Bear Fritz Land Co. v. Kachemak Bay Title Agency, Inc.
1996 Alas. LEXIS 67, 920 P.2d 759, 1996 WL 374076 (1996)
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Rule of Law:
Governmental regulations that restrict land use or impair its market value, such as a wetlands designation, do not constitute a defect in, lien on, or encumbrance on the title and are therefore not covered by a standard title insurance policy.
Facts:
- In 1984, Robert and Virginia Cooper owned a parcel of property in Homer, Alaska.
- While the Coopers were making improvements, the Army Corps of Engineers (Corps) ordered them to stop construction, informing them that the parcel contained wetlands which required a permit to fill.
- On May 2, 1985, the Corps issued the Coopers a three-year permit allowing them to fill certain areas; the Coopers never recorded this permit.
- While the permit application was pending, the Coopers negotiated the sale of the property to Bear Fritz Land Company (Bear Fritz).
- On May 1, 1985, Bear Fritz obtained a preliminary commitment for title insurance from Ticor Title Insurance Company (Ticor).
- Bear Fritz purchased the property from the Coopers at the end of May 1985.
- In 1989 or 1990, after the permit had expired, Bear Fritz claims it first learned of the wetlands designation and the prior permit.
- Upon this discovery, Bear Fritz stopped making payments to the Coopers on the purchase money note for the property.
Procedural Posture:
- The Coopers sued Bear Fritz in the superior court (trial court) to collect on the purchase money note.
- Bear Fritz filed a third-party complaint against its title insurer, Ticor, alleging breach of contract and negligence for failing to disclose the wetlands permit.
- The Coopers and Bear Fritz settled their separate dispute.
- Ticor moved for summary judgment on Bear Fritz's third-party complaint.
- The superior court granted summary judgment in favor of Ticor, concluding the wetlands permit was not a defect in title.
- Bear Fritz, as appellant, appealed the grant of summary judgment to the Supreme Court of Alaska, with Ticor as the appellee.
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Issue:
Does a property's wetlands designation or an associated land use permit constitute a 'defect in, or lien or encumbrance on' the title, thereby triggering coverage under a standard title insurance policy?
Opinions:
Majority - Compton, Chief Justice
No. A property's wetlands status and associated permit restrictions do not constitute a 'defect in, or lien or encumbrance on' the title. The court distinguished between defects affecting title marketability and conditions affecting only the economic marketability or value of the property. Title insurance solely covers defects in legal title—the legally recognized rights and incidents of ownership. Governmental land use regulations, like wetlands designations or building codes, fall into the latter category; they restrict the use of the property and may lower its value, but they do not create a right or interest in the property for a third person or otherwise cloud the owner's fee simple title. The policy also contained an explicit exclusion for governmental regulations, which the court found clear and unambiguous. Therefore, the wetlands designation was not a risk covered by the title insurance policy.
Analysis:
This decision reinforces the fundamental distinction between title marketability and economic marketability, circumscribing the scope of a title insurer's liability. It clarifies that title insurance protects against risks to legal ownership, not against business or development risks arising from governmental regulations. The ruling places the burden of due diligence for land use and zoning restrictions squarely on the property buyer. Consequently, buyers cannot rely on title insurance as a safeguard against undiscovered environmental regulations or other governmental impediments that may affect the value or intended use of the property.
