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Court of Appeal, Sixth District, California.

Lowell F. ANDERSON, Plaintiff and Respondent, v. FIDELITY NATIONAL TITLE INSURANCE COMPANY OF CALIFORNIA, Defendant and Appellant.

No. H009405.

Decided: March 19, 1993

Kelly D. Feese, Irvine, for defendant and appellant. Edward D. Nino, San Jose, for plaintiff and respondent.

Defendant title insurance company appeals from a judgment in favor of an insured resulting from the omission of a recorded easement on a title report.   We affirm.


In February 1988, plaintiff Lowell Anderson entered an agreement to purchase a piece of real property in Santa Cruz.   Redding Title Company prepared a preliminary report setting forth the condition of title.   Defendant Fidelity National Title Insurance Company of California (Fidelity) issued a binder, insuring the title upon the close of escrow in January 1989.

There was a structure on the real property, variously described by the parties in their appellate briefs as follows.   Anderson:  “an old shack ․, the doors and windows of which were boarded up with plywood.”   Fidelity:  “a small, older residential home․”

The purchase agreement stated:  “Buyer understands that he is buying a lot and that the structures on the property have no value and they're in poor condition and in need of many repairs.   Seller makes no warranties.”

The property was zoned to permit two dwellings totalling 3,000 square feet.   Before the close of escrow, Anderson engaged an architect to design a duplex for the lot.

A week after the close of escrow, through his surveyor, Anderson learned of a recorded sewer easement in favor of the City of Santa Cruz.   This easement was not listed on the title report and policy issued by Fidelity.   Anderson tendered a claim to Fidelity for the decrease in value of the property as a result of the easement.

Anderson and Fidelity both engaged experts to evaluate the loss.   With the experts employing different methods of valuation and the parties unable to resolve the dispute, Anderson filed this action in January 1991 against Fidelity for breach of contract and negligence.

The matter was tried to the court.

Anderson's expert testified that the highest and best use of the property was the construction of a duplex.   Without the sewer easement, the property could accommodate a duplex of 2,390 square feet.   With the easement, the duplex would be restricted to 1,950 square feet.   The loss in value to the property was $13,500.

Fidelity's expert did not evaluate the property based on highest and best use but, rather, based on its present state, including the current structure.   Relying upon recent sales of comparable properties, he figured the diminution in value to be $2,500.

The trial court found Anderson's expert's “appraisal is the most persuasive in this case” and awarded Anderson $13,500.

Fidelity appeals from the judgment.


 The parties agree that disposition of this case depends upon interpretation of Overholtzer v. Northern Counties Ins. Co. (1953) 116 Cal.App.2d 113, 253 P.2d 116.

The Overholtzers' predecessor in interest granted neighbor Musso an easement to construct and maintain a water pipe on his real property.   The Overholtzers were aware of the pipe when they purchased the property, but the title company did not report that the pipe represented a recorded easement constituting a cloud on the title.   Unknown to the title company, the Overholtzers intended to convert the land from agricultural to industrial use.   Relying upon the title report, the Overholtzers spent more than $50,000 to construct a lumber mill.   After the mill was operating, the Overholtzers and the Mussos got into a property dispute that ended in litigation over the water pipe.   The Overholtzers lost and then sued the title company.

After concluding that the Overholtzers were entitled to damages for the decrease in market value of the property, the court framed the issue:  “is it the diminution in the market value of the property caused by the defect and measured at the time of purchase, market value being measured by the use to which the property is then devoted, or is it the diminution in value as of the time of the discovery of the defect measured by the use to which the property is then being used?”  (Overholtzer v. Northern Counties Ins. Co., supra, 116 Cal.App.2d at p. 130, 253 P.2d 116.)

The court answered:  “It seems quite apparent to us that liability should be measured by diminution in the value of the property caused by the defect in title as of the date of the discovery of the defect, measured by the use to which the property is then being devoted.   When a purchaser buys property and buys title insurance, he is buying protection against defects in title to the property.   He is trying to protect himself then and for the future against loss if the title is defective.   The policy necessarily looks to the future.   It speaks of the future.   The present policy is against loss the insured ‘shall sustain’ by reason of a defect in title.   The insured, when he purchases the policy, does not then know that the title is defective.   But later, after he has improved the property, he discovers the defect.   Obviously, up to the face amount of the policy, he should be reimbursed for the loss he suffered in reliance on the policy, and that includes the diminution in value of the property as it then exists, in this case with improvements.   Any other rule would not give the insured the protection for which he bargained and for which he paid.”  (Overholtzer v. Northern Counties Ins. Co., supra, 116 Cal.App.2d at p. 130, 253 P.2d 116.)

In sum, the Overholtzers could recover for the diminution in value of the property measured at the time they discovered the defect in title rather than at the time of purchase.   Therefore, damages would be assessed based on the Overholtzers' industrial use rather the prior agricultural use of the property.

From this ruling, Fidelity argues that Anderson should also recover damages based on the use of the property at the time he discovered the defect in title.   Therefore, according to Fidelity, damages should be measured based on the property with the original structure rather than on the property improved with a duplex.

We believe that Fidelity's approach violates the spirit, if not the letter, of Overholtzer.

We do not read Overholtzer to establish a rigid rule that damages must be assessed in every case based on the diminution in value of the property as it exists when the defect is discovered.   In Nebo, Inc. v. Transamerica Title Ins. Co. (1971) 21 Cal.App.3d 222, 98 Cal.Rptr. 237, for example, the insured recovered from the title company rent lost on four houses during almost three and one-half years the company spent clearing the title.

 Finding Overholtzer and Nebo “harmonious,” the court in Native Sun Investment Group v. Ticor Title Ins. Co. (1987) 189 Cal.App.3d 1265, 1274, 235 Cal.Rptr. 34, observed:  “Taken together, those cases allow an insured to recover damages caused by a defect in title covered by the policy.  [Citation.]   By measuring the value of real estate without a given defect and subtracting the value of the land with the defect, a diminution in value measure of damages, such as the one used in Overholtzer, isolates the damages caused by the defect.   However, as the Nebo opinion demonstrates, diminution in value is not the only means of drawing a causal connection between proven damages and a title defect.”

Rather, the essence of Overholtzer is that the insured's expectations are paramount.   The court observed:  “Title insurance policies should be interpreted in the same fashion as are other insurance policies, that is, liberally in favor of the insured, and against the insurer.   Title insurance is practically an unregulated business.   No state control is exercised over the terms of the policies or over rates.   The companies frame the policies.   When the very contingency happens that was insured against, only clear and compelling reasons should permit a court to deny to the insured full reimbursement for all losses, up to the face amount of the policy, sustained because of the happening of such contingency.  [Citations.]”  (116 Cal.App.2d at p. 122, 253 P.2d 116.)

In this case, we see no reason why Anderson's recovery should depend upon the fact that, unlike the Overholtzers, he had not already constructed improvements at the time the defect in title was discovered.   Anderson relied upon representations by Fidelity in planning improvements on the property and in closing the sale.   More importantly, he relied upon Fidelity's representations in tendering the purchase price to the seller.   Anderson's inability to develop the property in the manner expected due to a recorded easement missed by Fidelity may be just as injurious as a property owner's discovery of an easement after development.   Indeed, in some ways, we think Anderson's case is stronger than the Overholtzers'.

The Overholtzers were aware of Musso's water pipe when they purchased the property because the pipe was partially above-ground.   Here, Anderson had no knowledge of the sewer easement.   Moreover, when the policy was issued in Overholtzer, the title company did not know that the buyers intended to convert the property from agricultural to industrial use.   Here, the purchase agreement recited that the structure on the property had no value.   At a minimum, Fidelity was on constructive notice that the buyer likely planned improvements on the property.   Thus, in this case, the buyer had less information and, at the same time, the title insurance company had more information than did the parties in Overholtzer.

We conclude that the trial court did not err in finding the appraisal of Anderson's expert to be more persuasive and in awarding damages accordingly.


The judgment is affirmed.

COTTLE, Presiding Justice.