National Mortg. Corp. v. American Title Ins. Co.

• Decision Date: 19 June 1979
• Docket Number: No. 7815SC587,7815SC587
• Citation: 41 N.C.App. 613,255 S.E.2d 622
• Court: North Carolina Court of Appeals
• Parties: NATIONAL MORTGAGE CORPORATION, v. AMERICAN TITLE INSURANCE COMPANY.

Page 622

255 S.E.2d 622

41 N.C.App. 613

NATIONAL MORTGAGE CORPORATION, v. AMERICAN TITLE INSURANCE COMPANY.

No. 7815SC587.

Court of Appeals of North Carolina.

June 19, 1979.

Allen, Hudson & Wright by James Allen, Jr., Chapel Hill, for plaintiff-appellant.

Midgette, Page & Higgins by Keith D. Lembo, Chapel Hill, for defendant-appellee.

MORRIS, Chief Judge.

Plaintiff's assignment of error presents two questions on appeal. First, did certain language of the policy of title insurance exclude coverage under the facts of this case? Second, is the defendant insurer liable for expenses incurred by plaintiff in defense of the Abernethy action brought to declare the deed of trust invalid?

Exclusions

Defendant relies on two separate provisions of the policy of title insurance to exclude coverage for plaintiff's losses. Defendant first relies on language in the "American Land Title Association Standard Loan Policy" outlining conditions and stipulations appearing on page three of the policy:

"3. Exclusions from the Coverage of this 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. . . ."

Defendant's contention is that plaintiff's improper disbursement of the loan proceeds was the causal factor in the loss of the lien of the deed of trust. They point out that the lien was declared ineffectual by the judgment in the Abernethy Case for the reason that the proceeds were not disbursed for the purpose of erecting permanent improvements. In that case, the owners of the fee were found to have subordinated their fee interest in the real estate only to the extent that the loan proceeds were disbursed in payment for the erection of permanent improvements. Plaintiff, on the other hand, contends that the exclusion applies only if the act causing the loss is the result of some dishonest, illegal or inequitable dealing by the insured. Plaintiff asserts that protection from loss due to the possible negligent creation of a defect by the insured is one of the reasons for purchasing title insurance. Plaintiff concedes that recovery would not be permitted if the plaintiff had knowingly created the title defect.

Although there are apparently no controlling cases in North Carolina, the overwhelming weight of authority supports plaintiff's position that the policy language does not exclude coverage for losses suffered by this insured. A fundamental rule in the interpretation of insurance policies requires that an ambiguity in the words of the policy must be resolved in favor of the insured. Grant v. Insurance Co., 295 N.C. 39, 243 S.E.2d 894 (1978); Pleasant v. Insurance Co., 280 N.C. 100, 185 S.E.2d 164 (1971); Insurance Co. v. Insurance Co., 269 N.C. 358, 152 S.E.2d 513 (1967). In applying a similar rule of construction, the courts in other jurisdictions have consistently concluded that policy language essentially identical to that of the policy language quoted above excludes coverage for losses incurred because of the insured's own conduct only when it is a result of some dishonest, illegal, or inequitable dealings by the insured. See generally Annot., 98 A.L.R.2d 527 (1964) where a defect in the title occurs because of innocent conduct by the insured, coverage should not be excluded by the language embodied in the "Conditions and Stipulations" of section 3(d) of the policy before the Court. See e. g., Laabs v. Chicago Title Insurance Company, 72 Wis.2d 503, 241 N.W.2d 434 (1976); Arizona Title Insurance & Trust Company v. Smith, 21 Ariz.App. 371, 519 P.2d 860 (1974); Hansen v. Western Title Insurance Company, 220 Cal.App.2d 531, 33 Cal.Rptr. 668 (1963). On the other hand, where the insured has been involved in a fraudulent or unconscionable scheme, recovery should be denied based on similar policy language. See e. g., Keown v. West Jersey Title and Guaranty Company, 161 N.J.Super. 19, 390 A.2d 715 (1978); Conway v. Title Insurance Co., 291 Ala. 76, 277 So.2d 890 (1973); Feldman v. Urban Commercial, Inc.,87 N.J.Super. 391, 209 A.2d 640 (1965); Taussig et al. v. Chicago Title & Trust Co., 171 F.2d 553 (7th Cir. 1948); First Nat'l Bank & Trust Co. v. New York Title Insurance Company, 171 Misc. 854, 12 N.Y.S.2d 703 (1939).

The precise meaning of the phrase " 'created, suffered, assumed or agreed to' " has been considered in the recent case of Arizona Title Insurance & Trust Company v. Smith, supra. That case, in accordance with the unanimity of authority, holds that the word "created" requires an affirmative act deliberately bringing about the defect. The word "suffered" implies a failure to exercise a power with the intention that the defect be created. Accord, Hansen v. Western Title Insurance Company, supra. The terms "assumed" or "agreed to" appear clearly inapplicable to the conduct of the plaintiff in the case at bar. The record is uncontradicted that the lender specifically demanded that as a precondition to the loan that the fee owners subordinate their interest to that secured by the insured's deed of trust. The insured, in this case, cannot be said to have "assumed" or "agreed to" a defect (the failure of the subordination agreement to remain effective) when it specifically sought to have the fee interest subordinated to its leasehold interest in order to obtain the loan and the title insurance. It follows that plaintiff has not " 'created, suffered, assumed or agreed to' " the defect in title invalidating plaintiff's deed of trust by authorizing an improper method of disbursement. Mere negligence does not constitute "creation". Keown v. West Jersey Title & Guaranty Co., supra.

Schedule B of the title insurance policy excludes loss or damage by reason of failure to comply with certain conditions added by the insurer to apply specifically to the transaction under consideration. The fifth condition provides in typewritten form:

"5. Pending disbursement of the full proceeds of the loan secured by the Deed of Trust described in Schedule 'A' hereof, this policy insures only to the extent of the amount actually disbursed, but increases as each Disbursement is made in good faith and without knowledge of any defects in, or objections to, the title, up to the face amount of the policy." (Emphasis added.)

The trial court relied on the foregoing underscored policy language as an additional or alternative ground for denying recovery. The correctness of that judgment depends upon the correct interpretation to be given the phrase "good faith" in contradistinction to "bad faith". The Court in Bundy v. Credit Co., 202 N.C. 604, 163 S.E. 676 (1932), in the process of reviewing a jury instruction defining "in bad faith", offered the following explanation of the phrase:

"Bad faith cannot be defined with mathematical precision. . . . Certainly, it implies a false motive or a false purpose, and hence it is a species of fraudulent conduct. Technically, there is, of course, a legal distinction between bad faith and fraud, but for all practical purposes bad faith usually hunts in the fraud pack." 202 N.C. at 607, 163 S.E. at 677; See also Polikoff v. Service Co., 205 N.C. 631, 172 S.E. 356 (1934).

That court approved the trial court's instruction stating that " 'the phrase " in bad faith" imports that the transaction involved was dishonestly conceived and consummated with knowledge of a fraudulent design or deception.' " We find no evidence in the record to suggest any bad faith conduct on the part of this plaintiff. To the contrary, it appears that plaintiff was the object of bad faith conduct on the part of Jonas W. Kessing who breached the agreement for disbursement of funds as proposed in his letter to the plaintiff. Plaintiff's conduct in authorizing the unusual disbursement procedure is at most negligent conduct. Defendant has failed to satisfy his burden of placing plaintiff within the fifth exclusion contained in the policy. See Brevard v. Insurance Co., 262 N.C. 458, 137 S.E.2d 837 (1964) (burden on insurer to show exclusion).

Equitable Estoppel

Additionally, defendant urges this Court to apply the doctrine of equitable estoppel to prevent what it characterizes as an opportunity for the plaintiff to reap benefits from its own improper conduct at the expense of the defendant, who is characterized as an innocent party. We cannot agree that the record supports defendant's characterization of the transaction, and we find no grounds for the application of equitable estoppel. Initially, plaintiff purchased the policy of title insurance precisely to insure the priority of its lien against unforeseen defects. The defect arose because of the unlawful conduct of a third party to whom plaintiff had entrusted, wisely or not, much of its investment. Any improper conduct on the part of the plaintiff was at most negligent management of its funds. Furthermore, plaintiff is not reaping benefits from any misconduct. The unpaid balance due on the loan remains at $79,282.26, excluding interest in accordance with Kessing v. Mortgage Corp., supra. Should plaintiff be entitled to recover, it would merely be recovering the balance of the loan made to Kessing. Finally, it can hardly be said that defendant in this action is "innocent". Defendant is in the business of insuring against the risk of loss incurred through unanticipated defects in title to real property.

The basis of the doctrine of equitable estoppel was well expressed in the case of Boddie v. Bond, 154 N.C 359, 70 S.E. 824 (1911). The elements thereafter were outlined as follows:

"In order to constitute an equitable estoppel, there must exist a false representation or concealment of material fact, with a knowledge, actual or constructive, of the truth; the other party must have been without such knowledge, or, having the means of knowledge of the real facts, must not...