Wheeler v. Reese, 90CA1170

• Decision Date: 12 March 1992
• Docket Number: No. 90CA1170,90CA1170
• Citation: 835 P.2d 572
• Parties: Kenneth Theodore WHEELER, Jr., a/k/a Kenneth T. Wheeler, Jr., Plaintiff, v. Kenneth L. REESE, individually, and d/b/a Skier's Edge Realty, Defendant. Eugene H. BARKER, Defendant and Third-Party Plaintiff-Appellant, v. TRANSAMERICA TITLE INSURANCE COMPANY, Third-Party Defendant-Appellee. . V
• Court: Colorado Court of Appeals

Page 572

835 P.2d 572

Kenneth Theodore WHEELER, Jr., a/k/a Kenneth T. Wheeler, Jr., Plaintiff, v. Kenneth L. REESE, individually, and d/b/a Skier's Edge

Realty, Defendant.

Eugene H. BARKER, Defendant and Third-Party Plaintiff-Appellant, v. TRANSAMERICA TITLE INSURANCE COMPANY, Third-Party Defendant-Appellee.

No. 90CA1170.

Colorado Court of Appeals,

Div. V.

March 12, 1992.

As Modified on Denial of

Rehearing April 9, 1992.

Certiorari Denied Aug. 31, 1992.

Hill, Hill & Manges, P.C., Richard B. Manges, Fort Collins, for defendant and third-party plaintiff-appellant.

Dietze, Davis and Porter, P.C., Peter C. Dietze, Robyn W. Kube, Boulder, for third-party defendant-appellee.

No appearance for plaintiff Kenneth Theodore Wheeler, Jr.

No appearance for defendant Kenneth L. Reese.

Opinion by Judge DAVIDSON.

Third-party plaintiff, Eugene H. Barker, appeals from a judgment entered after a bench trial in favor of third-party defendant, Transamerica Title Insurance Company, on claims of breach of duty to defend and tortious bad faith. We affirm in part and reverse in part.

In 1980, Barker Construction Company began road construction work for a residential subdivision for which Kenneth Reese was a principal and the primary real estate agent. It received lots within the development in partial payment for its work. Barker, a principal of that company, received some of these lots and, in turn, listed them for sale with Reese.

In 1985, Barker discovered that Reese had withheld from him $27,500 from the sale of some of his lots. Reese offered to settle the debt by delivering to Barker a deed for property owned by Kenneth Wheeler with a title commitment on the property from Transamerica. Barker accepted the offer and then took the documents to Transamerica in order to pay the closing costs, including the recording fee and the premium for a $50,000 title insurance policy.

Transamerica recorded the deed and subsequently issued a policy to Barker, which, by an error on the part of Transamerica staff, was not the standard owner's policy and which omitted many exclusions and exceptions typically included in a standard policy. Neither party realized the error at that time.

In October 1986, Wheeler sued Reese, Barker, and others, not parties to this appeal, regarding this and similar real estate transactions. Specifically, Wheeler sought damages against Reese for fraud and rescission of the deed against Barker. Barker asked Transamerica to conduct his defense, but it refused on the grounds that Wheeler's claims against Barker were outside the scope of, or excluded from, the coverage of his policy. Thereafter, Barker filed a third-party complaint against Transamerica for breach of its duty to defend and bad faith. Transamerica counterclaimed for reformation of the policy to add the exclusions found in the standard owner's policy.

In 1987, the trial court entered a default judgment in favor of Wheeler and against Reese. Thereafter, it entered summary judgment for Wheeler rescinding the deed of conveyance to Barker on the grounds that it was void for lack of consideration and that Reese had forged Wheeler's and the notary's signatures thereon.

After a bench trial, the court found for Transamerica on Barker's third-party claims for breach of duty to defend and bad faith. With regard to Transamerica's counterclaim for reformation of the policy, the trial court determined that there was no mutual mistake as to the material terms of the policy, and it therefore denied reformation. The denial of Transamerica's counterclaim was not raised as an issue on appeal, and therefore we do not address it.

I.

As a threshold matter, we note that Barker appealed earlier the summary judgment entered in favor of Wheeler on the issues of election of remedies and rescission. We affirmed in Wheeler v. Sperry (Colo.App. No. 90CA0336 and 90CA0387, June 20, 1991) (not selected for publication).

II.

A.

Barker first contends that the trial court erred in ruling that Transamerica had no obligation to defend him against Wheeler's claims. Specifically, he asserts that certain claims within Wheeler's complaint, such as forgery or alteration of the deed, defects in the acknowledgement, and Reese's fraud, are defects in the title for which Barker was entitled to a defense. We agree.

An insurer seeking to avoid its duty to defend bears a heavy burden. Its duty to defend arises when the underlying complaint against the insured alleges any facts that might fall within coverage of the policy. It is enough that the allegations state a claim which is potentially or arguably within the policy coverage, and if there is doubt as to whether a theory of recovery within the policy coverage has been pleaded, the insurer must accept the defense of the claim. Hecla Mining Co. v. New Hampshire Insurance Co., 811 P.2d 1083 (Colo.1991); see American Motorists Insurance Co. v. General Host Corp., 946 F.2d 1489 (10th Cir.1991). We note that the trial court did not have the benefit of our supreme court's holding in Hecla Mining at the time of its rulings.

Determining the duty to defend based on the allegations contained within the complaint comports with the insured's legitimate expectation of a defense. Hecla Mining Co. v. New Hampshire Insurance Co., supra; see Jarchow v. Transamerica Title Insurance Co., 48 Cal.App.3d 917, 122 Cal.Rptr. 470 (1975) (the provisions of the policy must be construed so as to give the insured the protection which he reasonably had a right to expect); Leland v. Travelers Indemnity Co., 712 P.2d 1060 (Colo.App.1985).

Here, Transamerica's policy to Barker provides:

[Transamerica] hereby insures ... the Insured against loss or damage ... which the Insured shall sustain by reason of: any defect in ... the title to the estate or interest covered hereby subject to [exceptions and exclusions listed herein.]

Transamerica's duty to defend is contained in the policy's "Conditions and Stipulations." It provides:

[Transamerica] agrees to defend at its own cost and expense the title ... hereby insured in all actions or other proceedings which are founded upon ... a defect ... against which this policy insures.

Wheeler's complaint against Barker alleged, inter alia, that the deed to Barker was recorded without Wheeler's knowledge or consent, that it was not properly notarized, that Wheeler received no consideration, that he did not agree to sell the property to Barker, that the deed was forged or fraudulently obtained, and that Wheeler was the rightful owner of the fee simple title to the property.

Construing the terms of the policy according to general rules of contract law, Hecla Mining Co. v. New Hampshire Insurance Co., supra, we find as a matter of law that Wheeler's claims are risks within the scope of the policy. The policy, by its terms, insures against any defects. Within Wheeler's allegations are several off-record defects, such as forgery and alteration of the deed, and fraudulent and defective transfer of that deed, which, although not revealed by an abstractor's search of the public record, are risks recognized and insured against in the title industry. D. Burke, Law of Title Insurance § 1.3.2 at 23 (1986); see R. Powell, Powell on Real Property § 1036 at 92-15 (1991) (fundamental sources of risks in title insurance, covered in policies in different degrees, include "[h]idden defects not disclosed by the public records").

Because these off-record risks are not excused or excepted from the terms of Barker's policy, we conclude that they are within the general insuring provisions of the policy. See Koncilja v. Trinity Universal Insurance Co., 35 Colo.App. 27, 528 P.2d 939 (1974) (having affirmatively expressed coverage through broad promises, the insurer assumed a duty to define any limitations upon that coverage in clear and explicit terms).

We disagree with Transamerica's argument that the claims asserted by Wheeler are an "attack upon the manner in which the insured acquired title," not a "challenge to the quality of the title received." By the plain language of his complaint, Wheeler alleged that he, rather than Barker, was "the rightful owner of the fee simple title ... free and clear of all claims of right or title." In our view this allegation is a challenge to the title--a total failure of title--for which Barker had a legitimate expectation of defense.

And, contrary to Transamerica's assertion, Safeco Title Insurance Co. v. Moskopoulos, 116 Cal.App.3d. 658, 172 Cal.Rptr. 248 (1981), from which the "manner in which [insured] acquired title" language derives, does not demand a different conclusion. In Moskopoulos, there were allegations that the insured himself had committed fraud. See D. Burke, Law of Title Insurance § 9.4 at 303 (1986) ("The majority view is that an insurer is not bound to defend a lawsuit based upon the intentional torts of the insured. A distinction is thus maintained between tort and title actions, and the insurer is bound to defend only the latter."). Also, there was a provision within the Moskopoulos policy which excluded coverage if the insured "created, suffered, assumed or agreed to" the defects which caused his losses. Moreover, the Moskopoulos court observed that there were no facts which constituted any defect in the title and no suggestions of "any off-record risk in the chain of title coming within the policy coverage, such as a forged, altered or improperly delivered deed" on the policy date.

Accordingly, Moskopoulos is distinguishable from this case in which the allegations of fraud were against Reese, not Barker, in which there are no applicable exclusions, and in which there were allegations of off-record risks of a forged, altered, and improperly delivered deed.

Moreover, we reject Transamerica's assertion that the defects are excluded either because the insured knew about them, created them, or failed to pay consideration. This argument is based upon exclusions contained within...