Posting for

Friday, October 16, 1998

by: Bert Rush

brush@firstam.com

CLAIMS/MARKETABILITY COVERAGE/BAD FAITH

Monday's posting on Marketability Coverage reminded me of a claim story from ten years ago--but not one of ours.

In 1981 Les and Cora Pratt's wholesale floor-covering business in Riverside County, CA, was going down in the recession. Facing bankruptcy the couple sold off assets, including a mountain cabin in nearby Idyllwild.

While the cabin was in escrow, the title company notified the Pratts that it appeared six tax liens and a judgment lien had attached to the property about five years earlier--when it was owned by one John Roger Hanson. The Pratts' sale could not close until these liens were cleared.

Mr. Pratt located his owner's title policy--issued by Stewart Title--and visited Stewart's office in Riverside where he explained the problem to V.P. and Chief Title Officer Bob Hagan. Hagan suggested that Stewart Title "write-over" the liens--or indemnify the title company handling the sale so it could write-over the liens--but Pratt told him that wouldn't be acceptable. it's unclear whether Pratt fully explained that his buyer had already nixed the writer-over idea. In any case, Hagan excused himself to discuss the problem with Stewart's in-house counsel.

The in-house counsel, Bill P., was reached by telephone at his office in San Diego County. Returning to Mr. Pratt, Hagan allegedly said, "I've spoken with our attorney and he says we are probably going to have to pay--but do what you have to do."

Pratt: "Does that mean we have to sue you?"

Hagan: "Do what you have to do."

Mr. Pratt hired an attorney who wrote a letter to Stewart Title in Houston, which letter was referred to Bob Hagan for reply. Hagan replied that review of his office file indicated Stewart had relied on a Statement of Information, signed by John Roger Hanson, to eliminate the liens in the Hanson-to-Pratt transaction years earlier--as if that helped the Pratts. Then he wrote:

Having already extended their closing date once, the Pratts now were compelled to borrow $6,445 in order to clear the liens and sell their cabin. And it turned out there were two offending judgment liens against Hanson, not just the one originally reported. The next letter from the Pratts' attorney to Hagan requested reimbursement of amounts paid to clear the liens ($5,674), plus interest charges on the new loan taken out to fund clearing of the liens ($1,512), plus additional mortgage payments on the cabin while the claim was pending ($635), plus legal expenses ($467), for a total of $8,288.

There followed an exchange of letters in which Stewart Title, through Bill P., agreed that it owed something to the Pratts--but something less than $8,288. Bill explained that he'd visited the courthouse in Palm Springs, where the largest of the two judgments was obtained, and examined docket indicating that the judgment (in excess of $3,000) was in fact satisfied by Hanson years before the Hanson-to-Pratt transaction.

So, Bill concluded, the Pratts paid off a judgment which they shouldn't have--and Stewart wouldn't reimburse for that. Instead, Bill suggested they go back to the attorney whom they paid for the release of the judgment lien.

By this time the Pratts had a new lawyer who sued Stewart Title (both the parent and California subsidiary) for breach of contract and "bad faith" denial of their insurance claim. As part of their bad faith claim, the Pratts sought damages for emotional distress and punitive damages.

Bill's response was to cross-complain against the Pratts' attorney, alleging that any emotional distress which they may have suffered was caused by the attorney's delays in responding to Bill's requests for proof of the correct amount due.

The case was tried before a jury. Witnesses included Bob Hagan and, as I recall, a senior executive of Stewart Title from Houston. These witnesses admitted Stewart owed the Pratts money--but when asked why nothing had been paid more than five years after the claim was first submitted they had no answer.

After the trial but before the verdict Stewart paid the Pratts $7,500.

The jury awarded the Pratts compensatory damages of $22,500, each, for a total of $45,000. Most of this was apparently intended to compensate them for emotional distress. The jury also awarded each of them punitive damages of $1,250,000, for a total of $2,500,000.

On Stewart's motion for a new trial, the judge ruled that each plaintiff's compensatory damage award would be reduced to $12,500, for a total of $25,000 (or $17,500 after giving credit for the post-trial payment), and that each's punitive damage award would be reduced to $450,000, for a total of $900,000.

Stewart appealed--but we never learned the final outcome.

So that's how one claims counsel got his tail in a knot trying to handle a garden-variety marketability claim.

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Following last Friday's posting Jim Dondero (Grand Rapids, MI) writes:

Holy _ _ _ _ ! Talk about your all-time mushrooming legal nightmare!

This is a good example of how the vague concept of "marketability" can combine with radical tort philosophy to reach an abominable result! It is frightening to underwriters and claims handlers alike (and two-thirds of us are BOTH!) who increasingly must exercise delicate judgment in how to deal with claims of "marketability" defects, typically spawned by another title company trying to insure a subsequent transaction. How about persuading ALTA to revise its policy to eliminate the insuring provision against lack of "marketability" (one excellent feature of the TEXAS Land Title Association policy, which I worked under for six years)???

Reply: Holy what? Trust me there's no sentiment in ALTA to drop marketability coverage. Besides, it's great coverage, adds to the value of title insurance and, if we're doing our job, we can deal with these problems without living the nightmare. In my opinion (disclaimer), I think (redundancy) marketability coverage is kind of (backpeddling) what title insurance is fundamentally all about.