No Protection Under Title Insurance Policy For Pre-Existing Environmental Contamination; Pre-Purchase Failure To Inspect Leaves Buyer Holding The Bag

Lexology reports:

• [A]ccording 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.

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• 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.

For more, see Can title insurance protect you from environmental defects? (requires paid subscription; if no subscription, TRY HERE, or GO HERE - then click appropriate link for the story).