(This post will probably be of absolutely no interest to absolutely anyone, other than maybe some title insurance industry people, and possibly, a certain anonymous blogger - me. Accordingly, here goes.)
The following facts are taken from a recent ruling of the South Carolina Supreme Court:
- On October 30, 2006, Plaintiff purchased a lot along the Intracoastal Waterway in Myrtle Beach. A mobile home and an out-building were situated on the property at the time of purchase. Plaintiff purchased the lot intending to build a single-family home on the property.
- Since 1931, the property has been subject to a properly recorded spoilage easement allowing for the construction and maintenance of the Intracoastal Waterway. According to Plaintiff/Landowner, the spoilage easement allows the Army Corps of Engineers to dredge and maintain the Intracoastal Waterway and to dump dredged material on Plaintiff/Landowner's lot at any time.
- At closing, Plaintiff purchased from Defendant an owner's title insurance policy in the face amount of $410,000—the amount of the purchase price.
- The existence of the spoilage easement was missed in the title search and therefore was not included as an exception to coverage in the title policy. The existence of the spoilage easement was not known by Plaintiff at the time she purchased the property.
- In January 2010, Plaintiff sought a building permit from Horry County to construct a home on her property. Through that process, she learned of the spoilage easement, which prevented her from obtaining a building permit.
- It is undisputed that by 2010, the value of the property had decreased as a result of the downturn in the real estate market, irrespective of the diminution in value caused by the title defect.
- Plaintiff filed an action seeking damages caused by the existence of the easement. The parties filed cross motions for summary judgment. Defendant argued the value of any loss should be measured as of the date of the discovery of the title defect.
- Plaintiff moved for summary judgment as to liability only and argued the case presented a jury issue regarding damages. Plaintiff contended that her damages, as measured by the diminution in property value, should be measured as of the date the property was purchased.
- The United States District Court found Defendant/Title Insurer was liable under the insurance policy and granted summary judgment in favor of Plaintiff.
- However, as to the issue of damages, because this issue required an interpretation of substantive state law for which the state law precedent may not have been clear, the district court 'punted' on answering that question, instead opting to certify the question to the South Carolina Supreme Court for an authoritative determination.
Despite acknowledging the apparent inequity against the title insurer resulting from its decision, the South Carolina Supreme Court ruled that, because of ambiguous language in the title insurance policy, state law required it to interpret the policy in a light most favorable to the insured.
Accordingly, they ruled that the date the property was purchased was the date to be used in measuring the diminution in property value resulting from the screw-up in the title search (when the property was worth much more due to the real estate market 'bubble'), resulting in a greater damages calculation for the landowner than would have been the case had the date of discovery of the title defect been used to calculate damages (when the property value was worth much less due to the subsequent real estate market 'crash' several years later).
In recognizing that courts around the country have generally identified three points in time to measure an owner's actual loss (the date the property was purchased, the date the title defect was created, and the date the defect was first discovered), the South Carolina Supreme Court made these comments:
- [W]e are guided by the contract principle that parties may contract as they see fit, provided the contract terms do not offend public policy. In the context of establishing a method of valuation in a title policy, as noted above, "[t]he terms of individual insurance agreements can control the method of valuation." Stanley, 377 S.C. at 411, 661 S.E.2d at 65.
The title policy here does not unambiguously set forth a method of valuation in line with the construction Defendant urges us to adopt.
Thus, we need look no further than the general rule that ambiguities in an insurance contract must be construed in favor of the insured. In this case, that construction results in a date-of-purchase valuation date.
We fully appreciate the equity and inherent logic for valuing the property in this case as of the date of the discovery of the title defect as Defendant suggests. See generally Matthew C. Lucas, Now or Then? The Time of Loss in Title Insurance, 85 Fla. B.J. 10, 15 (2011).
Defendant asserts that under a title policy the risk of a decline in the land's market value because of market conditions should be assumed by the purchaser, and the risk of the land's market value being impacted by a title matter should be assumed by the title insurance company.
We conceptually agree with Defendant, but we are construing a contract of insurance, not attempting to fashion an equitable remedy.
The insurance policy here simply fails to identify the valuation date as the date of discovery of the title defect or otherwise provide clear language that would require a valuation date in line with Defendant's position. The well-established rule concerning construction of ambiguous terms in insurance contracts compels a result adverse to Defendant's position.
In sum, although we acknowledge the apparent inequity in our answer to the certified question, the resolution of this question is not a matter of equity.
Rather, this Court is faced with the task of construing an insurance policy, and in the presence of an ambiguity we are constrained to interpret it most favorably to the insured. In this case, the date the property was purchased is the proper valuation date.
