NOURACHI v. FST AM TL INS. CO

LAWSON, J., concurring.

I concur in the majority opinion, but write to address what I view as the fundamental analytical flaw in an otherwise well-reasoned dissenting opinion. The dissent very logically and persuasively sets forth basic contract law and tort principles that, if applied to this case, would lead to a different result. This analysis, however, fails to recognize that there are some common law principles related to insurance (sometimes called "insurance law") that uniquely apply in the insurance context. This case is nothing more than a straight-forward application of one of the most basic insurance law principles — most often referred to as the "fortuity" principle or "known loss doctrine."

As explained in Appleman's latest insurance treatise:

One of the fundamental assumptions deeply embedded in insurance law is the principle that an insurer will not pay for a loss unless the loss is "fortuitous," meaning that the loss must be accidental in some sense. The public policy underlying the fortuity requirement is so strong that if the insurance policy itself does not expressly require that the loss be accidental courts will imply such a requirement. The fortuity principle is often expressed with reference to certainty: losses that are certain to occur, or which have already occurred, are not fortuitous.

Robert H. Jerry, II, Insurance Law's Fundamental Concepts and Assumptions, in New Appleman on Insurance Law Library Edition § 1.05 (2010). "[T]he fortuity and known loss doctrines are `integral to the nature of insurance and thus apply as a matter of public policy, irrespective of specific policy terms.'" HSB Group, Inc. v. SVB Underwriting, Ltd., 664 F.Supp.2d 158, 183 (D.Conn. 2009) (quoting Nat'l Union Fire Ins. Co. v. Stroh Companies, Inc., 265 F.3d 97, 107 (2d Cir. 2001)); see also General Housewares Corp. v. Nat'l Surety Corp., 741 N.E.2d 408, (Ind.App. 2000) ("the known loss doctrine is not so much an exception, limitation, or exclusion as it is a principle intrinsic to the very concept of insurance").

"Essentially, the doctrine provides that one may not obtain insurance for a loss that either has already taken place or is in progress." Pittston Co. Ultramar America Ltd, v. Allianz Ins. Co., 124 F.3d 508, 516 (3d Cir. 1997); see also Rohm Haas Co. v. Cont'l Cas. Co., 566 Pa. 464, 781 A.2d 1172, 1177 (2001) ("[W]hen an insured knows of an insurable harm incurred prior to the purchase of an insurance policy, the insured has suffered a `known loss' and the damage is no longer a mere risk and is deemed uninsurable."); 7 Lee R. Russ and Thomas F. Segalla, Couch on Insurance, § 102:8 at 20 (3d ed. 1997) ("losses which exist at the time of the insuring agreement, or which are so probable or imminent that there is insufficient `risk' being transferred between the insured and insurer, are not proper subjects of insurance").

This basic doctrine does not arise from a desire to protect an individual insurance company from something akin to fraud, as the dissent seems to suggest, but from a recognition that "the insured's risk is, in a real sense, borne by the insurer's policy-holders as a group, from whose pool of premiums all claims must be paid if the insurer is to remain in business." Fairfield Ins. Co. v. Stephens Martin Paving, LP., 246 S.W.3d 653, 673-74 (Tex. 2008). In other words, because society as a whole relies on insurance, public policy will not permit a transaction that is anathema to the very concept of insurance which, if allowed in the aggregate, could put insurance at risk for all.

In this case, the finder of fact expressly found that David Nourachi committed "fraud" by not disclosing the "known, express defect in title" created by the United States' superior ownership interest in the land. Although I agree with the dissent that the facts should not have been viewed through the lens of Florida tort law (fraud being an intentional tort), still, the trial court's finding can only be understood as a finding that Nourachi knew that he had suffered a loss compensable under the title policy before he purchased the First American policy. Because "one may not obtain insurance for a loss . . . that the insured either knows of, planned, intended, or is aware is substantially certain to occur" prior to contracting for insurance, 43 Am. Jur. 2d Insurance, § 479, the policy was properly rescinded.

The dissent is correct in its observation that, analytically, the fortuity doctrine would support a broader rule in the title insurance context than the rule applied in the majority opinion (and the cases relied upon therein). However, unlike the dissent, I see no reason to reject the more narrow rule simply because a broader rule might also be justified.

TORPY, J., dissenting.

The analysis of this case should begin and end with the insurance contract, which not only insures that title is vested in Appellant, but also provides coverage for undisclosed claims of the type at issue here. Although the policy contains an exclusion for known and undisclosed claims, it expressly excepts from that exclusion claims that may be discerned from the public record. See J.S.U.B., Inc. v. U.S. Fire Ins. Co., 906 So.2d 303, 309 (Fla. 2d DCA 2005) (exception to exclusion considered in determining scope of coverage). Specifically, the policy excludes coverage for:

Defects, liens, encumbrances, adverse claims, or other matters . . . not known to the Company, not recorded in the public records at Date of Policy, but known to the insured claimant and not disclosed in writing to the Company by the insured claimant prior to [the effective date of the policy].

The majority opinion dismisses this contract language by concluding that it only applies in the event that title insurance is procured before the property is purchased, a limitation not mentioned at all in the policy. With a stroke of the court's pen, the majority rewrites the contract to incorporate this limitation. The majority relies in part on fraud cases to support its holding, yet it conspicuously avoids any analysis of the elements of the law of fraud, the proof of which is woefully lacking here. Apparently conceding the absence of fraud, which was the basis upon which the lower court granted relief, the majority announces a customized, unlabeled legal theory that it purports to exact from two readily distinguishable decisions of foreign jurisdictions. Because established legal doctrine does not support Appellee's right to rescind the insurance contract, I dissent.

What the trial judge stated as his "critical factual finding" was that Appellant "was specifically placed on notice that the United States of America was claiming a superior interest in the real property," but failed to disclose it to Appellee. The actual ownership of the parcel was far from settled at the time Appellant purchased the insurance and even by the time of trial. The legal descriptions in the competing deeds were difficult to compare, so much so that both the property appraiser and title insurer had (apparently) incorrectly determined the ownership of the parcel. The surveyor could not figure it out without a full-blown survey costing several thousand dollars. His off-the-cuff opinion, which the trial judge did not include in his detailed findings of fact, even if properly considered by our Court, only implicated "part" of the property. Appellant had a deed to the property and had completed a quiet title action. The trial judge made no finding that Appellant's claim' of title was not colorable, nor was there evidence from which such a finding could be made. Appellant's deed had not been cancelled.

Unlike the majority, I do not think what Appellant did was unusual or unsavory. Appellant had purchased the property without the benefit of a warranty deed, which is typically the case in a tax deed sale. He filed and concluded a quiet title action — again, typical. Once he became aware of the claim of the United States, he consulted with a surveyor who could not give him a definitive answer without a full-blown survey. Instead of paying a surveyor $3,000, to investigate the claim on a piece of land that cost Appellant only $22,000, he took the prudent step of seeking a title policy at no initial cost. Cost aside, the procurement of title insurance afforded a more definitive and secure resolution of any doubt about ownership. The fact that Appellant sought a policy in excess of the purchase price was not unusual at all. The policy amount sets the ceiling on damages; it is not the measure of damages. This was vacant land. No doubt, Appellant desired to develop the property and sought to protect his future investment. Property owners not only rely upon title insurance in the acquisition of property, but also in connection with the exploitation of property already acquired, especially when the acquisition is without a warranty deed.

The trial judge permitted the rescission of the insurance contract based upon a finding that Appellant had procured the insurance through fraud. Because Appellant made no affirmative misrepresentation of fact, the lower court based its finding of fraud on the failure to disclose that which Appellant had a duty to disclose. The majority affirms the rescission without any analysis of the elements of the law of fraud. This is a critical omission because a party may not avoid the effect of a contract by claiming fraud in the inducement when the subject of the representation is expressly addressed in the contract. Mac-Gray Servs., Inc. v. DeGeorge, 913 So.2d 630, 634 (Fla. 4th DCA 2005). This is a point missed by the majority, which cites Massachusetts Bonding Insurance Co. v. Hoxie, 129 Fla. 332, 176 So. 480 (1937), for the general proposition that "literal language" may be avoided when a contract is procured by fraud. When a contract specifically addresses the very issue that is the subject of the alleged misrepresentation, this general proposition does not apply. Id. Here, this contract actually addresses the issue of nondisclosure by the insured of known claims and expressly excepts any duty of disclosure when the claims are matters in the public record. The duty of disclosure is thus negated by the contract itself, and the insurer assumes the risk of all claims of this sort, whether known or not known, or disclosed or not disclosed.

Even if the contract itself did not negate any duty of disclosure on Appellant's part, the general rule is that there is no duty to disclose facts during the formation of a contract. Maxwell v. First United Bank, 782 So.2d 931, 934 (Fla. 4th DCA 2001). Under Florida law, there are four categories of exceptions to the general rule. First, when the parties are in a fiduciary relationship. Dale v. Jennings, 90 Fla. 234, 107 So. 175 (1925). Second, where a party not under a duty to disclose undertakes to do so, but does so with half-truths. Vokes v. Arthur Murray, Inc., 212 So.2d 906 (Fla. 2d DCA 1968). Third, when a statute imposes the duty. See, e.g., § 517.061(11)(a)3., Fla. Stat. (2008) (dealing with sale of securities). Fourth, where one party has superior knowledge unavailable to the other, but then only under limited circumstances. See, e.g., Johnson v. Davis, 480 So.2d 625 (Fla. 1985) (sale of residence containing known, latent, material defects). These exceptions do not apply here.

In the specific context of title insurance, the rule is that "an insured under a policy of title insurance . . . is under no duty to disclose to the insurer a fact which is readily ascertainable by reference to the public records. Thus, even an intentional failure to disclose a matter of public record will not result in a loss of title insurance protection." L. Smirlock Realty Corp. v. Title Guarantee Co., 52 N.Y.2d 179, 437 N.Y.S.2d 57, 418 N.E.2d 650, 854 (1981); see also Lawyers Title Ins. Corp. v. D.S.C. of Newark Enters., Inc., 544 So.2d 1070, 1072 (Fla. 4th DCA 1989) (general rule is that title insurer cannot avoid liability for condition discernable from public record, even if insured knew of defect and failed to disclose it to insurer). Indeed, this policy expressly incorporates this rule. The majority opinion acknowledges this "general rule."

Although the cases upon which the majority relies all fit within one of the four exceptions to the general rule, this case does not fit within any of these exceptions. Instead of denying relief, the majority creates today a fifth exception to the general rule of nondisclosure — where an applicant for insurance becomes aware of a claim after he buys the property, but before he procures the insurance. Setting aside the fact that this policy expressly negates that duty for recorded claims, this holding is without doctrinal support in the law of contracts.

The majority fails to label the legal theory upon which it relies and offers flawed logic for the rule, which appears to apply only in the context of title insurance. It reasons that the owner relies upon the insurer's expertise only before it purchases the property, but not after, and that the general rule of nondisclosure should not apply when reliance is lacking. The fallacy in this distinction is that the insured has knowledge of the defect in both scenarios, so reliance from the stand-point of the insured is the same in both situations. Under the majority's approach, an insured who knows of a defect in title, but purchases property in the face of this knowledge, thereby intentionally damaging himself, is protected, whereas an insured who purchases property without knowledge of a defect, but who learns of the defect before procuring the insurance, is not. I fail to see how this factual distinction should make a difference in the rule of law. In both circumstances, the conduct of the insured is similarly "unsavory," using the majority's characterization of the conduct. The misdirection of the majority's rationale lies, in part, with its purported reliance on two decisions from foreign jurisdictions. When the holdings of these decisions are confined to the facts in each case, they do not support the holding here. Only by seizing on the superfluous language in these decisions does the majority find any precedential support for its rule of law. To this extent, however, these decisions do not embody the law of Florida. In any event, they are both readily distinguishable on the facts.

In Commonwealth Land Title Insurance Co. v. Ozark Global, L.C., 956 F.Supp. 989 (S.D.Ala. 1997), the contract contained an express exclusion that precluded coverage. There, the insured purchased property that was encumbered by six state tax liens. The warranty deed under which the insured took title was expressly made subject to the liens. The insured procured a title policy without disclosing the liens and the title company did not expressly delineate the liens in the exclusions. The policy did, however, exclude defects that had been "created, suffered, assumed or agreed to by the insured claimant." Id. at 993 (emphasis supplied). The court concluded that the tax liens fell within this exclusion because the insured had taken title with an express assumption of the liability. Id. Here, Appellant never expressly assumed or even acknowledged the validity of the defect. The policy here contains the same exclusion, but Appellee has made no contention that Appellant ever "assumed" the defect. Thus, Ozark Global presents a dramatically distinct scenario where the insured sought to insure against an obligation that it had expressly assumed and the contract expressly excluded from coverage.

Pioneer National Title Insurance Co. v. Lucas, 155 N.J.Super. 332, 382 A.2d 933 (N.J.Super.Ct.App.Div.), aff'd, 78 N.J. 320, 394 A.2d 360 (1978), the second case on which the majority relies, is nothing more than a garden variety fraud case. In that case, the insured had been informed by his attorney that his title was defective. The attorney told the insured that an exhaustive investigation had been conducted and the outcome certain. The insured engaged a second attorney who acted as his agent in procuring title insurance. Even though the second attorney was fully aware of the defect and that it could only be detected if the title company searched beyond the customary sixty-year period, he, in a letter, requested a sixty-year search and only agreed to pay for the sixty-year search. The attorney also directed the insurer's attention to a particular concern for the purpose of diverting its attention from the real concern. The court concluded that "[t]he record established] beyond question that [the] policy was procured by half-truths and concealment by [the insured's attorney] that justify its rescission." Id. at 937. It found that the attorney had taken "advantage of [the insurer's] credulity by leading it to believe that the usual 60-year search would suffice, when he knew that an adverse claim was being made by reason of conveyances well beyond that period in the 19th Century." Id. In drawing a distinction from the general rule, the Lucas court stated:

However, here more than awareness of a title defect is involved. The insured's attorney actually knew of an adverse claim discoverable only by a search beyond the usual 60 years; yet by deliberate silence, he induced the title company to rely on a 60 year search. Moreover, in the letter to [the insurer] confirming the request for a title search, [the insured's attorney] stated that the problem he wanted examined consisted of a disparity between the description of the property in the deed and the tax map. This reflects an attempt to lull [the insurer] into believing that the difficulty, if any, was something quite different from the real problem.

Lucas illustrates an exception to the general rule — that a party who undertakes to disclose information, even when not under a duty to do so, must disclose all material information. The very use of this exception presupposes that there exists no duty to disclose unless and until there is a partial disclosure. Here, by contrast, Appellant made no attempt to lull Appellee into a negligent search.

Neither do the Florida cases cited by the majority support its conclusion. Hoxie, 129 Fla. 332, 176 So. 480, is clearly distinguishable. It involved the exception to the general rule that applies when a party has superior knowledge not available to the other party. There, the insured was seeking retroactive renewal of an indemnity policy, but did not disclose that someone had fallen on the property during the lapse in coverage. Here, by contrast, it was Appellee, the insurer, that had superior access to the information. It was specially trained to find the information, and legally obligated to find it. Hoxie also involved indemnity insurance, an entirely different creature than title insurance. This is a distinction overlooked by my concurring colleague whose reliance on the "fortuity" doctrine is misplaced. Indemnity insurance protects against the risk of a subsequent occurrence. The premium is based on an actuarial prediction. Title insurance, by contrast, is issued based upon past events and represents the "informed opinion of title examining experts employed by the company that title is in the condition expressed in the policy." D.S.C. of Newark Enters., 544 So.2d at 1072. Title insurers routinely issue policies in the face of ambiguous documents and known claims. They are in the peculiar position to assess their risk with reasonable certainty and disclaim that which they are unwilling to assume. Here, Appellee expressly assumed the risk of claims that were discernable from the public record, even those known by Appellant. Again, New York's highest court makes this very point:

[T]itle insurance is procured in order to protect against the risk that the property purchased may have some defect in title. The emphasis in securing these policies is on the expertise of the title company to search the public records and discover possible defects in title. Thus, unlike other types of insurance, the insured under a title policy provides little, if any, information to the title company other than the lot and block of the premises and the name of the prospective grantor. Armed with this information, the title company then can search the various indices and maps to ascertain the state of title to the property. Indeed, it is because title insurance companies combine their search and disclosure expertise with insurance protection that an implied duty arises out of the title insurance agreement that the insurer has conducted a reasonably diligent search.

National Life Insurance Co. v. Harriott, 268 So.2d 397, 400 (Fla. 2d DCA 1972), also involved the nondisclosure of a fact known only by the insured (in the procurement of a credit life insurance policy) and unavailable to the company. Central to the court's decision was the nature of the credit life insurance itself, which is issued without an application, health examination or investigation. Thus, as with the other cases the majority relies on, Harriott is similarly distinguishable.

Even if a duty to disclose exists, the second part of the trial court's conclusion — that Appellant fraudulently concealed his knowledge — is an erroneous application of the law of fraud. Again, the majority opinion is devoid of any analysis of the elements of fraud. A central premise in the analysis of a fraud claim based upon nondisclosure is that the party advancing the claim must prove the claim as if the culpable party had "represented the nonexistence of the matter he failed to disclose." Restatement (Second) of Torts § 551; see Humana, Inc. v. Castillo, 728 So.2d 261, 265 (Fla. 2d DCA 1999) (reliance is element of fraud based on nondisclosure). In other words, the proof of fraud based upon nondisclosure requires proof of all the elements of common law fraud, except that the nondisclosure may serve as a substitute for the "affirmative misrepresentation" element. Otherwise, proof of fraud of the nondisclosure variety would be easier than if the culpable party had affirmatively misled the aggrieved party by denying the existence of the non-disclosed fact, a considerably more reprehensible variety of fraud. Thus, whether based upon an affirmative misrepresentation or a nondisclosure, the proponent of a fraud claim must establish materiality, the intent to induce reliance and justifiable reliance. Proof of any of these elements is woefully lacking here, something the majority totally overlooks.

First, the nondisclosure was not material. The immateriality of the nondisclosed facts is conclusively proven here by the policy, itself. The policy expressly addresses claims that are unknown by Appellee and known by Appellant, but only excludes from coverage those claims that are not discernible from the public record. By excepting from the exclusion those claims that are recorded in the public records, Appellee affirmatively eliminated any duty to disclose these facts because it expressly undertook the responsibility to find them and expressly accepted liability in the event that it did not find them. Even without this policy language, a reasonable title insurance company would attach no significance to an insured's representation of ownership or that his title to the property is free from claims of record. Title insurance companies are in the business of discerning ownership by resort to their own research and peculiar expertise. "Examination of record title or an abstract of the record title of real property is both an esoteric and a painstaking process[,]" which requires "considerable expertise." D.S.C. of Newark Enters., 544 So.2d at 1072.

Second, there was no intent to induce reliance by the nondisclosure. Again, the policy itself expressly addresses itself to claims that are unknown by Appellee and known by Appellant, but only excludes from coverage those claims that are not discernible from the public record. There can be no intent to induce reliance by failure to disclose that which is expressly addressed by the contract. Even absent this policy language, Appellant had every reason to expect that Appellee, the title insurer, would get to the bottom of who had title to this property using its own expertise. As New York's highest court explained:

[B]ecause record information of a title defect is available to the title insurer and because the title insurer is presumed to have made itself aware of such information, we hold that an insured under a policy of title insurance such as is involved herein is under no duty to disclose to the insurer a fact which is readily ascertainable by reference to the public records.

Finally, Appellee cannot establish justifiable reliance under an objective standard. In Mil Schottenstein Homes, Inc. v. Azam, 813 So.2d 91 (Fla. 2002), our high court considered whether the purchaser of property can justifiably rely on misrepresentations that are refuted by recorded documents in the chain of title. It concluded that it could not:

[W]here recorded information which is clearly contained in the chain of title of the parcel purchased is asserted as the basis for an action for misrepresentation by the purchaser, a distinct and very different matter than the situation discussed herein exists. Knowledge of clearly revealed information from recorded documents contained in the records constituting a parcel's chain of title is properly imputed to a purchasing party, based upon the fact that an examination of these documents prior to a transfer of the real property is entirely expected. For this reason, it may often be the case that where fraud regarding information contained in and clearly revealed through a parcel's chain of title is alleged, reliance is not justified and a cause of action will not exist. It is also plain that there may be situations in which a party's allegations of fraudulent misrepresentation fail to state a cause of action. Where the pleadings of the parties make it evident that reliance on the part of a purchaser was not justified as a matter of law, a trial court may certainly be correct in ruling as a matter of law that no cause of action exists.

The majority justifies its holding using the policy argument that the creation of this duty is necessary to avoid "unsavory" conduct in the future. Whether Appellant's conduct was unsavory begs the question. To create a duty to avoid unsavory conduct that is not unsavory but for the duty is the product of dyslexic logic. If there was no duty to speak, then there was nothing wrong with what Appellant did here. Certainly, his conduct defies no natural law. Indeed, before today, in an arm's-length transaction, there was no duty to disclose matters about which the other party has equal, if not superior, access. This is like the client who shops from lawyer to lawyer until he finds one who gives him the opinion that his proposed course of conduct comports with the law. As long as he does not misrepresent the facts, the client has no duty to tell the negligent lawyer that prior opinions have differed from his. The fact that the client had been given correct opinions by prior lawyers does not excuse the last lawyer from his duty to use due care.

In my view, established public policy, embodied in Florida jurisprudence, actually supports a contrary conclusion. Public policy favors freedom of contract, especially when the party seeking to avoid the contract is sophisticated and fully capable of protecting itself. See Nicholson, 539 So.2d at 1142 (rejecting, as matter of law, sophisticated businessman's attempt to avoid contract based on fraud). Here, it was Appellee that drafted the contract. All it had to do to avoid this dilemma was to exclude coverage for all defects known by the insured but not disclosed, whether or not the subject of public record. Instead it only excluded that which it could not be expected to find. I see no justification for excusing the performance of the bargained-for contract. There is also the policy that imposes upon title insurers the obligation to make a diligent search of the public record. Had Appellee fulfilled its obligation, it would have discovered the claim. Again, I see no reason why we should shift this duty to Appellant just because he had been given a different opinion that he did not disclose.

I am also concerned that the rule of law announced today is vague and capable of unforeseen havoc. If the holding is as expressed, under what circumstances does knowledge of a claim trigger the duty to disclose that which is discernable from a diligent search of the public record? Does it depend on the quality of the claim? Does it depend upon the identity of the claimant? Does the duty come into play only when a governmental entity, such as the property appraiser, confirms the validity of the claim? Does this case really stand for the proposition that an insured has a duty to disclose any known claims? Does the duty apply only to claims about which the insured has actual knowledge or does it also extend to those about which the insured should have knowledge? Does the insured have some duty to make inquiry? Is the lack of reliance the fact that the insured knew of the unresolved claim or the fact that he did not purchase the property in reliance on the policy? What if the insured relies upon the policy to develop the property, rather than acquire it?

Rather than formulate potentially bad law to address the peculiar facts of this one case, I would leave the law alone and let the chips fall where they may here. Appellant still must prove damages measured by the value of the property. I am certain that this title insurer and others can take measures to avoid similar dilemmas in the future.

I would reverse.