Lick Mill Creek Apartments v. Chicago Title Insurance Co.

AGLIANO, Presiding Justice.

The First Amended Complaint

The first amended complaint alleges the following material facts:
The real property which is the subject of this case comprises approximately 30 acres of land near the Guadalupe River in Santa Clara County. Prior to 1979, various corporations operated warehouses and/or chemical processing plants on the property. Incident to this use of the property, the companies maintained underground tanks, pumps, and pipelines for the storage, handling, and disposal of various hazardous substances. These hazardous substances eventually contaminated the soil, subsoil, and groundwater.

In 1979, Kimball Small Investments 103 (KSI) purchased the property. Between 1979 and 1981, the California Department of Health Services ordered KSI to remedy the toxic contamination of the property. KSI, however, did not comply with this order.
In early October 1986, plaintiffs acquired lot 1 of the property from KSI. In connection with this acquisition, plaintiffs purchased title insurance from Chicago Title Insurance Company (Chicago Title). The insurance policy issued was of the type known as an American Land Title Insurance Association (ALTA) policy (policy 1). Prior to issuing this policy, Chicago Title commissioned a survey and inspection of the property by Carroll Resources Engineering & Management (Carroll Resources).

Plaintiffs subsequently purchased lots 2 and 3 from KSI and secured two additional ALTA policies (policies 2 and 3) from Chicago Title and First American Title Insurance Company (First American). The entire site was surveyed and inspected. During its survey and inspection, Carroll Resources noted the presence of certain pipes, tanks, pumps, and other improvements on the property. At the time each of the policies was issued, the Department of Health Services, the Regional Water Quality Control Board, and the Santa Clara County Environmental Health Department maintained records disclosing the presence of hazardous substances on the subject property.

Following their purchase of the property, plaintiffs incurred costs for removal and clean-up of the hazardous substances in order "to mitigate plaintiffs' damages and avoid costs of compliance with government mandate." Then, claiming their expenses were a substitute, i.e., a payment made under threat of compulsion of law, for restitution to the State Hazardous Substance Account and "response costs" as defined under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), plaintiffs sought indemnity from defendants for the sums expended in their cleanup efforts. Defendants, however, denied coverage.

Discussion
I. The Nature of Title Insurance

"Title insurance is an exclusively American invention. It involves the issuance of an insurance policy promising that if the state of the title is other than as represented on the face of the policy, and if the insured suffers loss as a result of the difference, the insurer will reimburse the insured for that loss and any related legal expenses, up to the face amount of the policy."

[U]nder both the traditional concept and the statutory definition, title insurance covers matters affecting title.

Essentially two types of title insurance policies are available to owners of real property interests in California: California Land Title Association Standard Coverage (CLTA) policies and American Land Title Association (ALTA) policies. The ALTA policy, such as those purchased by plaintiffs here, provides greater coverage than the CLTA policy. Generally, it additionally insures against "off-record defects, liens, encumbrances, easements, and encroachments; rights of parties in possession or rights discoverable by inquiry of parties in possession, and not shown on the public records; water rights, mining claims, and patent reservations; and discrepancies or conflicts in boundary lines and shortages in areas that are not reflected in the public records." Since an ALTA policy covers many off-record defects in title, the insurer will typically survey the property to be insured.

II. Construction of Language in Insurance Policies

The insuring clauses of an insurance policy define and limit coverage. Where a reviewing court is required to interpret an insurance policy without extrinsic evidence, the question is one of law. Any ambiguity arising from policy language should be resolved in favor of the insured. However, this rule of construction applies only when the policy language is unclear. " 'A policy provision is ambiguous when it is capable of two or more constructions, both of which are reasonable.'" Whether language in a contract is ambiguous is a question of law.

Here the insuring clauses of policies 1, 2, and 3 are identical and provide the following: "SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS CONTAINED IN SCHEDULE B AND THE PROVISIONS OF THE CONDITIONS AND STIPULATIONS HEREOF [the insurer] insures, as of Date of Policy shown in Schedule A, against loss or damage, not exceeding the amount of insurance stated in Schedule A, and costs, attorneys' fees and expenses which the Company may become obligated to pay hereunder, sustained or incurred by the insured by reason of: [] (1) Title to the estate or interest described in Schedule A being vested otherwise than as stated therein; [] (2) Any defect in or lien or encumbrance on such title; [] (3) Lack of a right of access to and from the land; or [] (4) Unmarketability of such title."

III. Marketability of Title

Plaintiffs first contend the policies in the instant case expressly insured that title to the subject property was marketable and since the presence of hazardous substances on the property impaired its marketability, defendants were obliged to pay cleanup costs. Plaintiffs' position, however, is dependent upon their view that California courts have adopted a definition of marketable title that encompasses the property's market value. Our review of relevant authority establishes no support for this position.

In Mertens v. Berendsen, the plaintiff attempted to rescind a real estate purchase contract, claiming that the property encroached upon the street and rendered the title defective. In considering this issue, the court defined marketability of title as follows: " 'Such a title must be free from reasonable doubt, and such that a reasonably prudent person, with full knowledge of the facts and their legal bearings, willing and anxious to perform his contract, would, in the exercise of that prudence which business men ordinarily bring to bear upon such transactions, be willing to accept and ought to accept. It must be so far free from defects as to enable the holder, not only to retain the land, but possess it in peace, and, if he wishes to sell it, to be reasonably sure that no flaw or doubt will arise to disturb its market value. But a mere suspicion against the title or a speculative possibility that a defect in it might appear in the future cannot be said to render a title unmarketable. It is not required to be free from mere shadows or possibilities, but from probabilities. Moral, not mathematical, certainty that the title is good is all that is required.' " Plaintiffs focus on the court's reference to the market value of the property. What plaintiffs ignore, however, is the fact that the court made this reference only in the context of examining an alleged defect in title. Mertens does not stand for the proposition that a defect in the physical condition of the land itself renders the title unmarketable.

The case of Hocking v. Title Ins. & Trust Co., further illustrates the distinction between marketability of title and marketability of the land. In Hocking, the plaintiff purchased unimproved property and received a grant deed, describing it as two lots in a particular block according to a recorded subdivision map. However, because the subdivider had not complied with various local ordinances regarding subdivision of land, the city would not issue building permits until the plaintiff complied with the ordinances. The plaintiff sought damages from the title insurer claiming defective title.

The Hocking court noted the distinction between the land and its title: "It is defendants' position that plaintiff confuses title with physical condition of the property she purchased and of the adjacent streets, and that 'One can hold perfect title to land that is valueless; one can have marketable title to land while the land itself is unmarketable.'

Other jurisdictions have also recognized the distinction. In Chicago Title Ins. Co. v. Kumar, the defendant had purchased property on which hazardous substances were discovered. The defendant sought payment for cleanup costs from its title insurer. The insurer sought a declaration as to its obligations under the policy. The defendant owner filed a counterclaim, seeking a declaration that the presence of hazardous substances constituted a defect in title and the state's statutory power to impose a lien to secure payment of clean-up costs rendered his title unmarketable. Relying on Hocking v. Title Ins. & Trust Co., the court found in favor of the insurer, stating "the defendant confuses economic lack of marketability, which relates to physical conditions affecting the use of the property, with title marketability, which relates to defects affecting legally recognized rights and incidents of ownership.... The presence of hazardous material may affect the market value of the defendant's land, but, on the present record [since no lien had been recorded], it does not affect the title to the land."

Plaintiffs attempt to distinguish Kumar on the ground that here they purchased ALTA policies while the defendant in Kumar purchased a CLTA policy. They point out an ALTA policy which required a physical inspection and survey of the property would have insured against off-record risks and potential liens not covered by a CLTA policy. While an ALTA policy provides greater coverage than a CLTA policy, it does not follow that an ALTA policy extends coverage to matters not affecting title. We must still examine the policy language for a determination of coverage. Here the policy insures against "unmarketability of title." The definition of this term is not dependent upon the type of title insurance policy in which it appears.

We find no ambiguity in the insuring clause: defendants are obligated to insure plaintiffs against unmarketability of title on the subject property. Because marketability of title and the market value of the land itself are separate and distinct, plaintiffs cannot claim coverage for the property's physical condition under this clause of the insurance policies.

IV. Encumbrance on Title

The policies in question insure plaintiffs against "any defect in or lien or encumbrance" on title. Although no lien had been recorded or asserted at the time the title insurance policies were issued, plaintiffs contend the presence of hazardous substances on the property constituted an encumbrance on title.

Encumbrances are defined by statute as "taxes, assessments, and all liens upon real property." Where a property is contaminated with hazardous substances, a subsequent owner of the property may be held fully responsible for the financial costs of cleaning up the contamination. A lien may also be imposed on the property to cover such cleanup costs. Plaintiffs reason that because any transfer of contaminated land carries with it the responsibility for cleanup costs, liability for such costs constitutes an "encumbrance on title" and is covered. We disagree.

In United States v. Allied Chemical Corp., the plaintiff alleged a breach of warranty that property conveyed was free of encumbrance where hazardous substances were present on the property at the time it was conveyed. The court dismissed the plaintiff's cause of action, stating: "Plaintiff argues that the term 'encumbrance' is broad enough to include the presence of hazardous substances. However, the only authorities cited have interpreted 'encumbrance' to include only liens, easements, restrictive covenants and other such interests in or rights to the land held by third persons. Plaintiff has given no authority establishing its broad argument that any physical condition, including the presence of hazardous substances, is an 'encumbrance' if 'not visible or known' at the time of conveyance. [] The court declines to interpret 'encumbrance' as broadly as plaintiff urges. The court finds that, under current law, the term 'encumbrance' does not extend to the presence of hazardous substances alleged in this case."

In Chicago Title Ins. Co. v. Kumar, the court also held that the presence of hazardous substances on the land at the time title was conveyed did not constitute an encumbrance. "The mere possibility that the Commonwealth may attach a future lien ..., as a result of the release of hazardous material (existing but unknown at the time a title insurance policy is issued) when the Commonwealth has neither expended moneys on the property requiring reimbursement nor recorded the necessary statementof claim, is insufficient to create a 'defect in or lien or encumbrance on ... title.' "

Disposition
The judgment is affirmed.