White v. Western Title Ins. Co.

• Decision Date: 31 December 1985
• Docket Number: S.F. 24813
• Citation: 221 Cal.Rptr. 509,40 Cal.3d 870,710 P.2d 309
• Court: California Supreme Court
• Parties: , 710 P.2d 309 Brian WHITE et al., Plaintiffs and Respondents, v. WESTERN TITLE INSURANCE COMPANY, Defendant and Appellant.

Page 509

221 Cal.Rptr. 509

40 Cal.3d 870, 710 P.2d 309

Brian WHITE et al., Plaintiffs and Respondents, v. WESTERN TITLE INSURANCE COMPANY, Defendant and Appellant.

S.F. 24813.

Supreme Court of California In Bank.

Dec. 31, 1985.

Rehearing Denied Feb. 14, 1986. ^*

Garrison, Townsend & Orser, James L. Stoelker, D.D. Hughmanick, Daniel McLoughlin and Richard D. Carrington, San Francisco, for defendant and appellant.

Stanford H. Atwood, Jr., Robert Knox, Kevin L. Anderson and Atwood, Hurst & Knox, San Jose, as Amici Curiae on behalf of defendant and appellant.

Richard J. Henderson, for plaintiffs and respondents.

BROUSSARD, Justice.

Plaintiffs Brian and Helen White filed suit against defendant Western Title Insurance Company for breach of contract, negligence, and breach of implied covenants of good faith and fair dealing. A jury found for plaintiffs, awarding damages of $8,400 for breach of contract and negligence, and an additional $20,000 for breach of the covenants of good faith and fair dealing. We affirm the judgment.

In 1975, William and Virginia Longhurst owned 84 acres of land on the Russian River in Mendocino County. The land was divided into two lots, one unimproved, the other improved with a ranchhouse, a barn and adjacent buildings. It contained substantial subsurface water.

On December 29, 1975, the Longhursts executed and delivered an "Easement Deed for Waterline and Well Sites," conveying to River Estates Mutual Water Corporation an "easement for a right-of-way for the construction and maintenance of a water pipeline and for the drilling of a well or wells within a defined area and an easement to take water, up to 150 [gallons per minute], from any wells within said defined area." The deed was recorded the following day.

In 1978 plaintiffs agreed to purchase the property from the Longhursts. Plaintiffs, who were unaware of the water easement, requested preliminary title reports from defendant. Each report purported to list all easements, liens and encumbrances of record, but neither mentioned the recorded water easement.

Plaintiffs and the Longhursts opened two escrows, one for each lot. Upon close of escrow defendant issued to plaintiffs two standard CLTA title insurance policies, for which plaintiffs paid $1,467.55. Neither policy mentioned the water easement.

The title insurance policies provided: "SUBJECT TO SCHEDULE B AND THE CONDITIONS AND STIPULATIONS HEREOF, WESTERN TITLE INSURANCE COMPANY ... insures the insured ... against loss or damage, ... and costs, attorneys' fees and expenses ... incurred by said insured by reason of:

"1. Title to the estate or interest described in Schedule A being vested other than as stated therein;

"2. Any defect in or lien or encumbrance on such title; ..."

"SCHEDULE B" provided in part that "[t]his policy does not insure against loss or damage ... which arise[s] by reason of the following: ...

"3. Easements, liens or encumbrances, or claims thereof, which are not shown by the public records....

"5. (a) Unpatented mining claims; (b) reservations or exceptions in patents or in Acts authorizing the issuance thereof; (c) water rights, claims or title to water." (Italics added.)

About six months after the close of escrow, River Estates Mutual Water Corporation notified plaintiffs of its intention to enter their property to implement the easement. Plaintiffs protested, and River Estates filed an action to quiet title to the easement. Plaintiffs notified defendant, who agreed to defend the proceeding. Plaintiffs, however, declined defendant's offer, preferring representation by an attorney who was then representing them in an unrelated action. River Estates eventually decided not to enforce its easement and dismissed the suit.

Plaintiffs' appraiser estimated the loss in value of their lots resulting from the potential loss of groundwater at $62,947. Plaintiffs then made a demand on defendant for that sum. Defendant acknowledged its responsibility for loss of value due to the easement (the loss attributable to the occupation of plaintiffs' land by wells and pipes, and to the water company's right to enter the property for construction and maintenance). It maintained, however, that any loss in value attributable to loss of groundwater was excluded by the policy, and since plaintiffs' claim of loss was based entirely on diminution of groundwater, declined to pay their claim. ¹ Plaintiffs filed suit in October of 1979, alleging causes of action for breach of the insurance contract and negligence in the preparation of the preliminary title reports. Defendant moved for summary judgment; after briefing and argument the motion was denied. Defendant then retained an appraiser, who estimated plaintiffs' loss at $2,000. Assertedly based on this estimate, defendant in May of 1980 offered to settle the case for $3,000. Defendant did not furnish plaintiffs with a copy of the appraisal, and plaintiffs rejected the offer. In June defendant served a written offer to compromise for $5,000 pursuant to Code of Civil Procedure section 998. ² Plaintiffs, having already incurred litigation expenses exceeding this figure, rejected the offer. Plaintiffs then obtained leave of court to amend their complaint to state a cause of action for breach of the covenant of good faith and fair dealing.

The trial court separated the issues of liability and damages. The issue of liability under the original complaint was presented to the court without a jury in January of 1981; in August of that year the court rendered an interlocutory judgment finding defendant liable for breach of contract and negligence. Defendant then furnished plaintiffs with a copy of their appraisal, and filed a new offer to compromise for $15,000. Plaintiffs rejected the offer, and the remaining issues were tried to a jury in February of 1982.

The parties first presented evidence of the loss in value to plaintiffs' property; the jury returned a special verdict fixing the loss at $100 per acre, or a total of $8,400. The court then turned to the cause of action for breach of the covenant of good faith and fair dealing. Plaintiffs indicated their intention to present evidence of defendant's conduct, including settlement offers, during the whole course of the litigation. In response to defendant's objection, the court ruled that such evidence would be admissible only as to events occurring before the interlocutory judgment of August 1981. Plaintiffs' former attorney then testified to defendant's settlement offers of $3,000 and $5,000, its failure to provide plaintiffs with a written appraisal to support those offers, and the attorney's fees paid and incurred in prosecuting the suit. The jury returned a special verdict finding defendant in breach of the covenant, awarding compensatory damages of $20,000, and denying punitive damages. Defendant appeals from the judgment.

1. LIABILITY UNDER THE TERMS OF THE INSURANCE CONTRACTS.

The insurance policies purport to insure a "fee" interest, free from any defect in title or any lien or encumbrance on title, subject to the exceptions listed in schedule B of the policies. A fee interest includes appurtenant water rights. (See City of San Diego v. Sloane (1969) 272 Cal.App.2d 663, 77 Cal.Rptr. 620.) Thus the only question is whether coverage under the present case is excluded by schedule B.

Schedule B contains two parts. Part two lists specific exceptions, generally encumbrances of record discovered by the title company and therefore excluded from coverage under the policy. The easement of River Estates Mutual Water Corporation was not listed in part two. Part one describes nine kinds of title defects ³ excluded generally from coverage. The first four paragraphs describe interests which should have been, but were not, recorded; item 3, for example, excludes coverage of "[e]asements, liens, or encumbrances ... which are not shown by the public records...." The remaining five paragraphs exclude interests of a type which are ordinarily not recorded, including, in paragraph 5, "(a) Unpatented mining claims; (b) reservations or exceptions in patents or in Acts authorizing the issuance thereof; (c) water rights, claims or title to water." Defendant relies on this last exclusion to avoid coverage in the present case.

Construction of the policy, however, is controlled by the well-established rules on interpretation of insurance agreements. As described most recently in Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 807-808, 180 Cal.Rptr. 628, 640 P.2d 764: " '[A]ny ambiguity or uncertainty in an insurance policy is to be resolved against the insurer and ... if semantically permissible, the contract will be given such construction as will fairly achieve its object of providing indemnity for the loss to which the insurance relates.' The purpose of this canon of construction is to protect the insured's reasonable expectation of coverage in a situation in which the insurer-draftsman controls the language of the policy. Its effect differs, depending on whether the language to be construed is found in a clause providing coverage or in one limiting coverage. 'Whereas coverage clauses are interpreted broadly so as to afford the greatest possible protection to the insured ... exclusionary clauses are interpreted narrowly against the insurer.' " (Citations omitted.)

The Court of Appeal in Jarchow v. Transamerica Title Ins. Co. (1975) 48 Cal.App.3d 917, 941, 122 Cal.Rptr. 470, reiterated these rules in the title insurance context: "In determining what benefits or duties an insurer owes his insured pursuant to a contract of title insurance, the court may not look to the words of the policy alone, but must also consider the reasonable expectations of the public and the insured as to the type of service which the insurance entity holds itself out as ready to offer. (Barrera v. State Farm Mut. Automobile Ins. Co., 71 Cal.2d 659, 669, 79 Cal.Rptr. 106, 456 P.2d 674.) ...