Arizona Title Ins. & Trust Co. v. Smith

• Decision Date: 12 March 1974
• Docket Number: CA-CIV,No. 2,2
• Parties: , 87 A.L.R.3d 503 ARIZONA TITLE INSURANCE & TRUST COMPANY, an Arizona corporation, Appellant, v. Mary W. SMITH, as Executrix of the Estate of Norman H. Smith, Deceased, Appellee. 1516.
• Court: Arizona Court of Appeals

Page 860

519 P.2d 860

21 Ariz.App. 371, 87 A.L.R.3d 503

ARIZONA TITLE INSURANCE & TRUST COMPANY, an Arizona corporation, Appellant, v. Mary W. SMITH, as Executrix of the Estate of Norman H. Smith, Deceased, Appellee.

No. 2 CA-CIV 1516.

Court of Appeals of Arizona, Division 2.

March 12, 1974.

Rehearing Denied April 9, 1974.

Review Denied May 7, 1974.

Stuart Herzog, Tucson, for appellant

Murphy, Vinson & Hazlett, P.C., by Carl E. Hazlett, John U. Vinson and Thomas M. Murphy, Tucson, for appellee.

OPINION

HATHAWAY, Chief Judge.

Defendant Arizona Title Insurance and Trust Company (the company) appeals from a judgment rendered in favor of Mary W. Smith, widow and executrix of the estate of policy holder Norman H. Smith.

When Mr. Smith moved to Tucson from Colorado in 1961 for health purposes, he owned several parcels of real estate in Colorado. Between 1962 and 1966, he searched for suitable investment property in Tucson. In early 1966, two real estate brokers, Mr. Alan R. Friedman and Mr. Stewart Bailey informed him that the Villa Venice apartment complex in Tucson had been listed with their firm. The owners of the Villa Venice complex agreed to exchange it for an office building owned by Mr. Smith in Colorado together with cash and a promissory note. After examining computations of the 'cash flow' related to the Villa Venice complex with Mr. Friedman and Mr. Bailey, Mr. Smith signed an agreement to exchange the properties on March 3, 1966. On May 19, 1966 both parties conveyed their respective properties and on May 27, a title insurance policy was issued to Mr. Smith by defendant insuring Mr. Smith against 'loss or damage' resulting from '(a)ny defect in or lien or encumbrance on the title' to Villa Venice except those specifically listed in the policy.

In 1964 the City of Tucson had levied a special assessment on the Villa Venice complex which constituted a lien on the property. As of the May 1966 closing, approximately $13,000 remained to be paid on this assessment. The payments amounted to roughly $2,500 a year and were paid by the owners of Villa Venice as part of their monthly mortgage payments to Tucson Federal Savings, the holder of the mortgage on the property. The payments were deposited into an impound account along with the payments for real property taxes and insurance. The mortgagee would then pay the taxes, insurance premiums, assessment and interest on the assessment out of this impound account when they became due.

The title insurance policy failed to list the assessment as excluded from coverage under the policy. The employee of the company who conducted the title search admitted that the assessment was properly recorded and that the failure to list it was his error.

In August 1966, plaintiff testified that Mr. Smith became concerned over the amount of monthly payments on the property. She stated that he tried to contact his attorney but he was out of town. Mr. Smith became ill and entered a hospital. He died in November, 1966.

At trial, the company sought to prove that the assessment was not covered by the policy by reason of the following exclusion which was incorporated into the policy:

'This policy does not insure against loss or damage by reason of the following:

* * *

* * *

(d) Defects, liens, encumbrances, adverse claims against the title as insured or other matters

(1) created, suffered, assumed or agreed to by the Insured claiming loss or damage; or (2) known to the Insured Claimant either at the date of this policy or at the date such Insured Claimant acquired an estate or interest insured by this policy and not shown by the public records . . ..'

The company argues on appeal that the evidence established the applicability of this exclusion as a matter of law and that the jury verdict awarding plaintiff the amount of the assessment was therefore not supported by the evidence.

Plaintiff's prima facie case--the existence of the policy, the existence of a title defect not specifically excluded, and notice to the insurer--was virtually conceded by the company. Pacific Indemnity Company v. Kohlhase, 9 Ariz.App. 595, 455 P.2d 277 (1969). The burden of showing the exclusion therefore fell upon the company. Vanguard Insurance Company v. Cantrell, 18 Ariz.App. 486, 503 P.2d 962 (1972); United American Life Insurance Company v. Beadel, 13 Ariz.App. 196, 475 P.2d 288 (1970); Pacific Indemnity Company v. Kohlhase, supra.

At the outset, we note the well-accepted rule of resolving any ambiguity in insurance policies against the insurer and in favor of coverage. Caballero v. Farmers Ins. Group, 10 Ariz.App. 61, 455 P.2d 1011 (1969); Brenner v. Aetna Ins. Co., 8 Ariz.App. 272, 445 P.2d 474 (1968).

Our first consideration is the exclusion of coverage for any title defect 'known to the Insured Claimant . . . and not shown by the public records . . ..' This clause clearly would not exclude coverage unless (1) the insured had actual knowledge of the assessment and (2) the assessment was not recorded. Since the company introduced no evidence tending to show that the assessment was not recorded, we find that it failed to meet its burden of proof as to this exclusion.

The company contends that Mr. Smith in signing the exchange agreement, as a matter of law, rendered the assessment one which was 'created, suffered, assumed or agreed to by the Insured . . .' and therefore not covered by the policy. ¹

The exchange agreement which Mr. Smith had signed 45 days before closing was introduced into evidence. It was a printed form with other pertinent provisions typed in. It stated neither the balance of the assessment due (approximately $13,000) nor the yearly payments on the assessment (approximately $2,500). After a brief description of the Villa Venice, the exchange agreement specified in typewriting that it was to be conveyed subject to the following:

'Twenty (20) existing first realty morttages totaling approximately $708,000 payable (at) $6,756 including principal interest at the rate of 6% Per annum on the balance remaining from time to time unpaid, taxes, insurance, and assessments to Tucson Federal, Speedway Office.'

The printed form portion of the agreement referred to assessments in two other places. One clause provided that all 'taxes, insurance premiums, interest on assessments and mortgages or contracts, rentals and water charges, and unused mortgage impoundments on respective properties shall be prorated . . ..' The other provided that each property conveyed shall be subject to 'all restrictions of record, utility easements, zoning ordinances, current undue taxes, and non-delinquent assessments including assessments for improvements initiated but which have not yet become liens.'

Clearly the assessment was not created or suffered by the insured. The word 'created' would require some affirmative act on the part of Mr. Smith in bringing about the assessment. The word 'suffered' is synonymous with the word 'permit' and implies the power to prohibit or prevent the lien which has not been exercised although the insured has full knowledge of what is to be done with the intention that it be done. Hansen v. Western Title Ins. Co., 220 Cal.App.2d 531, 33 Cal.Rptr. 668, 98 A.L.R.2d 520 (1963); First Nat. Bank & Trust Co. v. New York Title Ins. Co., 171 Misc. 854, 12 N.Y.S.2d 703 (1939). Since Mr. Smith clearly did not bring about the assessment or allow it to be brought about, he did not 'create' or 'suffer' the assessment.

The company argues that the assessment was 'assumed' when Mr. Smith signed the exchange agreement providing that he would take the property 'subject to' 'assessments'. Under our policy of construing insurance policies in favor of the insured, we must reject this contention. Courts have consistently construed the words 'assumed' and 'subject to' as conveying totally different meanings in real estate transactions. In Del Rio Land, Inc. v. Haumont, 110 Ariz. 7, 514 P.2d 1003, 1005 (1973), the Arizona Supreme Court recently defined the words 'subject to' as meaning 'burdened with' in the context of real property sales. The court made it clear that a purchaser taking realty subject to an encumbrance 'does not necessarily Assume a personal obligation to pay it.' (Emphasis added). We therefore cannot hold that Mr. Smith 'assumed' the assessment in question merely because he agreed to take the property 'subject to' any assessments.

We must next consider whether Mr. Smith 'agreed to' the assessment in question as a matter of law. When used in a legal setting, 'agreed' usually carries the connotation of 'contracted'. Fish v. Fish, 307 S.W.2d 46, 50 (Mo.App.1957). Mr. Smith was clearly not a party to any contract providing for an assessment on the property. The assessment was imposed unilaterally by the City of Tucson. The company argues, however, that Mr. Smith contractually 'agreed to' the assessment in signing the exchange agreement. Assuming that one could 'agree to' an assessment within the terms of the exclusion in this manner, our policy of construing ambiguities in favor of the insured leads us to require Actual knowledge on the part of the insured as to the Full extent and amount of the assessment before the exclusion would become operative.

Implicit in the jury verdict for plaintiff in this case is a finding that the insured did not have actual knowledge of the assessment before the effective date of the policy. The company relies heavily upon the fact that the exchange contract mentioned the word 'assessments' three times--once in typewriting and twice in the printed form. We cannot say as a matter of law that the insured had knowledge of the assessment merely because he signed this agreement when the document contained neither the total amount due on the assessment nor the yearly payment on it, but only the word 'assessments'. Mr. Benisch, president of the escrow company which handled the escrow, Mr. Bailey, one of the real estate brokers, and Mr. Marshall,...