(The Measure of a Property Owner's Loss from a Title Defect is the Diminution in the Property's Value Caused by the Title Defect on the Date the Insured Discovers the Defect, Measured According to the Property's Highest and Best Use, Absent Language to the Contrary)
(October 2024) - In Tait v. Commonwealth Land Title Insurance Company, 103 Cal. App. 5th 271 (June 28, 2024), the California First District Court of Appeal reversed the trial court's order granting summary judgment in favor of Commonwealth Land Title Insurance Company ("Commonwealth"). In this case, plaintiffs Martin Tait, Jane Tait, and Bry-Mart, LLC (collectively, the "Taits") purchased a residential property for $1.25 million and Commonwealth issued a title insurance policy for the property. The policy insured the Taits against "actual loss" arising from certain defined covered risks, including someone else having an easement on the property. The policy limited Commonwealth's liability for an unknown easement to the lesser of the Taits' "actual loss" or the policy limit of $1.25 million. The policy did not define "actual loss."
After purchasing the property, the Taits proceeded with their plans to subdivide the property into two lots. However, the Taits learned about a maintenance easement on the property that they believed impacted the marketability and value of the property and interfered with its potential development. As a result, the Taits tendered a claim on the policy to Commonwealth and Commonwealth accepted coverage.
Commonwealth obtained an appraisal from AGI Valuations to assess the property's value reduction due to the maintenance easement. Applying the standard from Overholtzer v. Northern Counties Title Ins. Co., 116 Cal. App. 2d 113 (1953), AGI Valuations determined that the property's value without the easement was $1.3 million, and with it, $1.1 million, reflecting a $200,000 diminution. Commonwealth then requested a revision of the appraisal to exclude certain assumptions, leading to a revised value of $1,256,500 with a diminished value of $43,500, for which Commonwealth issued a check.
The Taits commissioned their own appraisal from Valbridge Property Advisors ("Valbridge"), which also used the Overholtzer standard. Valbridge valued the property at $2.08 million without the easement and $1.38 million with it, resulting in a $700,000 diminution. Based thereon, the Taits asked Commonwealth to cover the $656,500 difference, but were denied. Subsequently, the Taits sued Commonwealth for breach of contract.
The trial court granted summary judgment in favor of Commonwealth, concluding there was no material fact issue regarding the breach. The trial court ruled that the proper standard for title insurance losses did not account for the property's highest and best use, only its actual use as vacant residential land, thus disregarding the Taits' appraisal and upholding Commonwealth's appraisal as the sole evidence of loss.
Both the Taits and Commonwealth agreed that Overholtzer established that an owner's "actual loss" due to a cloud on title is measured by the resulting diminution in market value. However, the parties disputed how Overholtzer should be interpreted for calculating this depreciation. Commonwealth argued that the "actual loss" or depreciation was based on the property's current use, while the Taits argued it was based on the property's highest and best use.
The Court of Appeal concluded that the parties' two different interpretations were reasonable, rendering the term "actual loss" ambiguous. As a result, the Court of Appeal interpreted the term "actual loss" in line with the Taits' objectively reasonable expectations. In that regard, relying on eminent domain law, the Court of Appeal agreed that a property's market value is generally based on its highest and best use. The Court of Appeal therefore concluded that "in the absence of any language in the policy to the contrary, the measure of a property owner's loss from a cloud on title is the diminution of a property's value caused by the title defect on the date the insured discovers it, measured according to the property's highest and best use."
Commonwealth argued that regardless of whether the value of a property can be based on its highest and best use, the trial court properly granted summary judgment because the Taits did not provide competent evidence that subdivision into two parcels was the highest and best use of their property. The Court of Appeal, however, concluded that the evidence presented by the Taits demonstrated that there was a dispute of material fact regarding whether the Taits could achieve their proposed use of subdividing the property, which did not support the trial court's summary judgment ruling. In addition, the Court of Appeal held that there was also a triable issue of fact regarding whether Commonwealth's $43,500 payment to the Taits fully compensated them for their "actual loss."
Based on the above, the Court of Appeal concluded that the trial court should not have granted Commonwealth's summary judgment motion and reversed the trial court's judgment.
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