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Shotmeyer v. New Jersey Realty Title Insurance Company

A-2744-05T5 (N.J. Super. App. Div. 2007) (Unpublished)

CONTRACT; TITLE INSURANCE — Where a title insurance policy lists a property owner as two individuals trading in the name of a general partnership, a transfer of property from the partnership to a limited partnership still protects the two individuals because purchasers of insurance are entitled to the broad measure of protection necessary to fulfill reasonable expectations and such a transfer does not change the beneficial interests of the individual partners that the insurance policy was procured to protect.

A two-partner general partnership bought five parcels of land. The partners obtained a policy of title insurance in the amount of the purchase price. It listed their two names as trading as the general partnership. Eleven years later, the partners formed a limited partnership for estate planning purposes. They were the sole limited partners of that entity, and a separate corporation, of which they were the sole shareholders, was the general partner of the limited partnership. Thereafter, by deed, the general partnership conveyed the five parcels of land to the limited partnership for the nominal consideration of ten dollars.

Ten years later, one of the partners first alleged that he learned that an adjoining landowner claimed title to approximately twelve acres of the subject property. The partners notified and subsequently sued the title company for contractual breaches as individual partners, and on behalf of the general and limited partnerships. The insurer pled, as an affirmative defense, that the partners lacked an insurable interest by virtue of the general partnership being listed as the insured on the policy, but then having transferred title to the limited partnership. The insurer filed a motion for summary judgment, contending that the newly created limited partnership was not covered under the policy originally purchased by the general partnership.

The lower court determined, as a matter of law, that the transfer between the general partnership and the limited partnership did not occur under operation of law. Under the policy language, such a transfer would have continued the insurance coverage. Instead, it held that a purchase had taken place. Therefore, the court concluded that the limited partnership was not included in the coverage under the policy.

On appeal, the Appellate Division believed that even if the limited partnership was not covered by insurance, the individual partners were specifically named and covered. The Court noted that title insurance policies are to be liberally construed in favor of the insured and strictly construed against the insurer. Additionally, the Court stated that insurance purchasers are entitled to the broad measure of protection necessary to fulfill reasonable expectations. It observed that in this matter there was never a transfer of any beneficial interests of the individual partners in the lands the title insurance policy was procured to protect. The Court realized that the individual partners were the only individuals involved in either the general or limited partnerships. The respective partnerships were merely vehicles for their ownership of the property, and the partners never relinquished control or diluted their interest in the property. As there was no change of substance, the Court reasoned that the partners should have had no expectation that the title insurer would not recognize their continued interest in the property, as the partners did nothing to increase either the risk or the burden on the insurer. Therefore, the Court reversed the lower court, finding that the partners were entitled to the protection of the title insurance policy.

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