Sometimes, looking at US case law can provide a real pick me up for how well we do things in Canada. But you have to give the Americans credit for attempted ingenuity – after all, that’s what gives us such great cases (who can forget the McDonald’s coffee case!). According to a recent US case in Louisville, Kentucky, a title insurer cannot be held liable to its insured for pre-existing environmental contamination (Pavilion Park LLC v First American Title Insurance Co.). In that case, the insured sued its insurer under its title insurance policy claiming that a restrictive covenant documenting the property’s former use as a solid waste disposal site was an “encumbrance” under the title insurance. Pavilion argued that it precluded development of the property unless and until the property was cleaned up. The problem for Pavilion was a very basic recommendation made to purchasers of real property; investigate the property pre-purchase thoroughly, particularly in relation to the property’s former uses. Pavilion was not aware of the restrictive covenant at the time of purchase, despite the fact that it was properly recorded in the municipal clerk’s office. The purchase was an “as is” purchase on a foreclosure. Unfortunately, the purchaser only became aware of the property’s former use two years after the purchase.
The court was not particularly motivated to assist the insured purchaser because the purchaser had negotiated a contractual right to inspect the property during the due diligence period but apparently chose not to. One would think that such searches are commonplace. In the end, the court held that since the restrictive covenant did not create any legal impediment to title to the property, the insurer had no coverage responsibility. While it may have affected development, use, valuation and marketability, title insurance is not intended to address these issues. At its essence, it insures the prior chain of title; not an intended use. Challenges to marketability due to a regulatory restriction for a future clean up does not equal “title marketability”.
The insured purchaser’s argument in this case was not the first attempt at such an argument in the US and not the only context in which it has been made: asbestos, lead paint and former tanks have all been determined not to affect marketability of title under title insurance.
Not all title insurance policies are drafted equally, but the moral of the story is: due diligence is called due diligence for a reason. Read the policy, do the due diligence.