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Carney-Dunphy v. Title Company of Jersey

2009 WL 1874060 (U.S. Dist. Ct. D. N.J. 2009) (Unpublished)

TITLE INSURANCE; SUCCESSORS — Where the definition of an insured under a title insurance policy may also include persons or entities who succeed to the original insured’s interest by means of operation of law, it does not mean that voluntary transfers to a trust or voluntary transfers from a trust to a trust’s beneficiary extend coverage to the grantee as if the grantee were the insured.

A woman purchased title insurance when she bought her home. For estate planning purposes, she then voluntarily transferred the property to an irrevocable family trust. When the property was transferred to the trust, the trust did not get a new title insurance policy for the property. When the woman died, one of the trust’s beneficiaries attempted to clear a tidelands issue that was listed as an exception in the policy. The beneficiary sought coverage “by operation of law,” as the term was used in the policy. The title insurance company responded that she was not entitled to coverage because she was not the named insured under the policy and because the policy lapsed pursuant to its own terms when the property was transferred to the trust. The beneficiary sued the insurance company.

The United States District Court ruled in favor of the company. The relevant portion of the policy defined “insured” as follows: “[t]he insured named in Schedule A, and subject to any rights the Company may have against the named insured, those who succeed to the interest of such insured by operation of law, ... including but not limited to, heirs, distributes, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors.”

The District Court held that the beneficiary did not succeed to the decedent’s interest in the property by “operation of law.” According to the Court, the policy was a contract that continued in force indefinitely until the insured divested title or altered title in a way that terminated coverage. Although the Court noted that title insurance contracts are “adhesion contracts,” it refused to rewrite the policy in favor of the insured under the guise of interpreting the insurance contract’s reasonable terms, especially in the absence of ambiguity. Further, it noted that courts are unable to write into an insurance policy a more expansive definition of “insured” than the policy’s terms provide. It interpreted the term “operation of law” to mean only automatic or involuntary transfers done without any act of the insured. Essentially, the term “operation of law” does not encompass transactions requiring the voluntary acts of the parties to effect a particular transaction, as was the case here.

The Court also ruled that the transfer was not by way of inheritance, but, rather accomplished by way of a series of voluntary lifetime acts beginning with the decedent transferring of the entirety of her interest to a trust. In addition, the Court noted that the subsequent transfer of the property by the trust’s beneficiary to the decedent’s daughter in exchange for stock in the family business was likewise voluntary and did not occur by operation of law. It also distinguished this case from transfers of assets in dissolution of a corporation where such action is required by law and can therefore be said to be “by operation of law.” In the instant case, the Court held that the decedent’s transfer of her interest in the property to the trust was not the perfunctory discharge of any legal obligation.

It also rejected the argument that the trust was a fiduciary successor to the insured. To support that conclusion, it noted: (a) that the policy did not extend coverage to any recipient of the insured property who happens to be a corporation or fiduciary; and (b) the trust was at no time acting in a fiduciary capacity for the previously insured-decedent who irrevocably transferred her rights to a trust’s for the benefit of trust beneficiaries.

As to the beneficiary’s claim that the insurance company violated the New Jersey Insurance Trade Practices Act, the Court ruled that such a claim required her to be “an insured,” and was thus not sustainable as she was not a person entitled to coverage under the insurance contract.

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