Title Insurance Coverage Disputes

Title, Not Terrain: Survey Exceptions and the Marketability Covenant

The survey exception is the standard fight in owner’s policy litigation, and the leading construction explains both why it exists and how far it reaches. "The purpose of the survey exception is to exclude coverage when the insured fails to provide the insurer with a survey" — "[f]rom a search of relevant public records, a title company cannot ascertain the risks that an accurate survey would disclose," so "the title company puts that risk on the insured, who can control it either by obtaining a survey or arranging for the elimination of the survey exception" Walker Rogge, Inc. v. Chelsea Title & Guaranty Co., 562 A.2d 208 (N.J. 1989). The court refused to shrink the catchall: "Whatever else the phrase ‘other matters’ might mean in a survey exception, it clearly refers to the dimensions of the lot lines and the size of the lot" — "land exists on the ground, not on paper" — and "[a] shortage in acreage is one of the facts that an accurate survey and inspection would disclose," so the insured’s missing acres fell inside the exception. Two backstops sealed the result: "In the absence of a recital of acreage, a title company does not insure the quantity of land. Title companies are in the business of guaranteeing title, not acreage," and under the traditional rule "a title company’s liability is limited to the policy and ... the company is not liable in tort for negligence in searching records" unless the insurer voluntarily assumed duties beyond the contract to insure title.

The marketability covenant insures title, not the land’s economics. Fidelity National Title Insurance v. Woody Creek Ventures, LLC, 830 F.3d 1209 (10th Cir. 2016) — a diversity case predicting Colorado law — drew the line at rights of ownership: "defects which merely diminish the value of the property, as opposed to defects which adversely affect a clear title to the property, will not render title unmarketable within the meaning and coverage of a policy insuring against unmarketable title," a principle "often expressed" by the maxim that "one can hold perfect title to land that is valueless and one can have ‘marketable title’ to land while the land itself is unmarketable." The court construed "unmarketability of the title" "to relate to defects affecting rights of ownership—i.e., defects in title—rather than defects affecting the physical condition or use of the covered property," held that "a long-term, revocable right-of-way grant" — a 30-year BLM permit — "constitutes a ‘right of access’ as that phrase is used in the title insurance policy," and enforced the insurer’s cure right: having cured a defect "in a reasonably diligent manner," the insurer "shall have fully performed its obligations with respect to that matter and shall not be liable for any loss or damage caused thereby." California applies the same distinction to contamination — Lick Mill Creek Apartments v. Chicago Title Insurance, 231 Cal. App. 3d 1654 (Cal. Ct. App. 1991) held that "[b]ecause marketability of title and the market value of the land itself are separate and distinct, plaintiffs cannot claim coverage for the property’s physical condition under this clause of the insurance policies," adopting Kumar’s framing that the insured "confuses economic lack of marketability, which relates to physical conditions affecting the use of the property, with title marketability, which relates to defects affecting legally recognized rights and incidents of ownership": "The presence of hazardous material may affect the market value of the defendant’s land, but, on the present record [since no lien had been recorded], it does not affect the title to the land." In short, "The purpose of title insurance is not to protect the insured against loss arising from physical damage to property; rather, it is to protect the insured against defects in the title."

When a defect is covered, the measure-of-loss rule protects reliance. Overholtzer v. Northern Counties Title Insurance, 116 Cal. App. 2d 113 (Cal. Ct. App. 1953) held that "liability should be measured by diminution in the value of the property caused by the defect in title as of the date of the discovery of the defect, measured by the use to which the property is then being devoted." The rationale is the policy’s forward gaze: "When a purchaser buys property and buys title insurance, he is buying protection against defects in title to the property. He is trying to protect himself then and for the future against loss if the title is defective. The policy necessarily looks to the future," and "[a]ny other rule would not give the insured the protection for which he bargained and for which he paid." The construction canon points the same way — "Title insurance policies should be interpreted in the same fashion as are other insurance policies, that is, liberally in favor of the insured, and against the insurer" — and the insured need not wait for a physical ouster: "The mere existence of the easement created a cloud on the title. If that cloud resulted in diminution of the market value of the property then recoverable damage resulted."

Frame the claim around ownership rights from the start. For the insured, the cheapest win happens before closing: commission the survey and negotiate the survey exception off the policy, and get any acreage recital in writing, because quantity is otherwise uninsured. In litigation, plead the defect as one affecting legally recognized rights and incidents of ownership — lost value, contamination, and access economics read as uncovered land problems, not title problems — and account for the insurer’s option to cure, because a defect eliminated with reasonable diligence extinguishes the claim even if the fix, like a revocable right-of-way, is less than the insured hoped for. On damages, press the date-of-discovery measure with the property valued at its then-current use: it captures improvements built before the defect surfaced and can dwarf the purchase-date figure.