Lick Mill Creek Apartments v. Chicago Title Insurance Co.
231 Cal.App.3d 1654 (1991)
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Rule of Law:
Title insurance policies that insure against "unmarketability of title" and "encumbrances" do not cover losses arising from the physical condition of the property, such as the presence of hazardous substances. Such conditions may affect the land's market value, but they do not constitute a defect in or an encumbrance on the legal title itself.
Facts:
- Prior to 1979, various corporations operated chemical processing plants on a 30-acre property, contaminating the soil, subsoil, and groundwater with hazardous substances.
- In 1979, Kimball Small Investments 103 (KSI) purchased the property.
- Between 1979 and 1981, the California Department of Health Services ordered KSI to remedy the toxic contamination, but KSI failed to comply.
- In October 1986, Lick Mill Creek Apartments and Prometheus Development Company, Inc. (Plaintiffs) acquired the property from KSI in three separate lots.
- In connection with their purchases, Plaintiffs obtained American Land Title Association (ALTA) policies from Chicago Title Insurance Company and First American Title Insurance Company (Defendants).
- At the time the policies were issued, government agencies maintained records disclosing the presence of hazardous substances on the property.
- After purchasing the property, Plaintiffs incurred substantial costs to remove and clean up the hazardous substances.
Procedural Posture:
- Lick Mill Creek Apartments and Prometheus Development Company, Inc. sued Chicago Title Insurance Company and First American Title Insurance Company in a California trial court.
- Plaintiffs sought indemnity under their title insurance policies for the costs of cleaning up hazardous substances on their property.
- The trial court sustained the defendants' demurrer to the plaintiffs' first amended complaint without leave to amend.
- The trial court entered a judgment of dismissal in favor of the defendants.
- Plaintiffs, as appellants, appealed the judgment of dismissal to the California Court of Appeal, Sixth District.
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Issue:
Does the presence of hazardous substances on a property, which impairs its market value and requires costly cleanup, constitute an "unmarketability of title" or an "encumbrance on title" covered by a standard title insurance policy?
Opinions:
Majority - Agliano, P. J.
No. The presence of hazardous substances on the property does not render title unmarketable or create an encumbrance on title within the meaning of a title insurance policy. The court distinguished between the marketability of the land itself, which relates to its physical condition and economic value, and the marketability of title, which relates to defects in the legal rights of ownership. Citing Hocking v. Title Ins. & Trust Co., the court reasoned that while contamination makes the land less valuable and potentially unusable, it does not affect the owner's fee simple title. Similarly, an encumbrance is a right or interest in the land held by a third party, such as a lien or easement; the mere presence of contaminants is a physical state, not a third-party claim. The potential for a future government lien for cleanup costs does not constitute a present encumbrance.
Analysis:
This decision firmly establishes the boundary of title insurance coverage in California regarding environmental contamination, clarifying that title insurance protects against defects in legal ownership, not against problems with the physical condition or economic value of the property. The ruling forces property purchasers to conduct thorough environmental due diligence, such as a Phase I Environmental Site Assessment, rather than relying on title insurance for protection against contamination risks. It reinforces the principle that different types of insurance cover different types of risk, with title insurance focused narrowly on legal title issues.
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