Plaintiffs Joseph F. Summonte and Lauretta S. Summonte purchased 16 vacant lots of land from Franklin S. Radosti, Selma Radosti and Franklin Stephen Construction Company, Inc. The single deed which conveyed all 16 lots contained covenants of seisin, right to convey, right to possession and freedom from encumbrances, and further assurances. Title was insured by defendant First American Title Insurance Company ("American").
The lots were subject to the lien of a judgment against the Construction Company at the time of the purchase. Its existence was not known to the Summontes and not discovered by American; it was not excepted from the coverage of the policy. The judgment constituted a breach of the covenant of quiet possession and freedom from encumbrances contained in the deed to the Summontes. It was and is an encumbrance adversely affecting the title of all of the lots conveyed.
Simultaneously with the purchase of the lots the Summontes entered into an agreement to construct roads, drainage facilities and other improvements and then to sell the lots back to the Radostis. The agreement required the Summontes to accept a mortgage for a portion of the purchase price of each lot and contained an arrangement under which they were to act jointly
with the Radostis in regard to future sales of the improved lots, sharing commissions. Most of the improvements have been completed at a cost of approximately $70,000. One lot is subject to a contract for the construction of a home by the Radostis and its resale to the Summontes, for which purpose the latter have obtained a commitment for a construction mortgage. Some of the lots still owned by the Summontes but covered by the Radosti agreements are subject to further purchase contracts with third parties. Several lots have been conveyed to third parties, subject unknowingly, to the lien of the judgment.
Plaintiffs requested American, which now owns the judgment through an assignment, to remove its lien from their property by payment or release so that they could convey marketable title. American refused to do so. Instead, it demanded a conveyance of the remaining lots to it for a consideration equal to plaintiffs' sale price together with American's agreement to indemnify plaintiffs against any loss resulting from the conveyance; it claimed that its demand was authorized by the terms of the title insurance policy. Plaintiff disagreed with the claim, refused to convey the lots and brought this suit, obtaining an order to show cause why a judgment should not be entered requiring American to discharge the lien. The facts upon which their application depends are not in dispute. This opinion resolves the litigation.
I. The Policy Provisions; General Principles of Interpretation
The title insurance policy issued to plaintiffs insured them "against loss or damage . . . sustained or incurred . . . by reason of . . . a defect in or lien or encumbrance on [their] title. . . ." The judgment is clearly within this language. Other express language of the policy insured against claims of third-party grantees based upon a breach of covenants contained in any deeds of conveyance given by the Summontes.
American's demand for a conveyance is based in part on the following provisions of the policy:
(e) . . . Whenever requested by the Company, such insured shall give the Company all reasonable aid in any such action or proceeding, in effecting settlement, securing evidence, obtaining witnesses, or prosecuting or defending such action or proceeding, and the Company shall reimburse such insured for any expense so incurred.
5. The Company shall have the option to pay or otherwise settle for or in the name of an insured claimant any claim insured against or to terminate all liability and obligations of the Company hereunder by paying or tendering payment of the amount of insurance under this policy together with any costs, attorneys' fees and expenses incurred up to the time of such payment or tender of payment, by the insured claimant and authorized by the Company.
These policy provisions, to the extent they need construction, are to be "liberally construed in favor of the insured and strictly construed against the insurer." Sandler v. N.J. Realty Title Ins. Co. , 36 N.J. 471, 479 (1962). Further, they must be interpreted in a way which fulfills the reasonable expectations of the insured. Id. at 479; Kievit v. Loyal Protect. Life Ins. Co. , 34 N.J. 475, 482 (1961).
II. The Principle of Indemnity
The general rule, set forth in Sandler, supra is that
A title insurance policy is a contract of indemnity under which the insurer for a valuable consideration agrees to indemnify the insured in a specified amount against loss through defects in title to, or liens or encumbrances upon realty in which the insured has an interest. [at 478]
Thus it is said that the insured may recover only "the actual loss which he has sustained by virtue of title defects, encumbrances and the like." 9 Appleman, Insurance Law and Practice (perm. ed.), "Title Insurance," § 5217 at . The Summontes have not yet been obliged to spend any money on account of the judgment. American therefore argues that it has no obligation respecting the lien because it has occasioned no loss. It cites
Palliser v. Title Ins. Co. of N.Y. , 61 Misc. 490, 115 N.Y.S. 545 (Sup.Ct.1908), to support the argument. In that case the court dealt with an encumbrance which had not been excepted from a title insurance policy issued by the defendant. It held, stressing the indemnity aspect of title insurance policies, that
A covenant against incumbrances is treated as a contract of indemnity, and although broken as soon as made, if broken at all, nevertheless a recovery (beyond nominal damages) is confined to the actual loss sustained by the covenantee by reason of the payment or enforcement of the incumbrance against the property. He is not permitted to recover the amount of the outstanding incumbrance, before payment or loss of the property, although its existence may be an embarrassment to his title and subject him to inconvenience. [at 61 Misc. 493, 115 N.Y.S. 546; quoting from McGuckin v. Millbank , 152 N.Y. 297, 302, 46 N.E. 490, 492 (Ct.App.1897)]
Allied Mtg. Co. v. Atlanta Title & Trust Co. , 58 Ga.App. 366, 198 S.E. 310 (Ct.App.1938), is to the same effect. The Georgia court held that a mortgagee which paid a lien affecting the mortgaged property could not recover from the insurer of title. There was no proof that the payment could not be recovered from the mortgagor, who was primarily liable. Consequently, the necessary showing of actual loss was missing.
An even harsher rule is set forth in Blessing v. American Title and Ins. Co. , 121 So. 2d 455 (Fla.D.Ct.App.1960). The Florida plaintiffs were the innocent purchasers of a property subject to a judgment, not listed as an encumbrance on their title insurance policy. Upon discovering the judgment they discharged it by voluntary payment. The court held that the policy insured only actual loss not marketability, and that the insured was protected only when execution of the judgment was sought, not by voluntary satisfaction.
The Palliser court found that the plaintiff suffered no "actual loss." On the peculiar facts of that case ...