OK For Title Insurer To Stiff Homeowner By Failing To Defend Against 3rd Party's Adverse Possession Claim Based Solely On "Actual, Open, Notorious, Exclusive, Hostile & Continuous Possession" When 'Public Records Exception' Applies

The following facts have been abstracted from a recent decision of a U.S. District Court in Oregon in a case involving a homeowner-couple who sued their title insurer to recover costs and attorney fees, alleging that the insurer stiffed them on its duty to defend their title when the homeowners were sued for adverse possession by a third party on a purported claim that pre-dated the date the title insurance policy was issued:

1. In 2004, a couple (the "Hansens") purchased property located in Wilsonville, Oregon.
   .................
2. The Hansens obtained title insurance from Defendant Fidelity National Title Insurance Company.
   .................
3. Six years later, on August 19, 2010, the Hansens were sued by the trustees of the Rogers Family Living Trust ("Rogers trustees"), alleging that they were fee simple owners of a portion of the Hansens' property.
   ................
4. The Rogers trustees' adverse possession lawsuit against the Hansens was based on Rogers' allegation that "[they and their] predecessors in interest have had actual, open, notorious, exclusive, hostile and continuous possession...for more than ten years[.]."
   .................
5. Further, the Rogers' trustees alleged in their adverse possession lawsuit against the Hansens that "[A]t the time [Rogers and their] predecessor in interest obtained ownership, the disputed property was surrounded by physical barriers with access only from [Rogers] property, it was represented to [Rogers] and their predecessors that their property line included the disputed property, ... and at no time ... did [the Hansens] or their predecessors in interest assert any ownership interest in the disputed property[.]"
   .................
6. On September 1, 2010, the Hansens notified Fidelity that they had been sued and attached the complaint for the Rogers case. The Hansens also stated that they had retained counsel and requested Fidelity's assistance to defend against the Rogers trustees.
   ..............
7. In a letter dated September 15, 2010, the Hansens again requested that Fidelity tender a defense in the Rogers case and attached a proposed amended complaint.
   .....................
8. On October 4, 2010, after reviewing the amended complaint, Fidelity denied coverage under the title insurance policy, explaining that exceptions to the policy applied.
   ..................
9. The Hansens responded to Fidelity, arguing that the policy exceptions did not apply. On November 3, 2010, Fidelity again denied coverage and declined to tender a defense.
   ....................
10. The Hansens wrote once more to convince Fidelity that it was incorrect to deny coverage. On December 7, 2010, for the third time, Fidelity refused to tender a defense.
    ..................
11. The Hansens ultimately filed suit against Fidelity seeking reimbursement for costs and attorney's fees incurred in their property title defense in the Rogers case.

In ruling in favor of the title insurer, the court found that the insurer was not responsible for tendering a title defense based on the so-called "public records exception" (also referred to as the "parties in possession exception")(1) set forth in the insurance policy, which excepted from coverage:

• Any facts, rights, interests or claims which are not shown by the public records but which could be ascertained by an inspection of said land or by making inquiry of persons in possession.

The court found that Rogers' adverse possession claim fell within this exception in the policy, since the asserted claim could be ascertained by an inspection of said land or by making inquiry of persons in possession.(2)

For the ruling, see Hansen v. Fidelity National Title Insurance Company, No. 03:12-cv-00183-HZ (D. Or. January 31, 2013).

(1) The court explained the public records exception and the title insurer's duty to defend, as interpreted and applied in Oregon:

• The public records exception was interpreted in Cooper v. Commonwealth Land Title Ins. Co., 73 Ore. App. 539 (Or. Ct. App. 1985).
  
  In Cooper, the court dealt with the same issue—whether the public records exception precluded an insurer's duty to defend.
  
  The facts of Cooper are very similar to this case. Cooper involved a title insurance company's refusal to defend the property owner against a claim over possession of disputed land. Id. at 541. The Cooper court reversed the granting of the title insurance company's motion to dismiss because the complaint included allegations that possession was based on "claim of right and pursuant to a deed." Id. at 543.
  
  In other words, the complaint alleged possession under two different theories—"own[ing] the land by adverse possession" or holding "the land pursuant to a deed". Id. Because of the ambiguity, the court could not determine whether the allegations about the deed or the allegation of adverse possession was surplusage. Id.
  
  Considering the public records exception, the Cooper court stated that "[i]n the absence of the language about the deed, there would be no duty to defend, because that duty only arises when there is some claim shown of record." Id. (emphasis added).
  
  Thus, if the complaint had not alleged ownership of the land by deed, then the public records exception would have precluded coverage under the title policy.
  
  In this case, the amended complaint does not include an allegation of ownership by deed.
  
  Instead, the Rogers trustees described their possession of the land as "actual, open, notorious, exclusive, hostile and continuous" and that the land was "surrounded by physical barriers with access only from Plaintiffs' property". Stines Decl. Ex. C at 2-3.
  
  These allegations support a claim of ownership by adverse possession, not by deed. Plaintiffs argue that there is an ambiguity in the initial complaint, as in Cooper, and that the Rogers trustees claim could have been based on a deed.[3] Pls.' Mem. Supp. Mot. Summ. J. 10. I have already found that the amended complaint supersedes the initial complaint. Plaintiffs focus on the initial complaint is misplaced. Plaintiffs do not address the adverse possession allegations in the amended complaint.
  
  Plaintiffs further argue that Defendant failed to show that the exceptions apply. Pls.' Reply 5. Plaintiff is correct that "[t]he insurer has the burden of proof that the loss is excluded." Stanford v. American Guaranty Life Ins. Co., 571 P.2d 909, 911 (Or. 1977).
  
  But the "burden of proof" referenced in Stanford concerns whether coverage was properly denied on the merits based on evidence, not in the context of whether there was a duty to defend, which is solely based on the complaint and the policy.
  
  Plaintiffs also fault Defendant for failing to introduce evidence in support of "pleadings filed after the initial complaint". Pls.' Resp. Def.'s Cross-Mot. Summ. J. 6. As stated earlier, the inquiry is whether a duty to defend arises based on the allegations in the amended complaint, and whether the policy exceptions preclude coverage in light of the factual allegations in the amended complaint.

(2) The trick here would have been for the homeowner to get the title insurer to delete the public records exception from the insurance policy when initially buying the premises & policy.