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Dare Investments, LLC. v. Chicago Title Insurance Company

2011 WL 5513196 (U.S. Dist. Ct. D. N.J. 2011) (Unpublished)

TITLE INSURANCE; INTERPRETATION — The doctrine of reasonable expectations construing ambiguous provisions against an insurance company is only applied when the insurance company is the expert and unilaterally prepares the policy for an insured layman unversed in insurance provisions and practices; it does not apply where the insured is a sophisticated commercial entity.

A loan title insurance policy was issued. The policy insured against, among many things, “unmarketability of the title” to and “the invalidity or unenforceability” of the mortgage. Additionally, under the policy, the title insurance company was to pay attorney costs for defending title or defending the lien of the mortgage. The policy excluded coverage from “defects, liens, encumbrances, adverse claims, or other matters … created, suffered, assumed, or agreed to by the insured claimant” if not known to the insurance company or recorded in public records as of the policy date, but known to the title policy holder and not disclosed in writing to the title insurance company prior to the policy date.

A number of title claims were made after the issuance of the policy. As a result, the lender sought indemnification under the policy for unmarketability of title and for defense costs. The title insurance company denied coverage based on the policy’s exclusions, including its title insurance company’s assertion that the third party claims were based on rulings of which the lender had prior knowledge. The lender sued the title insurance company for common law fraud, reformation, breach of contract, negligence, bad faith, consumer fraud under the New Jersey Consumer Fraud Act (CFA), civil conspiracy, as well as for civil aiding and abetting under, and violations of, the federal RICO and New Jersey RICO statutes. The Court granted the insurance company’s motion for summary judgment as to all the claims except for the breach of contract claim. It found that the intent of the exclusionary provisions in the title policy was ambiguous and therefore a factual determination as to intent was required. According to the Court, the lender’s reasonable expectation under the title policy was unclear.

The lender then moved for reconsideration, arguing that since the Court found the policy exclusions to be ambiguous, the Court should construe the provisions against the insurance company and grant the coverage. The insurance company responded that there was no basis for reconsideration because the doctrine of reasonable expectations did not apply, and the lender could not show that it had a reasonable expectation of coverage.

The Court denied the lender’s motion for reconsideration. A party who seeks reconsideration must satisfy a high burden and rely on one of three grounds: “(1) an intervening change in controlling law, (2) the availability of new evidence not available previously, or (3) the need to correct clear error of law or prevent manifest of injustice.” The lender argued that the Court had committed a clear error of law because, under the doctrine of reasonable expectations, when a court finds a provision in an insurance policy to be ambiguous, it must interpret the provision in favor of the insured.

The Court ruled the doctrine of reasonable expectations was inapplicable. This doctrine is only applied in cases where “the insurance company is the expert and unilaterally prepares the policy, whereas the insured is a layman unversed in insurance provisions and practices.” The doctrine does not apply to cases where the insured is a “sophisticated commercial entity.” Here, the Court found the lender to be sophisticated with regard to title insurance because it hired two law firms to conduct die diligence on the validity of the mortgage and to negotiate the loan’s terms.

Finding the doctrine of reasonable expectations inapplicable, the Court treated the title policy as a contract between two parties of equal bargaining power. Finding the contract ambiguous, the Court found that the lender did not seek coverage for the amount due on the mortgage, but for unmarketability of that mortgage due to the claim to quiet title. The record did not speak as to whether the parties intended the title policy to insure against such a claim, thus, the Court would not rule that the title insurance company had breached the terms of the policy.


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