Title Insurer Bad Faith — Allegations, Extrinsic Facts, and the Duty to Defend
A title insurer owes a “duty to defend” its insured from a lawsuit filed by a third party whenever the lawsuit creates a potential for indemnity under the policy. A defense is owed even where the evidence suggests, but does not conclusively establish, that the insured’s loss is not covered. Any doubts must be resolved in favor of the insured.
The duty to defend is much broader than the duty to indemnify, which only applies to “claims that are actually covered, in light of the facts proved.”
The duty to defend can be triggered not only by the allegations of the third party’s lawsuit, but also by extrinsic facts known to the insurer. Courts recognize that allegations and theories can shift during a case. An insurer “cannot construct a formal fortress of the third party’s pleadings and retreat behind it walls. The pleadings are malleable, changeable and amendable.” (Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 276.) So, facts can trigger coverage, even if the third party’s allegations alone do not.
Separately, a title insurer is obligated to conduct a reasonable investigation to determine whether the tender raises any possibility of liability within the scope of the policy’s coverage.
An insurer acts in “bad faith” when it breaches its implied duty to deal fairly and in good faith with its insured. In short, bad faith is “unreasonable” conduct. Bad faith damages include any damages that are the proximate result of the insurer’s misconduct (including attorney fees), and can be far greater than damages for breach of contract.
In a case recently published by California’s Sixth Appellate District — Bartel v. Chicago Title Insurance Company — the court covered all of these issues, finding that the insurer acted in bad faith in repeatedly refusing to provide a defense to its insured.
Facts: insurer repeatedly denies insured’s tender of defense obligations despite known facts showing possibility of coverage; insurer relies on an “only allegations matter” mantra and conducts a cursory, self-serving “investigation”
Plaintiff Richard Bartel bought property in rural Santa Cruz County in 1998 to enjoy a quiet retirement. He obtained a title insurance policy from Chicago Title Insurance Company.
Bartel believed that he lived at the “end” of the private road (Pax Place Court) that he used to access his property. However, Bartel’s neighbor to the east (Composti) claimed easement rights to cross Bartel’s property using Pax Place Court. By 2005, foot and vehicle traffic on Pax Place increased substantially, and Composti began crossing Bartel’s property with trucks used for an illegal marijuana cultivation operation on Composti’s property.
Composti filed a lawsuit against Bartel, alleging he had easement rights to cross Bartel’s property on Pax Place. Composti’s complaint did not allege a deeded easement right (relying instead on other easement theories), but nevertheless attached as an exhibit a Grant Deed recorded in 1971 (the “Boyd-Sluyter Deed”) describing a 40-foot easement “over an existing road.” The Boyd-Sluyter Deed would later serve as the basis of a judgment in Composti’s favor confirming that he, in fact, had an express easement over Pax Place through Bartel’s property.
Bartel tendered the matter to Chicago Title. Chicago Title denied coverage, stating that the theories alleged by Composti were excluded from coverage either because they implicated a road Maintenance Agreement (which covered some roads in the area but not Pax Place) or a prescriptive easement theory — both of which the policy expressly excluded from coverage. Chicago Title asserted that an insurer’s duty to defend arises “if, but only if, any of the allegations against the insured could result in a judgment that the insurer would be obligated to pay.”
Chicago Title repeated this “only allegations matter” mantra in several subsequent letters rejecting Bartel’s requests for reconsideration.
Bartel’s counsel continued writing to Chicago Title requesting reconsideration, noting that Composti’s complaint contained factual incongruities that made Composti’s theories and the road targeted by his allegations unclear. Chicago Title continued to deny coverage, saying it “didn’t seem necessary” to obtain a surveyor to clarify some of the factual ambiguities raised by the complaint, and stating that some of the complaint’s allegations hinting at potential coverage must have been “incorrect” and “mistaken.”
Eventually, without explanation, Composti dismissed his complaint. However, because the truck traffic along Pax Place continued to worsen, Bartel sued Composti to have the matter conclusively adjudicated. Composti filed a cross-complaint, again alleging he had easement rights across Bartel’s property. This time, Composti included allegations about deeded easement rights, but did not call out the Boyd-Sluyter Deed.
Again, Bartel tendered the matter to Chicago Title. Again, Chicago Title denied coverage, asserting that the “gravamen” of Composti’s allegations were based on the road Maintenance Agreement, which was excluded by the policy. Chicago Title also conducted a short investigation, but restricted its view of extrinsic facts to solely how they interacted with the allegations in Composti’s complaint, none of which specifically relied on the Boyd-Sluyter Deed.
Composti later filed a motion for summary adjudication, which for the first time argued that, aside from his other theories, his easement right were also based on the express language in the Boyd-Sluyter Deed. After further unwarranted denials, Chicago Title finally reversed course, accepted coverage, and defended the action (which resulted in the judgment in Composti’s favor based on the Boyd-Sluyter Deed). Chicago Title agreed to reimburse Bartel’s defense costs and fees only for a small portion of the time that the litigation was pending.
While the Composti litigation was pending, Bartel sued Chicago Title for breach of contract and bad faith.
Trial court: insurer breached duty to defend, but no bad faith because “figuring out” the ultimate facts and their legal impact was difficult
In the first phase of trial, the court held that Chicago Title breached the title policy by refusing to defend Bartel from the date of his first tender. The court cited Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263 and other case law clearly holding that “the bare allegations and theories in a third party’s complaint against an insured do not alone control the duty to defend. The duty to defend is also triggered by extrinsic facts of which the insurer is aware, when those facts show a potential for liability under the policy.” The court observed that the Boyd-Sluyter Deed, on which the Composti judgment was ultimately based, was attached to Composti’s earliest iterations of his complaint, and therefore triggered coverage. As a result, Chicago Title was liable for Bartel’s defense costs and fees for the periods that Chicago Title had failed to defend.
The second phase of trial involved Bartel’s claim for bad faith. The trial court held that while Chicago Title could have handled the claim better, it did not act in bad faith. The court acknowledged that Chicago Title “placed an inordinate level of significance upon the Composti complaint allegations and did not perform the requisite investigation to determine if other factors existed that would confirm/support the duty to defend.” However, the court held that the facts of the case were confusing, the impact of the Boyd-Sluyter Deed was not obvious, and it was “neither equitable, nor legally supportable, that the entire responsibility for figuring … out” the issues rested solely with Chicago Title.
Bartel appealed the bad faith ruling.
Court of Appeal: reversed; insurer liable for bad faith
The Court of Appeal reversed the trial court’s bad faith ruling, holding the trial “court’s analysis does not reflect the degree to which Chicago Title’s conduct persistently and unreasonably fell short of its contractual obligation to its insured.”
The court noted that the trial court was overly focused “on the complexity of the fact pattern and difficulty in identifying the roads” at issue leading to the trial court’s refusal to “place responsibility for this confusion” solely on the insurer. The court held: “This approach misconstrued the nature of the insurer’s obligation to fairly and in good faith fulfill its contractual duty to defend based on the possibility of a covered claim. The trial court effectively conflated Chicago Title’s duty to defend with the duty to indemnify.”
The court recited the correct controlling standard: “Any doubt must be resolved in favor of the insured, such that the insurer is excused from defending against a third party claim only when the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.”
Applying that standard to the facts, the court held: “While Chicago Title was not required to conclusively assess coverage by ‘figuring out’ [the] details …, it was required to accept Bartel’s tender unless an adequate investigation demonstrated that the possibility of any coverage was precluded.” Under this standard, Chicago Title’s repeated denials on the sole grounds that Composti’s mere allegations did not express a covered claim — while the Boyd-Sluyter Deed was known and ultimately was proven to be a covered issue — was unreasonable and in bad faith.
Further, Chicago Title’s “investigation” was artificially restricted to the facts seen through the lens of the complaint’s allegations, “rather than examining those facts for the potential liability created by the suit.” The limited investigation constrained by the complaint’s allegations showed that Chicago Title failed to comply “with the fundamental legal principles governing the duty to defend.”
Finally, the court rejected the trial court’s premise that it was unfair to expect Chicago Title to “figure it all out.” The court held:
The implied covenant [of good faith and fair dealing] in this context did not require Chicago Title to divine the outcome or speculate as to unpleaded legal theories. Rather, in the face of a claim against the property based on ambiguous maps and road designations, Chicago Title had an implied promise to take reasonable steps to fulfill the expectations of its insured and provide a defense to the claim arising from circumstances conceivably within the scope of the policy.
Chicago Title’s failure to provide a defense “was not an isolated miscalculation but the result of the insurer’s persistent but misguided belief” that only the third party complaint’s allegations mattered and that the complaint’s ambiguous allegations could only be interpreted in a manner defeating coverage, while ignoring other obvious possibilities shown by the known facts.
Lesson
The Bartel opinion provides a strong reminder to title insurers — the extrinsic facts matter. An insurer cannot hide behind the allegations of a third party’s complaint while evaluating and investigating a claim. If the facts show any possibility for indemnity under the policy, the duty to defend applies. An insurer who refuses to defend its insured based on the false mantra that “only the allegations matter” faces liability for bad faith.
* Disclosure: The author represents Bartel.