Paramount Properties Co. v. Transamerica Title Ins. Co.

• Decision Date: 15 January 1970
• Docket Number: S.F. 22691
• Citation: 463 P.2d 746,1 Cal.3d 562,83 Cal.Rptr. 394
• Court: California Supreme Court
• Parties: , 463 P.2d 746 PARAMOUNT PROPERTIES COMPANY, Plaintiff and Appellant, v. TRANSAMERICA TITLE INSURANCE COMPANY, Defendant and Respondent.

Page 394

83 Cal.Rptr. 394

1 Cal.3d 562, 463 P.2d 746

PARAMOUNT PROPERTIES COMPANY, Plaintiff and Appellant, v. TRANSAMERICA TITLE INSURANCE COMPANY, Defendant and Respondent.

S.F. 22691.

Supreme Court of California,

In Bank.

Jan. 15, 1970.

Rehearing Denied Feb. 11, 1970.

Haizlip, Ring, O'Donnell & Moore and David D. Ring, San Francisco, for plaintiff and appellant.

Tobin & Tobin and John J. Hopkins, San Francisco, for defendant and respondent.

TOBRINER, Justice.

Paramount Properties Company, a commercial lender (hereinafter designated Paramount), filed suit against the Transamerica Title Insurance Company seeking the reimbursement of expenses incurred in the defense of a lawsuit. Paramount claims that the provisions of two insurance policies which the title insurance company had issued to it required the company to defend it in litigation involving the validity of two deeds of trust which it held. After a trial without a jury, the superior court, concluding that the insurance company was not obligated to provide such a defense, entered judgment in favor of defendant. This appeal by plaintiff Paramount followed. The case raises the issue of the proper construction of several provisions of the standard lender's title insurance policy.

On December 12, 1963, plaintiff lent $35,000 to Oscar Holmberg and received a promissory note secured by a deed of trust to two parcels of land located in Contra Costa County and Marin County, respectively. The deed was executed by Holmberg as trustor and named plaintiff as beneficiary; it was recorded in both counties one week later.

On the date of recordation, the City Title Insurance Company ¹ issued two separate title insurance policies to plaintiff, one covering the Contra Costa parcel, the other the Marin parcel. By these policies' terms, defendant guaranteed that the trust deed was a valid trust deed on the named properties and insured plaintiff 'against loss or damage * * * which the Insured shall sustain by reason of * * * any defect in the execution of' the trust deed. Paragraph 3(d)(2) of the policy excluded from this general coverage 'defects * * * known to the Insured either at the date of this policy or at the date such Insured acquired an estate or interest insured by this policy and not shown by the public records * * *.' Defendant also agreed to defend, at its own expense, any action against plaintiff founded upon a claim that the trust deed was not a valid lien, prior to all other liens, except those specifically set forth in the title policy. ² On the last page of each policy under a paragraph headed 'Payment of Loss' there appeared paragraph 7(c) which read in part: 'Payment in full by any person or voluntary satisfaction or release by the Insured of a mortgage covered by this policy shall terminate all liability of the (title) Company to the insured owner of the indebtedness secured by such mortgage, * * *' ³ No language preceded this last sentence to warn the policyholder that it did not involve payment of loss but non-payment of loss.

On April 9, 1964, and April 10, 1964, Lawrence J. Giubbini fiiled quiet title actions in Contra Costa and Marin Counties, respectively, in connection with the previously mentioned parcels, naming plaintiff as one of the defendants in each action. Giubbini claimed, in substance, that Holmberg and another party, Willer, had induced him to execute and deliver to them the deeds to the two parcels, leaving the name of grantee blank on each deed; Holmberg and Willer allegedly promised to hold the deeds in trust and not to fill in a grantee without Giubbini's consent. Since Giubbini had never given his consent to the execution of the deed to plaintiff, he contended in his action that the trust deed was void, and that he was the owner of the two parcels.

In accordance with its obligations under the title insurance policies, defendant undertook the defense of this action on behalf of plaintiff. During the pendency of this action, Holmberg and Giubbini apparently reached an agreement on at least a temporary settlement; on July 14, 1964, Giubbini paid plaintiff the amount of the indebtedness due to it, i.e., $35,000 plus interest, received a reconveyance of the trust deed and dismissed his action without prejudice. The title insurance company did not inform plaintiff that it would contend that acceptance of the payment effectuated a termination of the policies. By paying off the loan in this manner Giubbini cleared record title to the parcels and was able to sell the Contra Costa property. Only two months later, however, on September 22, 1964, Giubbini commenced a new action against Holmberg, Willer and plaintiff seeking to recover the $35,000 plus interest paid in July.

In this second action Giubbini claimed that Paramount's lien was invalid on the identical grounds stated in the original quiet title action. In addition he alleged that although Paramount knew or should have known of the invalidity of the lien, it continued to assert an interest in the title and, as a result, Giubbini claimed that in order to sell the Contra Costa property it was necessary for him to pay the Paramount loan, which he did. ⁴ The complaint maintained that these facts illustrated that the payment of the loan had been made under duress, and prayed for reimbursement of the payment.

Paramount gave timely notice of the pendency of this new action to the title company and requested that the company undertake the defense. Defendant refused. Thereafter Paramount successfully defended the action itself and then instituted this suit against the title company for the expenses incurred in that defense.

We shall point out that under the proper interpretation of the terms of the insurance policies defendant insurance company was obligated to undertake plaintiff's defense in the second Giubbini lawsuit. As we discuss below, the payment of the debt in the instant case, coupled, as it was, with the commencement of a suit for refund, did not terminate the coverage of the policy. Since the second Giubbini action was grounded on an alleged defect in the title, for which defendant might have been liable, the insurance company should have defended plaintiff and must now reimburse plaintiff for expenses incurred in its own defense.

1. The provisions that the policy 'shall terminate' upon 'payment in full' of the loan refers to final and unconditional payment.

Initially we address defendant's primary contention that at the time the September 22 action was commenced defendant was not required to defend plaintiff because the title policies, under which such an obligation might arise, had terminated on July 14. Paragraph 7(d) of the policies provides, in part: 'payment in full by any person * * * of a mortgage covered by this policy shall terminate all liability of the Company to the insured * * *.' Defendant contends that since the language of this provision is clear and unambiguous, we need not, and should not, resort to the traditional rules for construing ambiguities in insurance contracts against the draftsman of the contracts, the insurance company. Since Giubbini paid plaintiff the full amount due under the note in July, defendant insists coverage clearly ceased at that time.

In the usual case the provision of paragraph 7(d) would operate in a straightforward manner; once a lender has been paid in full he normally no longer has an interest in the title of the underlying security. When a full payment is made but subsequently alleged to have been given under duress and a suit for refund of the payment is instituted, however, the lender is in a completely different position. He no longer is free from concern as to the validity of the supporting security but rather is embroiled in litigation which threatens to recast him as a vulnerable creditor. To determine whether such a 'payment followed by a suit for refund' is equivalent to 'payment in full' within the meaning of paragraph 7(d), we look first to the purposes behind this language as revealed in the reasonable expectations of the parties. (3 Corbin on Contracts, p. 164.)

In procuring title insurance, a lender seeks to insure himself against the risk that a defect in the underlying title may invalidate his lien and leave him in the status of an unsecured creditor. That risk continues so long as the lender does not receive final and unconditional payment of the loan proceeds. The termination clause of paragraph 7(d) gives no indication of any intention to cut short coverage while the insured's primary risk survived; more reasonably, the provision should be interpreted as designed to reflect the conditions which represent a curtailment of this risk. Once the insured no longer has any interest in the validity of the title, paragraph 7(d) provides that the liability of the insurer ceases. If 'full payment' is interpreted to apply to a payment which does not eliminate the insured's risk, then the provision irrationally ties the termination of the policy to an arbitrary and fortuitous occurrence. We do not think such an interpretation is in accord with the reasonable expectations of the parties.

In the circumstances of the instant case it is clear that the initial payment by Giubbini did not terminate plaintiff's interest in the security nor its need for protection against title defects. If Giubbini had been successful in his second suit, Paramount would have been obligated to return the payment and plaintiff's lien on the parcels would have been invalidated, rendering plaintiff an unsecured creditor of Holmberg. This eventuality is precisely the risk against which plaintiff could reasonable expect its title insurance would protect. Thus, even under generally applicable rules of contract interpretation, we conclude that in light of the reasonable expectations of the parties the term 'payment' must reasonably be construed to encompass only final or unconditional payments, i.e., payments which in fact...