No coverage for matters created by the insured

[Peter Walther]

Here's a repost of a comment on a recent Florida title insurance coverage matter.

Salas v. Commonwealth Land Title Ins. Co, 2022 WL 1630988 (N.D. Fla. Apr. 5, 2022): Salas bought a lot from a developer in a Florida subdivision. The purchase contract required him to build on the lot within two years; if he did not do so, the developer had several remedies, including a right of repurchase and liquidated damages.

Salas failed to build within the 2-year window and the developer sued him for damages. Salas, in turn, demanded that Commonwealth, which had issued him an owner’s title policy, provide a defense to the suit and cover him for any damages he might have to pay. Commonwealth denied coverage. After three years of litigation, Salas settled the suit with the developer, who bought back the lot at a reduced price. Salas had by then spent more than $800,000 on the litigation, which he wanted Commonwealth to reimburse.

The purchase agreement, which contained Salas’ obligation to build within two years, was not listed as an exception to coverage in Schedule B of the title policy. Additionally, Salas pointed out that the title agent had actual knowledge of Salas’ obligation to build. Hence, Salas argued that Commonwealth was obligated to cover him for his loss under this title “defect.”

Commonwealth, however, took refuge in Standard Exclusion 3(a), which excludes from coverage “Defects, liens, encumbrances, adverse claims or other matters created, suffered, assumed or agreed to by the insured claimant.” The court agreed with Commonwealth. There was no doubt that Salas had agreed to this “defect,” since it was spelled out in the purchase agreement that he had signed.

Moreover, the court noted that this was precisely the sort of matter that title insurance is not designed to protect against. Salas was essentially seeking to have Commonwealth insure him against his own acts and based on liability he had agreed to. “Here, had the [Salas] chosen to comply with his obligations, no coverage issues would have been implicated. In other words, no defect or encumbrance was created on the title until [Salas] failed to construct within the 2-year period and failed to pay the liquidated damages.”

The court likened a valid title claim to a surprise, and noted that there was no surprise here: “The Purchase Agreement, however, was not a surprise to [Salas], nor were [Salas’] obligations under the Purchase Agreement. See Commonwealth Land Title Ins., Co., 956 F. Supp. at 992 (“When, as in this case, the insured has knowingly purchased land encumbered by tax liens, it cannot be said that the insured will experience ‘surprise’ when the title insurance policy does not list a known encumbrance as an exception to coverage”).

Thus the case furnishes a prime example of the principle that “you brought it on yourself.” And that’s not what title insurance is for.