Policy Does Not Cover Business Expenses or a Post-Policy Ordinance

Munden v. Stewart Title Guar. Co., _ F.Supp.3d _, 2023 WL 4902006 (D. Idaho 2023) (permanent citation not yet available).

An Idaho court has held that a title insurer is not required to pay expenses incurred by the insured in operating its cattle ranch, especially those caused by an ordinance adopted after the policy date. The court also held that the insureds’ marketability of title claim was stayed until ownership of the disputed road is resolved in a separate action, and addressed several litigation defense cost issues.

Prior decisions in this lawsuit were reported in the May 2020 and October 2021 issues.

In 2006, Bannock County, Idaho passed Ordinance 2006-1, which designated several roads and trails as part of the Scout Mountain Loop snowmobile trail. This included the Upper Garden Creek Road. In winter, the only traffic allowed on the road was by snowmobile.

In 2012, Dennis and Sherrilyn Munden bought 768 acres lying North of Upper Garden Creek Road. The nearest all-weather public road is a mile away. The Mundens got a Stewart Title policy that contained exceptions for unrecorded easements and for any public road running through the property.

In 2014, the Mundens bought the 660 acres South of the road. They got a Chicago Title policy. That policy had an unrecorded easement exception, but not a public road exception. The South parcel gets access from both Upper Garden Creek Road and a different street.

The Mundens operate a cattle ranch on the combined parcels. In 2019, they sued the county in state court over the snowmobile trail ordinance, because it prohibits them from hauling ranch supplies and equipment over Upper Garden Creek Road in winter. Bannock County filed counterclaims, alleging that Garden Creek is a public road. The state court lawsuit has made a trip to the state Supreme Court, in 504 P.3d 354 (Idaho 2022), but is still pending.

Also, in early 2019, Bannock County amended its ordinance to say that the snowmobile trails (including Upper Garden Creek Road) would be closed at the discretion of the county public works director, not for the fixed period of Dec. 15 to April 15 each year.

The Mundens made claims under both policies for attorney fees in the ordinance lawsuit and their expenses in adjusting their cattle operations. They also claimed that the title to both tracts was unmarketable. The Ninth Circuit held that the public road exception in the Stewart policy negated coverage for all of those claims. However, the court found that the unrecorded easement exception in the Chicago Title policy did not negate coverage. Munden v. Stewart Title Guar. Co., 8 F.4th 1040 (9th Cir. 2021).

After the Ninth Circuit decision, Chicago Title accepted coverage. It paid the Mundens about $135,000 in attorney fees incurred in the state court action, and in prosecuting the coverage action. It also paid them $4,000 as the diminution in value, based on an appraisal.

Both sides moved for summary judgment. Chicago Title argued that it had fulfilled all of its policy duties. The Mundens claimed that the insurer owed more attorney fees and that the diminution was greater, because title to the South parcel is “clouded” by the county’s claim that the road is public.

The court deferred a ruling on the Munden claim that title was clouded until the state court decides whether or not the road is public. The judge said:

If the Upper Garden Creek Road is privately owned by the Mundens, no cloud on title exists, rendering any compensation for the “defect of title” inappropriate. Alternatively, if Upper Garden Creek Road is a public road owned by Bannock County, then this Court can determine whether the compensation paid by Chicago Title based on the diminution of value appraisal fulfilled Chicago Title’s contractual obligation under the Policy.  

Next, the court addressed attorneys’ fees. The court agreed with Chicago Title that it was not required to pay the fees the Mundens incurred in prosecuting their state court action before the county brought counterclaims asserting that the road was public. It reasoned that the policy creates only an obligation to defend the insured in litigation. It said:  

Here, because the Mundens initiated the state case against Bannock County, it was only when Bannock County filed a counterclaim that Chicago Title’s duty to defend was triggered. Any fees incurred before Chicago Title’s duty to defend was triggered are not covered under the Policy.  

Chicago Title next argued that it had no duty to pay fees incurred on appeal in either the state court action or the coverage suit, because Condition 5(c) of this 2006 form ALTA policy says that the insurer may elect to appeal an adverse ruling “in its sole discretion.” The court admitted that the plain language of the policy seemed to favor Chicago Title. However, the court said, Chicago Title did not defend the Mundens in the state action until the Ninth Circuit ruled. The Mundens appealed the action against the county before that ruling. The court said that the policy “does not contemplate this circumstance or circuitous timing, and therefore, there is an ambiguity” that it was required to resolve in the Mundens’ favor.

The court also said that Condition 5(c) might not apply at all:

Alternatively, because Chicago Title did not bring the action or assert a defense on the Mundens’ behalf, it could be found that Condition 5(c) does not apply at all, and Chicago Title did not have the sole discretion to appeal. If Condition 5(c) does not apply, there are no other provisions permitting Chicago Title to exclude appellate fees from the Mundens’ reimbursable legal fees.The court said there was a question of fact as to the amount of attorneys’ fees owed. Finally, the court took up the Mundens’ claim that the $4,000 check from Chicago Title was too little. They said that the 2019 modified ordinance forced them to spend more than $400,000 for their calving operations, for new equipment and tires, and a new place for their cattle to reside during winter. In addition, the Mundens sought about $33,000 for a calving barn that they “never used” because of the “closed road” after the passage of the 2019 ordinance.

The court said that the Mundens’ claims were far afield of title issues, and were about post-policy acts. It reminded the Mundens that title insurance protects “against the defects in title which appear of record.” Brown’s Tie & Lumber Co. v. Chicago Title Co. of Idaho, 764 P.2d 423, 427 (Idaho 1988) (quoting 9 Appleman, Insurance Law and Practice § 5201, 8–9 (1981)). That means “easements, liens, encumbrances, and so forth.” Futher, all coverage is retrospective. The policy begins by saying that it “insures, as of Date of Policy … against loss or damage.” (emphasis added). The court said: 

Conflicts involving private property rights are common, which is why property owners acquire and rely on title insurance. Title insurers are bound to pay when they miss easements, encroachments, and other claims in the public record affecting an individual’s ownership. However, insurance policies only provide compensation for encumbrances and defects that existed at the time of the policy issuance. Title insurers are not bound to compensate for future, unknowable events.  

Further, Brown’s Tie also said that “[t]he business success is not what has been insured, only the title.” Thus, the court said, insureds “should hold no expectation that title insurance will guarantee the success of how they intend to use the property.” The court held that the business expenses claimed by the Mundens are not loss payable under the policy:

The limitations to business operations arising after the issuance of the Policy are outside the scope of the Policy because of subject matter and the timing. Chicago Title is not liable for any business expense losses resulting from an Ordinance passed after the Policy was issued.  

The Mundens also demanded policy limits because they claim that there is a cloud that renders title unmarketable, due to the road dispute. The Mundens relied “heavily” on Jericho State Cap. Corp. of Fla. v. Chicago Title Ins. Co., 848 S.E.2d 572 (S.C. Ct. App. 2020). In that case, the South Carolina Court of Appeals held that a reservation on a county map and ordinance for the possible taking of a future right-of-way rendered title to the affected parcels unmarketable and invoked policy coverage. The Jericho court reasoned that the map made it likely that the right-of-way area would be condemned in the future, making title unmarketable.

This court distinguished Jericho, saying:  

Although Jericho similarly involved an ordinance, it is inapposite because the South Carolina Ordinance specifically restricted use to ensure future acquisition, which led to the increased probability of litigation. Nothing within the 2006 or 2019 Bannock County Ordinances establishes rights for future acquisition or threatens the current ownership. The 2019-01 Ordinance only changed the time and manner of road closure and did not alter title to the property. There is nothing to suggest the 2019-01 Ordinance increased the probability of litigation. Litigation was unexpected as Bannock County believed ownership rights of the Upper Creek Garden Road were established. Additionally, there is nothing to suggest that condemnation proceedings have been initiated since the ownership question arose.  

The court concluded with an admonition to the Mundens. It said that the “elephant in the room of this litigation revolves around ownership of Upper Creek Garden Road.” In Idaho, the proper way to challenge the status of a road is under Idaho Code section 40-208(7). Bannock County cited that statute in their counterclaim in 2019. The Idaho Supreme Court reiterated the “required adherence to the statute” in its 2022 decision in the state court action. This court said that nothing in the record established that the Mundens “have sought a validation proceeding, which would establish the status of the road and could potentially clear the cloud on title.” Therefore, the judge said, “until the latter issue is resolved, a determination of compensation for unmarketable title is premature.”  

This is an excellent decision. It is one of the few to address head-on an insured’s claim that loss under the policy should include post-policy business expenses incurred by the insured. The court did a good job of distinguishing between reduction in the value of the real estate due to a title matter and business expenses incurred by the insured allegedly resulting from the title issue.

Matthew R. Cleverley of Fidelity National Law Group in Seattle capably represented Chicago Title Insurance Co.

J. Bushnell Nielsen, shareholder in the law firm Reinhart’s litigation and real estate practices, is the editor of the Title and Escrow Claims Guide and The Title Insurance Law Journal. He can be reached at bnielsen@reinhartlaw.com.

This article is reprinted from The Title Insurance Law Journal, by permission. All rights reserved. Click here to subscribe to the journal.