The owners of property sued their title insurer for coverage of a longstanding dispute with the owner of adjacent land, who had once sought to purchase their tract of land instead of them. The insurer had argued that the disputes were excluded from coverage.
The case is Stephen Dudek and Doreen Cross v. Commonwealth Land Title Insurance Co. (U.S. District Court for the District of South Carolina, No. 2:19-cv-3237).
The dispute originally arose from a legal battle over a 6-acre tract of land in Dorchester County, S.C. The property originally was part of an 8-acre tract until the original sellers subdivided the land into two parcels, the property and an adjacent 2-acre tract.
Stephen Dudek and Doreen Cross entered into a purchase contract with the sellers in 2012. Shortly after the contract was signed, Molly Morphew entered into a backup contract with the sellers, placing Morphew under contract for the property if the plaintiffs’ purchase contract fell through before the plaintiffs’ closing date.
At some point before the closing, a dispute arose between the sellers, the plaintiffs and Morphew over who could purchase the property. In 2013, the plaintiffs and Morphew each sued the sellers for specific performance of their respective contracts in state court. The suits were consolidated and the plaintiffs ultimately prevailed in the 2013 action.
In 2016, Morphew appealed the decision and, while her appeal was pending, filed a separate lawsuit in state court related to the sale of the property. On Jan. 11, 2017, the South Carolina Court of Appeals affirmed the lower court’s decision in favor of the plaintiffs. On Jan. 31, 2017, Morphew’s other suit was dismissed. An appeal in that suit remains pending.
Finally, on June 5, 2017, Dudek and Cross closed on the purchase contract. At closing, they purchased title insurance from Commonwealth Land Title Insurance Co. On June 12, 2017, Morphew filed another suit against the plaintiffs in state court, requesting that the court place the property in a constructive trust based on the plaintiffs’ alleged abuse of process and fraud during the 2013 and 2016 actions. The complaint was dismissed Feb. 20, 2018.
On Sept. 19, 2018, Morphew filed another suit against the plaintiffs in state court, seeking to enforce a provision of the purchase contract that purports to grant a water and sewer easement to the adjacent 2-acre property, which then was owned by Morphew, and seeking damages for various torts she alleged against the plaintiffs. The plaintiffs moved to dismiss Morphew’s complaint, which remains pending.
On April 25, 2019, the plaintiffs tendered notice of the 2018 action to Commonwealth, demanding that Commonwealth provide them with a defense. They updated their demand April 29, 2019, requesting that Commonwealth assume the defense of the 2017 action as well, in the event that the 2017 action proceeds beyond the pending appeal. On April 30, 2019, Commonwealth denied their claims and refused to provide a defense to the 2018 action, relying on two exclusions contained in the policy.
On Oct. 8, 2019, Dudek and Cross filed suit against Commonwealth. On March 25, 2020, the plaintiffs filed a motion for partial summary judgment on the issue of Commonwealth’s duty to defend. On April 15, 2020, Commonwealth responded to the motion and filed its own motion for summary judgment.
U.S. District Judge David Norton granted Commonwealth’s motion for summary judgment and denied Dudek and Cross’ motion for summary judgment.
Norton first addressed Dudek and Cross’ argument that Commonwealth had a duty to provide them with a defense to the 2017 action. He noted that Exception 10 in the policy explicitly excludes from coverage matters that arise from the 2013 action and/or the 2016 action.
“A plain of reading Morphew’s complaint in the 2017 action makes clear that the lawsuit arises from the 2013 action, the very risk policy Exception 10 contemplates and excludes from coverage,” Norton stated. “To recap, the 2013 action was the initial litigation over the property between Morphew, plaintiffs, and the sellers, which resulted in an award of specific performance in favor of plaintiffs. Morphew’s complaint in the 2017 action includes three causes of action, each of which directly attacks the process or outcome of the 2013 action. Morphew’s first cause of action, labeled ‘right to possession,’ alleges the same facts that served as the basis for her original claim to the property in the 2013 action and asserts that plaintiffs obtained the property ‘unlawfully’ in the 2013 action. Morphew’s remaining two causes of action for ‘abuse of process’ and ‘fraud’ allege that plaintiffs committed various unlawful and fraudulent acts throughout the life of the 2013 action, including presenting false testimony, blackmailing the sellers, and ‘fool[ing]’ the Master-In-Equity with fraudulent misrepresentations.
“In short, each allegation in Morphew’s 2017 complaint directly challenges the result of the 2013 action, the legitimacy of the 2013 action, or both,” Norton continued. “Commonwealth did not need to look beyond the allegations of that complaint to determine that the 2017 action arises from the 2013 action and thus falls within policy Exception 10. Neither Morphew’s complaint in the 2017 action nor policy Exception 10 is ambiguous, and the conclusion that the 2017 action falls within policy Exception 10 is not arguable. Therefore, coverage under the policy does not extend to the 2017 action as a matter of law, and Commonwealth has no duty to defend plaintiffs with respect to the same.”
Norton then noted that Morphew’s tort claims in the 2018 action do not receive coverage under the policy because they do not assert an ownership interest in the property. Morphew’s remaining claims do assert an ownership interest in the property because they assert ownership of a water and sewer easement on the property. Although Commonwealth conceded that the insuring language of the policy extend coverage to the allegations of ownership of the water and sewer easement, it argued that the claims are excluded from coverage by the fourth exclusion to the policy and the fourth exception to the policy.
In regard to the fourth exclusion, Norton noted that the policy extends coverage for losses that arise from covered risks, including the risk that someone has an easement on the land, but also contains two exceptions with the respect to easements, the fourth and fifth exclusion.
“The court can think of no policy provisions better suited for application of the illusory coverage doctrine,” Norton stated. “The policy extends coverage for adverse easement claims and simultaneously, by way of two exclusions, completely eliminates the very coverage it purports to extend. An insurance policy that insures coin flips but excludes coverage in the event that the coin lands on heads and in the event the coin lands on tails provides no insurance coverage at all. Thus, the policy’s coverage with respect to adverse easement claims is illusory, and the court will not enforce its unambiguous language because ‘its application would lead to unreasonable results.’ ”
Alternatively, Commonwealth argued that even if the allegations of the 2018 action do not fall within policy Exception 4, they fall squarely within policy Exclusion 4 and therefore do not receive coverage.
“Morphew’s complaint in the 2018 action makes clear that her claim to the water and sewer easement derives solely from the Water and Sewer Easement Provision in the purchase contract,” Norton stated. “The very first allegation under Morphew’s first cause of action for ‘Trespass Upon Easement’ states that plaintiffs ‘specifically agreed to grant water and sewer easement to the adjacent 2-acre property ... at purchase of [the property].’ That allegation includes a citation to the addendum to the purchase contract, which Morphew attached to her complaint. As another example, Morphew’s breach of contract claim, which alleges that plaintiffs breached the purchase contract by not adhering to the Water and Sewer Easement Provision, alleges that plaintiffs ‘have failed or intentionally failed to provide [a] water easement to the adjacent 2-acre property [ ] as specifically conditioned within their sales contract....’ In short, the 2018 action is, in essence, an action to enforce the Water and Sewer Easement Provision of the purchase contract, and each allegation of Morphew’s complaint that claims ownership of a water and sewer easement on the property derives that claim solely from the Water and Sewer Easement Provision in the purchase contract.
“By consenting to the addendum, which included the Water and Sewer Easement Provision, plaintiffs created the risk that an owner of the adjacent 2-acre tract would seek to enforce his or her right to a water and sewer easement on the property,” Norton continued. “It does not require much analytical strain for the court to conclude that when a person agrees in a contract to grant an interest to a third party, that person creates or agrees to the risk that the third party might later lay claim to that interest. At the very least, a person who agrees in a contract to grant a certain right knows of the risk that someone might later seek to enforce that right. Therefore, based on the Water and Sewer Provision of the purchase contract, plaintiffs created, agreed to, or, at the very least, knew of the risk that an owner of the adjacent 2-acre tract might seek to enforce a water and sewer easement on the property. Indeed, that was the very risk realized by the plaintiffs in the 2018 action. As such, Morphew’s claims in the 2018 action arise directly from a risk that plaintiffs created, agreed to, or at least knew about at the policy’s inception date.”
The plaintiffs argued that whatever risk they created through the water and sewer easement provision has been eliminated by the merger doctrine, and that the water and sewer easement provision was merged out existence when the deed was issued, nullifying any risk to the plaintiffs’ title that existed prior to the delivery of the deed. The court disagreed, finding that the merger doctrine does not eliminate the risk to the plaintiffs’ title to the property.
“The merger doctrine is a complex legal doctrine that has received disparate treatment from courts throughout South Carolina. South Carolina recognizes at least three broad exceptions to the doctrine, and Morphew is free to argue each exception in the 2018 action to enforce the Water and Sewer Easement Provision,” Norton stated. “Therefore, the court cannot say that the merger doctrine renders the Water and Sewer Easement Provision in the purchase contract unenforceable. As such, the court finds that the merger doctrine does not eliminate the risk to plaintiffs’ title that they created through the Water and Sewer Easement Provision and does nothing to remove the 2018 action from parameters of policy Exclusion 4. Thus, the 2018 action does not receive coverage under the policy, and Commonwealth thus has no duty to defend plaintiffs in the 2018 action.”