Denny's Restaurants, Inc. v. Security Union Title Ins. Co.

• Decision Date: 07 September 1993
• Docket Number: 29992-1-I,Nos. 29129-7-,s. 29129-7-
• Citation: 859 P.2d 619,71 Wn.App. 194
• Court: Washington Court of Appeals
• Parties: DENNY'S RESTAURANTS, INC., a California corporation, Appellant, v. SECURITY UNION TITLE INSURANCE COMPANY, a corporation, Respondent. Division 1

Page 194

71 Wn.App. 194

859 P.2d 619

DENNY'S RESTAURANTS, INC., a California corporation, Appellant, v. SECURITY UNION TITLE INSURANCE COMPANY, a corporation, Respondent.

Nos. 29129-7-I, 29992-1-I.

Court of Appeals of Washington,

Division 1.

Sept. 7, 1993.

Michael Rorick, Seattle, for appellant.

Stephan Todd, Seattle, for respondent.

GROSSE, Judge.

Denny's Restaurants, Inc. (Denny's) appeals an adverse decision on summary judgment in favor of Security Union Title Insurance Company (Security Union) with respect to coverage. We reverse, holding that this court's decision in Transamerica Title Ins. Co. v. Northwest Bldg. Corp., 54 Wash.App. 289, 773 P.2d 431, review denied, 113 Wash.2d 1008, 779 P.2d 727 (1989), relied on by the trial court, is fundamentally flawed and must be disregarded.

In 1982, in conjunction with the purchase of 35 VIP's restaurants, Denny's negotiated the purchase of extended coverage title insurance for the properties. One of those properties at issue here is located in Mount Vernon, Washington. VIP's held that property under an unrecorded 20-year lease that was assigned to Denny's in the sale. Prior to closing, Denny's applied for title insurance with Security Union and provided a copy of an unrecorded long-term lease which contained a metes and bounds legal description. This legal description, however, did not describe VIP's property. It erroneously described property adjacent to VIP's. Security Union detected the erroneous legal description and in its preliminary title commitment substituted the legal description contained in VIP's recorded memorandum of lease. The memorandum of lease contained a description that omitted the west 60 feet of the restaurant site containing the landscaping, parking, and signage. Security Union apparently did not detect this discrepancy.

Security Union then issued a preliminary title commitment. The preliminary commitment did not disclose the discrepancies in legal descriptions between the unrecorded lease and the recorded memorandum of lease, nor did it reveal any boundary or encroachment problem although Security Union sent an inspector out to visit the site. After a visual inspection, the record indicates the inspector established property lines according to the landscaping and fencing and apparently included the west 60 feet of parking. ¹

Two basic types of title policies are available: standard and extended coverage. The standard policy Schedule B exempts coverage for most off-record defects. ² For an additional premium, the insured may purchase an extended coverage policy that omits the standard Schedule B exemptions. The preliminary commitment issued by Security Union to Denny's sets forth exemptions from coverage in Schedule B for both standard and extended coverage insurance.

Prior to closing, Denny's purchased the extended title insurance policy from Security Union. ³ This extended policy omitted the standard Schedule B policy exclusions for off-record defects disclosable by accurate survey. ⁴ The policy also deleted the exemption for defects relating to the unrecorded leasehold interest. ⁵ This provision was deleted after Denny's submitted the VIP's long-form lease to Security Union. Denny's subsequently completed the purchase of the Mount Vernon restaurant site on the basis of the favorable title insurance commitment.

After the sale took place, the Denny's restaurant conducted business for several years without incident. In 1986 Denny's learned that the western 60 feet of the restaurant site was not owned by the original lessor but was owned by the City of Mount Vernon. The original lessor had entered into a terminable lease with the City in 1976 that allowed the lessor to use the City property for parking. The lease provided the City could terminate on 30 days' written notice. In 1988, the City gave Denny's notice of termination. By letter dated May 4, 1988, Denny's contacted Security Union, enclosing the notice of termination and tendering the defense of title. On May 20, 1988, Security Union notified Denny's that the policy did not insure the disputed parking area. The City brought suit on January 9, 1989 to quiet title and eject Denny's from the western 60 feet. Denny's subsequently lost the use of all but 15 parking spaces. Denny's was also required to remove its signs and rearrange the configuration of the remaining parcel, as well as arrange for temporary parking elsewhere. Denny's maintains that if it loses the temporary parking area, it will be forced to abandon the restaurant.

Denny's filed suit against Security Union alleging that Security Union had breached its contract with Denny's under the extended coverage title policy and also alleging that Security Union had breached its duty to search for and disclose any title defects in the restaurant property. Security Union successfully moved for partial summary judgment on Denny's contract claims. The trial court denied Denny's subsequent motion to amend its complaint to allege mutual mistake. Security Union moved for summary judgment on the remaining tort claims, and a final judgment was entered in its favor.

On appeal, Denny's contends the trial court erred when it granted Security Union's motion for summary judgment and dismissed Denny's claims for breach of the title insurance contract and negligence in failing to disclose the discrepancies in the legal description. When reviewing a summary judgment, the reviewing court must take the position of the trial court and assume facts in a light most favorable to the nonmoving party. Douchette v. Bethel Sch. Dist. 403, 117 Wash.2d 805, 818 P.2d 1362 (1991); Everett v. American Empire Surplus Lines Ins. Co., 64 Wash.App. 83, 823 P.2d 1112 (1991). Summary judgment is properly granted when the pleadings and affidavits "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." CR 56(c); Douchette v. Bethel Sch. Dist. 403, 117 Wash.2d at 808-09, 818 P.2d 1362.

Denny's contends that genuine issues of material fact exist in its contract claim and summary judgment was therefore improperly granted. Denny's bases this contention on three different theories and argues (1) under Berg v. Hudesman, 115 Wash.2d 657, 801 P.2d 222 (1990), extrinsic evidence should be allowed to prove the parties' intent to insure against encroachments and matters of boundary and location; (2) Security Union impliedly agreed to cover defects that would have been uncovered by examination of the unrecorded lease, and (3) the extension of Denny's parking stalls onto the adjoining property renders title to the lot unmarketable.

Extrinsic Evidence of Intent

Denny's asserts the parties intended the extended coverage insurance policy to insure against just such a risk as occurred in this case, and under Berg v. Hudesman extrinsic evidence should be allowed to prove that intent. Denny's points out the original preliminary standard title commitment referred to exclusions for "encroachments or questions of location, boundary, and area, which an accurate survey may disclose ..." The extended coverage policy omitted the standard policy exemptions, and Denny's argues the extended policy thus impliedly provides protection for encroachments and questions of boundary. Additionally, Denny's asserts Security Union impliedly agreed to insure for defects that would be revealed by an examination of the unrecorded long-term lease because the policy deleted that exception as it existed in the preliminary commitment. Denny's accordingly assumed that any defects in the leasehold interest would consequently be insured.

The Berg decision was intended to reconcile previous inconsistent case precedent and provide a uniform guideline for contract interpretation. The Berg court rejected the plain meaning rule and adopted the "context rule", holding that extrinsic evidence was admissible to interpret the meaning of a contract term. Berg, 115 Wash.2d at 663, 801 P.2d 222. The Berg court made a distinction between contract interpretation and contract construction. Interpretation is a determination of fact; it is the process that ascertains the meaning of a term by examining objective manifestations of the parties' intent. Construction is a question of law; it is the process that determines the legal consequences that follow from a contract term. Berg, 115 Wash.2d at 668, 801 P.2d 222. In order to interpret the original meaning of a contract term, extrinsic evidence is admissible, even if the term appears unambiguous. Berg, 115 Wash.2d at 669, 801 P.2d 222.

The impact of Berg on the interpretation of insurance contracts has not yet been specifically addressed by the courts of this state. Denny's argues that under Berg, evidence of industry practice and Security Union's own internal memoranda should be admissible to demonstrate the parties' true intent that the policy was purchased to cover questions of off-record encroachment and boundary. Security Union argues that Berg does not apply to insurance contract interpretation, which is strictly a matter of law, relying on Roller v. Stonewall Ins. Co., 115 Wash.2d 679, 682, 801 P.2d 207 (1990) ("The interpretation of insurance policy language is a question of law."). ⁶

Although Berg allows extrinsic evidence to interpret an existing contract term, it does not obviate the parol evidence rule. In the instant case, Denny's is not attempting to interpret an existing written term, but rather undertakes to show that the parties intended to imply a term covering encroachments and boundary disputes. While extrinsic evidence is not admissible to contradict or supplement an integrated, unambiguous instrument, Berg, 115 Wash.2d at 670, 801 P.2d 222; Max L. Wells Trust v. Grand Central Sauna & Hot Tub Co., 62 Wash.App. 593, 602, 815 P.2d 284 (1991), it may be admitted to prove additional consistent terms to a partially integrated agreement. In other words, if the written...