Title Insurer's Duty to Defend Limited to Covered Causes of Action
The California Supreme Court has granted review in two defense cost allocation cases, Imcera Group Inc. v. Liberty Mutual Insurance Company and Buss v. Superior Court. While neither case involves title policy it does provide an opportunity to recognize that the defense duty is specific to each contract of insurance. This is particularly relevant to policies of title insurance where defense obligations are stated in terms of "causes of action" rather than "suits."
In Imcera, the Second District Court of Appeal ruled that the primary insurers held liable for an insured's defense costs in an underlying hazardous waste action were not liable for defense costs related to uninsured damage and the apportionment of defense costs among the primary insurers had to be equal. The Supreme Court has requested that the parties also brief the question of whether the insured may be required to bear those costs of defense that the insurer proves are attributable to non-covered causes of action.
In Buss, the Second District Court of Appeal found that an insurer who provided a defense to its insured under a reservation of rights for the entire action, even though only one claim had the potential for coverage, could recover defense costs reasonably allocated to non-covered claims. However, the Court also concluded that if there is a potential for coverage, a liability insurer must provide a defense to a third-party's action, "and such duty extends to the entire action if any claim encompassed within it may potentially be covered."
The rule in question in the Buss case is the so-called "in for one, in for all" rule - that "[o]nce the defense duty attaches, the insurer is obligated to defend against all of the claims involved in the action, both covered and noncovered. . . " (Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081, citing Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 564.) Despite how often this rule is applied, the Supreme Court apparently has never articulated its necessary premise: that the obligation derives entirely from, and must therefore be defined by, the underlying insurance policy.
In the Supreme Court's most recent statement of the rule, the Court did not discuss policy language at all, but instead merely cited the seminal case of Hogan v. Midland National Insurance Co. (1970) 3 Cal.3d 553, 564. (Horace Mann Ins. Co. v. Barbara B., supra, 4 Cal.4th at p. 1081.) Hogan contains no analysis of the policy's duty-to-defend language; neither does any of the five decisions it cites.
The absence of textual analysis no doubt stems from the fact that there are few meaningful variations in the phraseology of defense clauses in liability policies. But despite this judicial silence, there can be no doubt that
"[t]he nature of the insurer's duty to defend is purely contractual. There is no common law duty as to which the courts are free to devise rules. The obligation on the Court is merely to interpret the language of the insurance contract." (All-Star Insurance Corp. v. The Steel Bar, Inc. (N.D. Ind. 1971) 324 F.Supp. 160, 163.)
(See also Okada v. MGIC Indemnity Corp. (9th Cir. 1986) 795 F.2d 1450, 1454 ["'the nature of the insurer's duty to defend is purely contractual and depends, in the first instance, on the language of the particular policy involved'"].)
Unlike past duty-to-defend cases that have focused on the potential for coverage, the Buss case requires direct consideration of the defense clause itself. Indeed, Buss invites it, contrasting the breadth of "any suit" defense language in his policy with the narrower language of policies that "allow insurers to defend or pay defense costs only for covered claims." (Buss Opening Brief, pp. 18-22 and fn. 8 [mentioning errors and omissions and title insurance policies].) This is therefore a singularly appropriate opportunity for the Supreme Court to fill the long-standing gap in California Law by making clear that there is no duty to defend beyond what the policy expressly describes, and that in evaluating the duty to defend, the Court must "look first to the language of the contract." (Waller v. Truck Insurance Exchange (1995) 11 Cal.4th 1, 18.)
There is no common-law or statutory obligation to undertake a broader defense than required by a policy. Indeed, Civil Code Section 2778, subd. (4) imposes a lesser obligation than the "in for one, in for all" rule:
"In the interpretation of a contract of indemnity, the following rules are to be applied, unless a contrary intention appears: . . .
"4. The person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if he chooses to do so." (Italics added.)
The statute allows the parties to narrow even this limited obligation by contract. (See Gribaldo, Jacobs, Jones & Associates v. Agrippina Versicherunges A.G. (1970) 3 Cal.3d 434, 448.) That is what title insurers have done.
Title insurance is different from virtually every other kind of insurance, including the general liability policies at issue in Buss and Imcera, misunderstandings about it abound. Unlike other kinds of insurance, title insurance provides no protection against future events. Rather, its obligations are based strictly on the circumstances that exist when the policy is issued. In simple terms, a title policy describes an interest in real property as of that date and insures against losses resulting from differences between the actual record title and title as insured. The measure of coverage is equally limited: The most the insured can recover (within policy limits) is the loss in value resulting from the difference between title as insured and record title.
Since title insurers never purport to insure anything but title, they have taken pains to make sure that their defense obligations do not extend beyond title disputes. Unlike liability policies, standard title policies impose a narrow and carefully defined defense obligation:
"[T]he Company, at its own cost and without unreasonable delay, shall provide for the defense of such insured in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against by this policy. The Company shall have the right to select counsel of its choice (subject to the right of such insured to object for reasonable cause) to represent the insured as to those stated causes of action and shall not be liable for and will not pay the fees of any other counsel. The Company will not pay any fees, costs or expenses incurred by an insured in the defense of those causes of action which allege matters not insured against by this policy." (CLTA Standard Coverage Policy-1990, _4(a), quoted at Cont. Ed. Bar, California Title Insurance Practice (Supp. 1995) at p. 152, italics added.)
By stating their defense obligations in terms of "causes of action" rather than "any suit," title insurers have created a fundamentally different kind of defense obligation than exists under liability policies. While there are no reported California cases regarding title policies, the leading case is Enron Corp. v. Lawyers Title Insurance Corp., (8th Cir. 1991) F.2d at 311, a title insurance case, where the Court noted:
We note that courts have taken a strong stand against holding insurers liable for the defense costs of claims their policies do not cover, even when those claims are joined with covered claims. For example, the Fifth Circuit has joined the Sixth Circuit in holding that an insurer should be held liable for the defense of covered and non-covered claims only where 'there is no reasonable means of prorating the costs of defense between the covered and non-covered items.' EEOC v. Southern Publishing Company, 849 F.2d 785, 791 (5th Cir. 1990) (quoting Insurance Company of North America v. Forty-Eight Insulations, Inc., 633 f.2d 1212, 1224 (6th Cir. 1980)... See also Okada v. MGIC Indemnity Corp., 823 F.2d 276, 282 (9th Cir. 1986) ('If an action...incorporates both covered and uncovered claims, the parties must apportion the costs so that {the insurer} need only pay for amounts generated in defense of covered claims.'); Harborside Refrigerated Services, Inc. v. LARW Insurance Company, 759 F.2d 829, 831 (11th Cir. 1985) (stating that the defense costs should be apportioned between covered and uncovered claims where practicable.)
In rejecting the insured's claims that its title insurer committed bad faith or breached its defense duty when it assumed the defense of the sole covered cause of action alleged against the insured in a foreclosure action and refused to defend a non-covered, albeit "related" cause of action the Eighth Circuit was interpreting the terms of a title policy. A reasonable expectation is that whatever form the California Supreme Court decision takes, it too will focus on policy language as a starting point in defining an insurer's duty to defend.
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