By Lauren P. McKenna, Esq.
Insured brought claim against title insurer arguing that it was entitled to recover the difference between the value of the property subject to a title defect and the value without the defect. The insurer defended, claiming that the value of the property without the defect was fixed by the purchase price of the property, not by its alleged current market value. HELD: The Philadelphia Court of Common Pleas held that the insured was only entitled to recover a maximum of $100,000 under the title insurance policy issued by the insurer based on the purchase price of the property and that the alleged current market value of the property did not control. Nette Properties, LLC v. First American Title Insurance Company, October Term, 2007, No. 02928.
There is often confusion over the extent of liability of a title insurer under the terms of a title insurance policy. In some instances, the holders of the policies claim that the language regarding coverage is ambiguous. This issue was recently addressed in the connection with litigation commenced by Nette Properties, LLC against First American Title Insurance Company and others. In Nette Properties, LLC v. First American Title Insurance Company, the Philadelphia Court of Common Pleas analyzed the issue and held that the language in a policy regarding the extent of liability of an insurer is not ambiguous. The Court found in favor of a title insurer who challenged a claim brought by an insured for full policy limits.
The Nette decision arose from a transaction between Nette Properties and Claire Nelson. Nette claimed that it purchased the land and air rights to property located at 1822 Spring Garden Street, Philadelphia, Pennsylvania for $1.8 million. After completion of the sale, Nette obtained title insurance for the transaction from First American Title Insurance Company in the form of a 1992 policy. On December 27, 2005, Nette signed an agreement of sale to sell the property to a real estate developer, who agreed to pay $3.9 for the land and air rights to the property and build a 40 story building at that location. Prior to closing on the sale, it was discovered that the air rights to the property were actually owned by a neighboring property owner, not the original seller. As a result, the agreement of sale was terminated. In addition, Nette made a claim under the title insurance policy issued by First American because it allegedly did not own the air rights at issue.
Nette also commenced litigation against First American claiming, among other things, that First American breached the title insurance policy and was therefore liable to Nette for the full limit of the policy of $1.8 million. Recognizing the requirement that it must show a diminution in value in the property in order to recover under the policy, Nette produced an appraisal which concluded that the property was worth $3.95 million with the air rights and only $1.7 million without the air rights. As a result, Nette claimed a diminution in value of $2.25 million and made a demand for policy limits of $1.8 million.
In advance of trial in the matter, First American filed a motion in limine seeking to limit the damages claimed by Nette. First American argued that the damages potentially recoverable under the policy would be limited to $100,000. First American maintained that the starting point for calculating damages under paragraph 7(a) of the policy, i.e., the “value of the insured estate or interest as insured”, was fixed by the purchase price of the property of $1.8 million, not by its alleged current market value of $3.95 million.
In considering First American’s motion, the Court recognized that a title insurance policy is a contract of indemnity against the actual monetary loss or damage sustained or incurred by an insured for reasons insured against by the policy. The Court noted that the policy contains a formula for determining a loss which provides that the liability of a company under the terms of the policy shall not exceed the lesser 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 in the policy.
The Court noted that the parties agreed on the amount of the insurance ($1.8 million) and the value of the insured estate or interest subject to the defect ($1.7 million). However, the Court stated that the parties disagreed as to the value of the insured estate or interest as insured. First American claimed that this value was fixed by the $1.8 million paid by Nette for the property. Nette claimed that this provision of the policy was ambiguous and could be interpreted to be an amount equal to Nette’s lost bargain, which amount was fixed by its expert witness at $3.95 million. Under First American’s interpretation, the amount of the loss would therefore be capped at $100,000. Under Nette’s interpretation, the amount of the loss would be $2.25 million. Further, as the difference of $2.25 million is greater than the $1.8 million policy limit, Nette claimed that it was entitled to recover the full policy limit from First American.
In considering this issue, the Court noted that there was no Pennsylvania case law interpreting this provision of the policy and instead relied on a decision issued by an Ohio court, Zeiger v. Shons, 2001 Ohio App. LEXIS 1991. In Zeiger, the Ohio court determined that the “value of the insured estate or interest as insured” was fixed by the purchase price of the property. The Court in Nette concluded that it was bound by the same analysis. As a result, the Court granted First American’s motion in limine and found that under the clear and unambiguous language in the policy, Nette’s damages were fixed by the purchase price of the property as insured ($1.8 million), minus the value of the insured estate subject to the defect ($1.7 million), resulting in a potential recovery to Nette of no more than $100,000.
The Nette case represents an important interpretation of the loss provisions contained in the 1992 policy and the first time a Pennsylvania court has squarely addressed the issue. While the Nette case is important, it should be noted that the reasoning of the Court would not be applicable to a claim made under a 2006 policy if the insurer had attempted to cure the defect and been unsuccessful. Under the 2006 policy, an insured has the ability to pick the date of determining loss when an insurer has not fixed the title defect. Nevertheless, the Nette case provides guidance regarding the method for determining loss under the 1992 policy.
Lauren McKenna is a partner at Fox Rothschild LLP in Philadelphia, and is Co-Chair of the firm’s Title Insurance Defense Group. Lauren’s practice involves commercial litigation, with a particular emphasis on real estate and title insurance defense matters. She represents commercial property owners, residential property owners and real estate professionals, as well as title insurance companies, their agents, and insureds.
