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Federal District Court Denies Title Insurer's Summary Judgment Motion

This is the most recent decision in a long-festering morass of state and federal litigation respecting a condominium development in Newport, Rhode Island known as "Goat Island South" ("GIS"). The title insurer for the development moved for summary judgment on a $10 million claim brought by the developer arguing that the developer had failed to submit to an examination under oath ("EUO"); had prejudiced the insurer by submitting a late notice; the policy did not cover certain parts of the development known as the North Unit; and claims related to amendments to the condominium documents after the policy issued were not covered. The federal district court denied the motion finding there were material issues of disputed fact with respect to all the insurer's arguments.

It would be difficult, if not impossible, to summarize adequately for a blog the full scope of all the litigation arising from this project which began in 1988. The subject title policy issued in 1994. The first lawsuit was filed in 1999. The litigation has already gone to the Rhode Island Supreme Court twice, American Condominium Association, Inc. v. IDC, 844 A.2d 117 (R.I. 2004) and America Condominium Assocation, Inc., 879 A.2d 434 (R.I. 2005), and the First Circuit twice, Commonwealth Land Title Insurance Co. v IDC Props., Inc., 547 F.3d 15, 20 (1st Cir. 2008) and In re IDC Clambakes, Inc., No. 12-1710, 2013 WL 4081901 (1st Cir. Aug. 14, 2013). A different title insurer for the project filed a declaratory judgment action in 2001 and obtained a judgment that its policy was void because the developer had failed to disclose the title dispute with the insurer in this matter. Commonwealth Land Title Ins. Co. v IDC Props., Inc. 524 F.Supp.2d 155 (D.R.I. 2007). The First Circuit affirmed. 547 F.2d 15. In August 2013, the First Circuit reluctantly remanded a different case related to this project for further proceedings in the bankruptcy court. In re IDC Clambakes, Inc., supra. This particular case, which was filed in state court in 2009, seems likely to go up on appeal, as well. Perhaps the project should be renamed "Bleak Condos."

With respect to this decision, these seem to be the most salient facts. It is undisputed that while the title policy specifically refers to four parcels of land, it does not specifically refer to the North Unit (also called "the Reserved Area"). Schedule A of the policy says generally that it covers "All right title, and interest in...special declarant rights in and to [GIS]-A WATERFRONT CONDOMINIUM, as created by the Declaration of Condominium dated as of January 12, 1988...." The Declaration refers to four parcels, including the North Unit. In 1994, one individual unit condominium owner told the developer's principal that the individual unit owners should be able to vote on the Third Amendment to the Declaration (a position subsequently upheld by the R.I. Supreme Court).

The policy includes exclusions for claims created by the insured, claims known to the insured but not disclosed in writing to the insurer, and claims created by amendments to the condominium documents created after the policy issued.

The first R.I. Supreme Court opinion found that the Third Amendment to the Declaration was void ab initio due to the voting procedure used, the insured's development rights in the North Unit expired when the insured failed to exercise them before December 31, 1994, and the Declaration itself violated the R.I. Condominium Act particular consent requirements.

Following the two adverse decisions by the Rhode Island Supreme Court respecting its development rights, the developer sent a letter to Chicago Title for loss or damage under the policy that Chicago Title had issued. The developer said the claim arose as a result of those decisions. Chicago Title gave notice that it wanted to conduct an EUO of the insured. That EUO began in 2006 and stopped after 5 hours. Despite repeated communications between the parties over the next two years, it was not resumed. In 2009, Chicago Title denied coverage and the insured filed suit.

The district court said that under Rhode Island law the provisions of an insurance policy are interpreted pursuant to the laws of contract. Courts look at the "four corners" of the policy, view it in its entirety and give its terms their "plain, ordinary and usual" meaning. Any ambiguity in the policy is interpreted against the insurer. Any exclusion in the policy is strictly construed against the insurer.

Under R.I. law, insurance clauses requiring prompt notice are enforced to facilitate the timely investigation of claims. However, to block a claim, the insurer must show it was prejudiced by the insured's delay in providing notice. To determine whether an insurer has been prejudiced, courts look to the length of the delay, the reasons for the delay and the probable prejudicial effect of the delay on the insurer. The mere passage of time does not establish prejudice. The issue of whether the insured has cooperated with the insurer as required by the policy is usually an issue of fact. The insurer must show that any failure to cooperate is "substantial" and "material."

The court rejected the insurer's argument that coverage was limited to the five parcels specifically mentioned in the policy. Instead, it said coverage extended to the developer's rights set forth in the Master Declaration and Third Amendment pursuant to the general language in Schedule A. Since the Master Declaration referred to the North Unit, it came within the scope of the policy. The court said even if there was an ambiguity in the policy, it would be construed against Chicago Title.

The court rejected Chicago Title's argument that the insured had caused the claim by failing to declare its development rights in the North Unit in a timely fashion. Instead, the court said insured's loss of development rights was caused in part by the R.I. Supreme Court's decision invalidating the Declaration's voting scheme.

The court rejected Chicago Title's argument that coverage was excluded because the insured had failed to disclose that the one unit owner had expressed his disagreement with the Declaration's voting scheme and this constituted a material misrepresentation or omission. The court said that the Declaration's voting scheme was a matter of public record when the policy was issued as was the R.I. Condominium Act so the insurer could have independently determined that scheme violated the Act. The court said it could not conclude as a matter of law that the failure to disclose this disagreement was a "material" omission that would have affected the insurer's willingness to issue the policy.

Similarly, the court rejected Chicago Title's argument that the claim was created following the issuance of the policy because the insured attempted to extend its development rights through amendments to the Declaration after the policy issued. The Rhode Island Supreme Court found those amendments void in its second decision because of an illegal voting scheme. The court said that because the voting scheme originated it could not conclude as a matter of law that the sole cause of the insured's loss was the post-policy amendments.

The court also rejected Chicago Title's argument that the insured did not comply with the policy's notice requirements and that this failure caused "irreparable prejudice." Chicago Title pointed out that notice was provided in 2005, which was six years after the litigation ensued, four years after the insured lost a summary judgment motion in Superior Court, fifteen months after the first R.I. Supreme Court decision and three months after the second Supreme Court decision.

The insured offered no explanation for its delay. Instead it argued that the insurer had timely notice. In 1997, its counsel informed the insured's counsel that it would not insure the condo units in the North Unit. The insured argued that Chicago Title was aware of the ongoing litigation, had an opportunity to intervene but failed to do so. The court said Chicago Title has not shown what it would have done differently had it gotten earlier notice. It held that there were many disputed facts concerning when the insurer received notice and what difference it would have made had the insurer received earlier notice.

This decision seems to set as forth a strong statement of the law in support of the insured in a coverage dispute. In particular, the court's decision that the insured's harm was not caused by its actions or inactions but, rather, by a court's application of the law is unusual. In addition, the decision also seems to impose an unusual burden on the insurer to involve itself proactively in the insured's litigation in the absence of an affirmative claim under the policy. As such, it is likely to go up on appeal, either on an interlocutory basis, or after what promises to be a lengthy, wide-ranging trial.

IDC Properties, Inc. v. Chicago Title Insurance Co., C.A. No. 09-632-M, 2013 WL 5434597 (D.R.I. Sept. 30, 2013)

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