynes Properties LLC , Case No. 05-2002-CA-011345 at 2.

(32) Id.

(33) Id.

(34) Id.

(35) Id. at 3.

(36) Id. at 4.

(37) See, e.g., Kentucky Title Co. v. Hail, 292 S.W. 817 (Ky. Ct. App. 1927); Flockhart Foundry Co. v. Fidelity Union Trust Co., 132 A. 493 (N.J. 1926).

(38) FLA. STAT. [section] 627.777 (2006) ("A title insurer may not issue or agree to issue any form of title insurance commitment, title policy, other contract of the insurance, or related form unless it is filed with and approved by the office").

(39) FLA. STAT. [subsection] 627.780 and 627.782 (2006).

(40) FLA. STAT. [section] 627.782, (2005); see also Chicago Title Ins. Co. v. Butler, 770 So. 2d 1210, 1217-18 (Fla. 2000) (discussing the legislature's concern with title insurer solvency and the statutory measures taken to address this concern).

Mark A. Brown is a shareholder, and Christopher W. Smart is an associate, with Carlton Fields, P.A., in Tampa. Mr. Brown chairs, and Mr. Smart is a member of, the firm's real property litigation practice group. Mr. Brown is chair of the Real Property Litigation Committee of the Real Property, Probate and Trust Law Section of The Florida Bar. Mr. Smart is chair of the Land Use and Zoning Committee of the Real Property, Probate and Trust Law Section of the American Bar Association. Mr. Brown received his J.D., with honors, in 1980 from the University of Florida College of Law. Mr. Smart received his J.D., with high honors, in 2002 from the University of Florida College of Law.

This column is submitted on behalf of the Trial Lawyers Section, Robert C. Palmer III, chair, and D. Matthew Allen, editor.