Posting for

Tuesday, February 27, 2001

by: Bert Rush

brush@firstam.com

ADVERTISING MATERIALS/COVERAGE ISSUES/DUTY TO DEFEND

Let's play "You Be the Judge!"

On December 17, 1982, Raymond and Donna purchased their home and ordered an owner's policy of title insurance. At closing, they were given a sales brochure explaining the benefits of title insurance. The brochure said, in part:

"...if anyone makes a claim against your

title as insured to you...The cost of

defending any such attack will be borne

by the Title Company...."

This brochure did not describe exceptions or exclusions from coverage, and these subjects weren't discussed at closing.

About two weeks later, Raymond and Donna received their title policy.

Things were fine for almost twelve years. Then, in late 1994, a neighbor filed suit against Raymond and Donna, claiming a portion of the insured property. The neighbor's claims were based on theories of adverse possession and prescriptive easement.

Raymond and Donna made a claim under their policy, and the title company investigated. After receiving a copy of a survey of the property, done in 1990, the title company denied coverage based on the standard exception for "any state of facts which an accurate survey or an inspection of the premises would disclose."

Raymond and Donna paid for their own (successful) legal defense, then filed suit against the title insurer to recover attorney's fees of $20,250.

Raymond and Donna argue that their claim should be covered, because the only information about policy coverage given them at closing was the sales brochure, on which they totally relied; and because their claim appears covered by the language of the brochure.

The title insurer argues that the only contract between the insurer and insured is the written title insurance policy, and the claim is properly denied under the standard policy exception for matters that would be disclosed by an accurate survey or inspection of the property.

This one's simple enough...so how would you decide the case???

Per Connecticut practice, the case was assigned by the trial court to a fact finder for initial hearing. The fact finder filed a report deciding that Raymond and Donna should prevail, because they relied on the sales brochure, and the dispute with the neighbor is clearly within the brochure's description of coverage.

The title insurer objected to the fact finder's report, and the objections were considered by the trial court.

The trial court held that the fact finder's report was based on a misunderstanding of the law, and remanded the case for the fact finder to issue a revised report.

In so holding, the trial court said that the only "operative contract" between an insurer and its insured is the written policy of insurance--in light of which language to be found in advertising materials cannot be controlling. Said the court, "(t)hough the plaintiffs did not receive a copy of the policy until two weeks after the closing, they were in possession of the policy containing the exclusionary clause for approximately twelve years before the adverse possession suit was brought, and therefore should have been aware of the exception to coverage."

The case is Kelly v. Nations Title of New York, Inc., 2000 WL 151235, 26 Conn.L.Rptr. 283 (2000).

Comment: I think this is the correct result, but these facts should be sharply distinguished from similar circumstances under which coverage may be justified.

For example, if advertising materials misrepresent the nature or extent of coverage, then the advertising may be controlling to the extent it varies from provisions contained in the policy. (In this case, the court doesn't tell us whether the brochure included the usual disclaimers about the need to read the policy itself, for details about coverages, exceptions and exclusions. If in fact it did not, the brochure should be revised to include them. Without such disclaimers, seems to me an insured may have an argument that the advertising materials are misleading or false.)

Another example: If the title company offered more than one form of owner's policy, and if the insured's claim would have been covered by a policy form about which the insured was given no information, then the insured may have an argument that they were not given an informed choice and should be entitled to the fullest coverage available.

In this case, the court doesn't consider whether the insureds might have obtained an extended coverage policy, which might have covered the neighbor's claim. If so, those facts coupled with the fact the insureds were given an 'over-promising' sales brochure could swing this case in the opposite direction.

Finally, I'm a little surprised that the magic words "reasonable expectations" don't appear in this decision....

In other words, despite this court's clear and unqualified statement of the law, I think there may be cases where poorly drafted advertising can get an insurer into trouble--or, at least, into the realm of unintended coverages.

**********

Following Tuesday's posting, Oscar Beasley writes:

I think that a lot may depend upon who made up the brochure and what knowledge the title company may have had of it. Generally I think that a title company should be careful of what the builder might do. If they could be considered as an agent for an agent it could be very interesting.

Alan Rubin (Manhattan) writes:

I think the decision is the right one. Clearly, the "blurb" contained in the sales brochure was intended to highlight obvious benefits (as in any form of advertising) in obtaining a fee policy. And, as the court held, the title policy was the only operative contract between the parties.

In the case of the sale of a life insurance policy, a salesman will emphasize that upon the insured's death, his/her spouse and children will be provided for, and will present the insured with a schedule of benefits. A sales brochure would not highlight the exceptions and exclusions to coverage.

However, the decision should remind us of the importance of accuracy in sales brochures given to the prospective insured at closing.

Jim Williams (Barboursville, WV) writes:

Far be it for me to second guess the lawyer and judge types, but it appears to me the court missed the magic words "...as insured..." contained in the brochure. How could the plaintiffs' (insureds) claim the brochure afforded a different coverage than the policy when the language "...as insured..." clearly indicates that the policy language will rule?

William Homa (Pittsburgh, PA) writes:

Two questions I have from reading this posting: What about the Title Commitment and who ordered the Survey done in 1990 and why was one ordered?

Reply by Bert Rush: If a commitment was issued, apparently it wasn't shown to the buyers. As to the second question, the Court doesn't tell us any more about the survey, other than it was prepared in 1990 (four years before the dispute arose) and it was used by the title insurer as a basis to deny coverage.

Greg Scanio (Columbia, SC) writes:

Regarding your additional example of enhanced policies; that is the argument we have used to successfully implement the Eagle policy in South Carolina. For those of you who do not know, South Carolina is an attorney agent state where ONLY attorneys may do closings. What we have done is inform these attorneys that they could be derelict in the duty to their clients if they don't sell the Eagle Policy. The thought of a possible disciplinary action for failure to properly provide the best coverage to their clients has made the Eagle a hot product here. Thank you to Cliff and everyone at the home office that worked on the Eagle.

Reply by Bert Rush: The EAGLE Policy, which turns four years old this month (February), was produced mainly by Cliff Morgan, Paul Hammann, Richard Flory and Gene Aalseth.

Joe Bartle (Grass Valley, CA) writes:

The jackets that are attached to the preliminary reports that we issue, identify the list of printed exceptions and exclusions by policy type. In Nevada County, California, we actively market and issue the Eagle Protection Policy (Extended Coverage) for owners, as our "default policy" when applicable. Considering the circumstances involved, it would appear that "Raymond and Donna" would have been prime candidates for a testimonial in a new "Eagle Policy" brochure!