Arizona Court Holds Insured’s Inability to Subdivide Property Did Not Render It Unmarketable Under Title Policy

The Arizona Court of Appeals recently affirmed a lower court’s decision granting summary judgment to a title insurance company, among others, holding that an insured did not have coverage under a title insurance policy for losses arising after the insured discovered a covenant that prohibited it from selling the property as individual units.  See VACC LLC v. Chicago Title Ins. Co., et al., 2021 WL 710793 (Ariz. Ct. App. Feb. 23, 2021). In December 2013, Plaintiff purchased a parcel of land (the “Property”) with the intent of developing single-family residences for sale. Chicago Title Agency (“CTA”), the escrow agent under the purchase agreement, obtained a title insurance policy (the “Policy”) for Plaintiff from Chicago Title Insurance Company (“Chicago Title”). Plaintiff’s predecessor in interest recorded covenants, conditions, and restrictions (“CC&Rs”) stating that the “declarant intends to lease portions of the Lots to be used as the sites for residential dwellings.” The Property also was subject to a plat (the “Plat”) that incorporated the lease restriction. The following year, a potential purchaser’s title agency discovered that the Property was platted as one large lot, rather than individual lots. Plaintiff filed a claim under the Policy, asserting that the Property was unmarketable and seeking to recover the costs associated with amending the Plat. Chicago Title investigated the claim and subsequently denied coverage. Plaintiff then brought an action against CTA and Chicago Title seeking compensatory and punitive damages for: (1) breach of contract; (2) breach of the duty of good faith and fair dealing; (3) breach of fiduciary duty; and (4) bad faith. The trial court granted summary judgment in favor of CTA on all counts, and granted summary judgment in favor of Chicago Title with regard to Plaintiff’s claims for bad faith and breach.  It denied summary judgment on the breach of contract claim based on the “reasonable expectations” of the parties. Thereafter, Chicago Title moved for reconsideration on the contract claim, asserting that an analysis of the parties' “reasonable expectations” is only relevant in the context of a non-negotiated contract. In granting the motion, the trial court agreed with Chicago Title’s position, and further determined that the lease restriction in the Plat did not make the Property unmarketable. 

On appeal, the Court affirmed. First, the Court held that the trial court properly granted summary judgment in favor of CTA because “there was no question that [Plaintiff] was aware that [Chicago Title] was the title insurer and the party which [Plaintiff] entered the contract.” Moreover, the Policy is a contract for title insurance, and because Plaintiff’s claims were premised on the rights and obligations created by the Policy, Plaintiff was required to show that CTA was a party to that contract, which it was not. Second, the Court held the trial court properly granted summary judgment in favor of Chicago Title. In doing so, the Court rejected Plaintiff’s claim that title to the Property was unmarketable because the lease restriction in the Plat did not allow for the sale of individual lots, and that the Policy covered costs incurred because of such unmarketability. In contrast, the Court found that “the Policy did not provide insurance for a specific use and instead insured title subject to the conditions in the Plat.” The Court further found that the insured “has not asserted that anyone else claimed an ownership interest in the Property, or that anything prevented [the insured] from conveying the same interest it acquired when it purchased the Property.”  Moreover, the Policy “expressly excluded ‘loss or damage, and . . . costs, attorneys’ fees or expense that arise’ because of ‘easements, covenants, conditions, and restriction as set forth on the plat.’” On appeal, Plaintiff also argued, among other things, that under the “reasonable expectations” doctrine, the parties’ intent controls, and here, the parties intended that the Policy would cover Plaintiff’s ability to sell the Property in individual units. In rejecting this argument, the Court noted that because the Policy was a negotiated agreement, the reasonable expectations did not apply. Lastly, the Court held that the trial court properly granted summary judgment in favor of Chicago Title with regard to Plaintiff’s claims for bad faith, breach of fiduciary duty, and breach of good faith and fair dealing. The Court found that Chicago Title denied coverage after a reasonable investigation and had a reasonable basis for doing so. Thus, summary judgment in favor of Chicago Title was proper.

For a copy of the decision, please contact Michael O’Donnell at, Michael Crowley at, Desiree McDonald at, or Andrew Raimondi at