THE STATE OF SOUTH CAROLINA In The Court of Appeals

Jericho State Capital Corp. of Florida, Plaintiff,

v.

Chicago Title Insurance Company, Defendant,

AND

Lynx Jericho Partners, LLC, Plaintiff,

v.

Chicago Title Insurance Company, Defendant,

Of which Jericho State Capita l Corp. of Florida and Lynx Jericho Partners, LLC are the Appellants,

and Chicago Title Insurance Company is the Respondent.

Appellate Case No. 2017-001646

Appeal From Horry County Karl A. Folkens, Special Referee

Opinion No. 5731 Heard February 6, 2020 – Filed June 10, 2020

AFFIRMED IN PART, REVERSED IN PART, AND
REMANDED

Fred B. Newby, Sr., and C. Scott Masel, both of Newby Sartip & Masel LLC, of Myrtle Beach, for Appellants.Demetri K. Koutrakos, of Callison Tighe & Robinson, LLC, of Columbia, for Respondent.

HILL, J.: We are presented with the ques tion of whether a reservation of a right-of-way on an official county map—as authorized by section 6-7-1220 of the South Carolina Code (2004) and a county ordinance—constitutes a defect in or
encumbrance on the title to the affected land or renders its title unmarketable so as to come within the coverage of two title insurance policies. Based on the specific circumstances of this case, we hold it does. We further conclude none of the policies' coverage exclusions apply. We therefore reverse the or der of the special referee granting Chicago Title Insurance Compa ny (Chicago Title) summary judgment as to Jericho State Capital Corporation of Florida's (Jericho's) and Lynx Jericho Partners, LLC's (Lynx Jericho' s) (collectively Appellants) claims for breach of
contract and breach of the covenant of good faith and fair dea ling. We affirm, however, the order granting summary judgme nt to Chicago Title on Appellants' bad
faith claim.

I. FACTS

South Carolina law allows counties and munici palities to "establish official maps to reserve future locations of any street, hi ghway, or public utility rights-of-way, public building site or public space open for fu ture public acquisiti on and to regulate structures or changes in land use in su ch rights-of-way, building sites or open spaces." § 6-7-1220. In 1999, the Horry County Council established an official map by passing Ordinance 107-98 or the Offici al Map Ordinance (Ordinance).

The Ordinance created the official map to "show the location of existing or proposed public streets, highways and utility right-of-w ays, public building sites and public open spaces." The Ordinance further provi ded that after the official map was adopted, "no building, structure, or other improvement, shall here inafter be erected, constructed, enlarged or placed within the reservation area . . . without prior exemption or exception . . . ." The purpose of the Ordinance and the official map was to provide for the public welfare a nd Horry County's fina ncial convenience by "designating and reserving" such locations . The Ordinance established a procedure for landowners to appeal land use restric tions and provided a criminal penalty for violating the Ordinance. Later in 1999, Ho rry County created the index map, which included the proposed locations for segmen ts of the Carolina Bays Parkway.In 2002, Horry County Council adopted Or dinance 88-202 (the 2002 Amendment), which amended the official map to add "the right-of-way identified as Alternative 1 for the proposed Carolina Bays Parkway . . . as shown in the document entitled 'Carolina Bays Parkway, Phase V FEIS Con ceptual Roadway Plans.'" The roadway plan was attached to the 2002 Amendment, and the amended i ndex map showed the Parkway bisecting the property at issue in this appeal and cro ssing the intracoastal waterway. Both the Ordinance and the 2002 Amendment were recorded with the Register of Deeds and indexed under Horry County.

In 2006, Peachtree Properties of North My rtle Beach, LLC (P eachtree) purchased

131.40 acres in Horry County (the Property), which it planned to develop as a residential subdivision along the wate rway, from the McClam family for $22,500,000. Peachtree financed the purchas e with two mortgage loans, granting a first mortgage to R.E. Loan s, LLC (REL) and a second mort gage to Jericho. Both
REL and Jericho received title insurance fro m Chicago Title. The title insurance policies are printed on the 1992 standard form of the American Land Title Association and contain the following identical language and provisions:

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTI ONS FROM COVERAGE . . . AND THE CONDITIONS AND STIPULATIONS,
CHICAGO TITLE INSURA NCE COMPANY . . . insures, as of Date of Policy . . . against loss or damage . . . sustained or incurred by the insured by reason of: . . .

***

2. Any defect in or lien or encumbrance on the title;

3. Unmarketability of the title . . . .

In 2007, Peachtree defaulted on its loans. Jericho foreclosed, successfully bid on the Property at sale, and receiv ed a master's deed subj ect to the REL mortgage. In 2009, the South Carolina Department of Transportation (SCDOT) filed an eminent domain action against Jericho to take 10.18 acres of the Property for the Carolina Bay Parkway. Meanwhile, for reasons not pertinent here, the REL mortgage was assigned to Lynx Jericho. In 2014, a jury awarded Jericho and Lynx Jericho $2.1 million as just compensation for the taki ng. During the five-year condemnation litigation, Jericho and Lynx Jericho submitt ed title insurance claims to Chicago Title, which Chicago Title denied.In response to the denial of coverage, Jericho and Lynx Jericho sued Chicago Title for breach of contract, breach of the covena nt of good faith and fair dealing, and bad faith refusal to pay insurance benefits. The cases were consolid ated and referred to the special referee, who heard arguments on the parties' cross motions for summary judgment and conducted the proceedings e xpertly. The special referee denied Appellants' motion for summary judgmen t and granted Chicago Title summary judgment, ruling: 1) the Ordinance did not create a defect or encumbrance on the Property; 2) the Ordinance did not make title to the Property unmarketable; 3) exclusions 1, 2 and 3(d) ba rred coverage; and 4) Chica go Title did not act in bad faith by contesting Appellants' clai ms. This appeal followed.

II. STANDARD OF REVIEW

We review grants of summary judgment usi ng the same yardstick as the trial court. Woodson v. DLI Props., LLC , 406 S.C. 517, 528, 753 S.E. 2d 428, 434 (2014). We view the facts in the light most favorable to Appellants, the non-moving parties, and
draw all reasonable inferences in their favor. NationsBank v. Scott Farm , 320 S.C. 299, 303, 465 S.E.2d 98, 100 (Ct. App. 1995). Chicago T itle is entitled to summary judgment only if "there is no genuine issue as to any mate rial fact". Rule 56(c), SCRCP. Summary judgment is a drastic remedy to be invoked cautiously and must be denied if Appellants demonstrate a scintilla of evidence in support of their claims. Hancock v. Mid-South Mgmt. Co. , 381 S.C. 326, 330, 673 S.E. 2d 801, 803 (2009).

III. COVERAGE UNDER THE TITL E INSURANCE POLICIES

A. General considerations regardi ng title insurance policy coverage

Title insurance is designed to protect a r eal estate purchaser or mortgagee against defects in or encumbrances on the title; the purpose of title insurance is to "place the insured in the position he thought he o ccupied when the policy was issued." Pres. Capital Consultants, LLC v. First Am. Title Ins. Co. , 406 S.C. 309, 31 6, 751 S.E.2d 256, 260 (2013). "Title insurance, instead of protecting the insured against matters that may arise during a stated period after the issuance of the policy, is designed to save him harmless from any lo ss through defects, liens, or encumbrances that may
affect or burden his title when he takes it." Firstland Vill. Assocs. v. Lawyer's Title

Ins. Co. , 277 S.C. 184, 186, 284 S. E.2d 582, 583 (1981) (quoting Nat'l Mortg. Corp.

v. Am. Title Ins. Co. , 261 S.E.2d 844, 847–48 (N.C. 1980)); see also Loflin v. BMP
Dev., LP , 427 S.C. 580, 595–96, 832 S.E.2d 294, 302 (Ct. App. 2019). One court has well explained:The sole object of title insurance is to cover possibilities of loss through defects that may cloud the title. . . . Some defects will be disclosed by a search of the public transfer records; others will be disclosed only by a physical examination or a survey of th e property itself. Often the
existence of title defects w ill depend upon legal doctrines and judicial interpretations of various applicable statutes. Since the average purchaser has neither the skill nor the means to discover or protect himself against the myriad of defects, he must rely upon an institution holding itself out
as a title insurer.

United States v. City of Flint , 346 F. Supp. 1282, 1285 (E.D. Mich. 1972).

As a leading commentator notes:

[T]itle insurance policies usua lly cover risks arising from errors in title examination, some known defects, defects
that would be disclosed by examination, and some
undisclosed defects that would remain hidden even after competent examination of public records . . . . In that sense, title insurance is "all -risks" coverage, under which
a loss must fall within the basi c description of the covered peril—such as a "defect in or a lien or encumbrance on the title"—and not be within any explicit exclusions.

11A Maldonado et al., Couch on Ins . § 159:20 (3d ed. 2019) (footnotes omitted).

We interpret the language of title insuran ce policies like other contracts and enforce plain and unambiguous language as wr itten, giving the words their common meaning. Williams v. Gov't Ins. Co. (Geico) , 409 S.C. 586, 594, 762 S.E.2d 705, 709 (2014). Whether coverage exists under an insurance policy is a matter of law.
Id. at 593, 762 S.E.2d at 709. The insured bears the burden of proving its claim falls within the policy's coverage. Gamble v. Travelers Ins. Co ., 251 S.C. 98, 103, 160 S.E.2d 523, 525 (1968).B. Defect, lien, or encumbrance

The policies insure Appellants from damage s incurred by any "defect in or lien or encumbrance on title." Appellants assert the Ordinance caused a defect in or
encumbrance on the title because it created a third-party interest in the Property in favor of the County, which bur dened the land and depreciated its value. We agree.

The policies do not define the term "encum brance," but we have. An early case, noting encumbrance was a catc h-all term found in Eng lish conveyances, defined it as any weight on the land that lowers its value without conflicting with passing of
the fee. Grice v. Scarborough , 29 S.C.L. (2 Speers) 649, 652–53 (1844). More recent decisions have said the same thing in different ways, defining an encumbrance as "a right or interest in the land granted 'which may subsist in third persons to the diminution in value of the estate although c onsistent with the passing of the fee.'" Truck S., Inc. v. Patel , 339 S.C. 40, 48, 528 S.E.2d 424, 428–29 (2000) (quoting Martin v. Floyd , 282 S.C. 47, 51, 317 S.E.2d 133, 136 (Ct. App. 1984)); see also Pres. Capital Consultants, LLC , 406 S.C. at 316, 751 S.E. 2d at 259 ("[D]efects for which title insurance policies provide covera ge may generally be defined as liens
and encumbrances that result in a loss in the title's value."). An encumbrance is a
burden on the land that is adverse to the landowner's interest a nd impairs the value
of the land but does not defeat the owner's title. Butler v. Butler , 67 S.C. 211, 45
S.E. 184, 185 (1903); see 21 C.J.S. Covenants § 18 (2020) ("[A]n 'encumbrance' is any right or interest held by someone other than the grantee or grantor which
diminishes the value of the estate but not so much that it leaves the grantee with no title at all. That is, an 'encumbrance,' within the meaning of a covenant against encumbrances, is any interest in a third pe rson consistent with a title in fee in the grantee, if such outstanding interest inju riously affects the value of property or constitutes a burden or limitation upon the ri ghts of the fee title holder." (footnotes omitted)).

The Ordinance described the location of the highway as a "right-of-way," and defined "right-of-way" as "land reserved . . . for a road." The Ordinance declared its intention to "reserve" future locations of highways and proscribed any use of the Property that would interfere with the C ounty's future acquisition of the highway parcel, and the Ordinance and amended map showing th e location of the proposed highway were publicly record ed. As Chicago Title argue s, the Ordinance allowed affected property owners to appeal their property's inclusion on the map, but that proves Appellants' point that the Ordi nance encumbered the Property.Ordinances may regulate land use without encumbering title, but the Ordinance here went beyond regulating use and created a third- party interest in th e property in favor of the County. The enabling statute sepa rates the concept of right-of-way from land

use. See § 6-7-1220 (noting one purpose of official map is to "regulate structures or changes in land use in such rights-of-way "). We agree with Appellants that the Ordinance, including its provisions regarding the appeal procedures and penalties for violations, constituted an encumbra nce within the mean ing of the policy coverage. Although Chicago Title is correct that the Ordinance did not create a right-of-way, the policy coverage turns no t on whether the Ordinance created a legal right-of-way but whether it created a defect or encumbrance.

We find the Ordinance similar to the acquisition map at issue in Ascot Homes, Inc.

v. Lawyers Mortgage & Title Co. , 237 N.Y.S.2d 179, 180–81 (N.Y. Sup. Ct. 1962). There, a 1949 county map mark ed a strip of certain land for public acquisition. When Plaintiff purchased the land in 1960, he applied to the zoning authority for a building permit. The permit wa s denied because, without the marked strip, plaintiff's lot was not large enough to meet setback requi rements. When plaintiff then tried to sell the land, a purchaser refused to close, citing the map. Plaintiff's title insurer denied his claim, pointing to the exclusi on from coverage for "[z]oning restrictions or ordinances imposed by any government al body." The court, however, held plaintiff's loss was covered because the acquisition map qualified as a lien or encumbrance not excepted by the policy.

We conclude the Ordinance c onstituted a defect and an en cumbrance. We therefore reverse the special referee's grant of summa ry judgment to Chicago Title as to this
issue.

C. Unmarketability of title

The policies define unmarketability of t itle as "an alleged or apparent matter affecting the title to the land, not exclude d or excepted from c overage, which would entitle . . . the insured mortgage to be released from the obligation to purchase by virtue of a contractual condition requiring the delivery of marketable title." This opaque definition—a model of circularity—i s unenlightening. We are confident, though, that a purchaser who discovered a por tion of the real estate he was about to buy purportedly in fee simple absolute had been reserved by ordinance in favor of a governmental right-of-way may be entitled to rescind the sale. "To be marketable, a title need not be flawless. Rather, a ma rketable title is one free from encumbrances and any reasonable doubt to its validity. It is a title which a reasonable purchaser,
well-informed as to the facts and their legal significance, is ready and willing toaccept." Gibbs v. G.K.H., Inc. , 311 S.C. 103, 105, 427 S. E.2d 701, 702 (Ct. App. 1993).

Delivery of marketable title requires title be free of not only defects and encumbrances but also the reasonable probability of litigation. Sales Int'l Ltd. v. Black River Farms, Inc. , 270 S.C. 391, 398, 242 S.E.2d 432, 435 (1978) (providing a "reasonable probability of litigation" rende rs title unmarketable). The Ordinance created a reasonable probability of liti gation concerning the title because the right-of-way was reserved for acquisition, making futu re condemnation reasonably probable.

The Ordinance differs from land use and zoning regulations, which can restrict development and impose an economic burden on the owner but do not create a third-party interest in property. See McMaster v. Strickland

, 305 S.C. 527, 530, 409 S.E.2d 440, 442 (Ct. App. 1991) (holding wetlands designation did not render title unmarketable); Patel , 339 S.C. at 49, 528 S.E.2d at 429 ("Because the wetland designation does not render the title unmarketable, Patel ca nnot rescind the contract based upon an encumbrance."); Martin , 282 S.C. at 52, 317 S.E.2d at 136 ("While marsh or water might be a burden upon property, it is certainly not a lien, easement, or a right existing in a third party."). We recognize the Ordinance resembled zoning and other land use tools, given it was to be enforced by the zoning administrator and the enabling statute described the official ma ps as "instruments of land use control." § 6-7-1220. In substance, though, the Ordi nance created a third party interest in the property and is so foreign from typical land use measures that there is no genuine
issue of material fact that it rende red Appellant's title unmarketable.

A marketable title is one free from doubt a nd any reasonable threat of litigation. Unmarketability cannot be based on just any doubt or defect, for almost any title can be flyspecked. But if the doubt is an objectively reasonable one concerning a material defect, then the title is unmarketable. A materi al defect is one that interferes or conflicts with the rights and incidents of title—the insu red's fee simple absolute's "bundle of rights"—to the extent that an ordinary and prudent purchaser would not buy the title, or only buy it at a discount reflecting the defect. 1 Palomar, Title Ins.

Law § 5.7 (2019 ed.). This meshes with th e policy definition of marketability, which explains coverage extends to any "alleged or apparent" matter affecting title.

Chicago Title argues the Ordinance did not affect marketability of the title because it only regulates use of the Property. We conclude, however, that the Ordinance
interferes with the insured's title because it limits the rights and incidents of ownership. It is true that matters that affect only the use of land are not title matters,
but it does not follow that a matter that affects use cannot also affect title. Id . Noone would contend, for exampl e, that a covenant restric ting use does not also affect title and, therefore, marketab ility. Because the Ordinance created an interest in the land by reserving a right-of-way and restricting use of the reserved land, we conclude it diminished the owner's bundle of rights a nd, consequently, affected title. And the diminishment was enough to cause a reasona ble buyer to decline or discount a sale for a price less than what an unclouded title would demand on the market.

There is no factual dispute the Ordina nce created a reasona ble probability of litigation, thereby making the tit le unmarketable as a matter of law. The Ordinance, which, again, was publicly recorded, reserv ed the future site of the highway and took steps to minimize the County's future acquisition costs. Although we agree with Chicago Title that in ge neral all landowners are at risk of eminent domain proceedings at any given time, the County's intent and pre liminary steps set forth in
the Ordinance foreshadowed a reasona ble probability of condemnation. Black River Farms, Inc. , 270 S.C. at 398, 242 S.E.2d at 435 (mere possibility or remote probability of litigation is not sufficient to make title unmarketable). Therefore, we hold the Ordinance rendered Appellants' t itle unmarketable and reverse the special referee's grant of summary judgment to Chicago Title.

IV. EXCLUSIONS FROM COVERAGE

In deciding whether a policy exclusion bars coverage, the burden of proof flips: the insurer must prove the exclusion applies. Owners Ins. Co. v. Clayton , 364 S.C. 555, 560, 614 S.E.2d 611, 614 (2005) ("Insurance policy exclusions are construed most strongly against the insuran ce company, which also bears the burden of establishing the exclusion's applicability.").

A. Exclusion 1

In relevant part, Exclusion 1 bars coverage for losses arising by reason of:

Any law, ordinance or governmental regulation (including but not limited to building and zoning laws, ordinances, or regulations) restricting, regul ating, prohibiting or relating to (i) the occupancy, use or enjoyment of the land . . . .

In granting Chicago Title summary judgme nt, the special referee ruled Exclusion 1 excluded coverage because the Ordinance merely affected the use of the land. As we have just discussed, the Ordinance relate d to and affected the title of the land, not just its use. Exclusion 1 therefore does not apply as a matter of law. We reverse the special referee's grant of summary judgment to Chicago Title as to this issue.B. Exclusion 2

Exclusion 2 bars coverage for losses arising by reason of:

Rights of eminent domain unless notice of the exercise thereof has been recorded in the public records at Date of Policy, but not excluding from coverage a ny taking which has occurred prior to the Date of Policy which would be binding on the rights of a purchaser for value without knowledge.

Neither Appellants nor Chicago Title clai m the Ordinance constitutes an eminent domain action, and Appellants are not se eking coverage for the 2009 condemnation action, which began after the ef fective date of the policies. The special referee noted the exclusive procedure for eminent domain in this state is the Eminent Domain Procedure Act, S.C. Code Ann. §§ 28-2-10 to -510 (2007 & Supp. 2018). But this misses the mark. Appellants are not s eeking recovery of loss for the 2009
condemnation action but for loss the Ordinan ce caused to the value of their title when they took it in 2007. Appellants contend these losses exceed and are different in kind from those sought in the condemnation action. Therefore, Exclusion 2 does not apply, and the special refe ree erred in granting Chi cago Title summary judgment
based on Exclusion 2.

C. Exclusion 3(d)

Exclusion 3(d) excludes coverage for "[ d]efects, liens, encumbrances, adverse claims or other matters . . . attaching or created subsequent to Date of the Policy."
The Ordinance and the 2002 Amen dment were filed years be fore the effective date of the policies, and therefore clouded th e title as of the Date of the Policy. The special referee therefore erred in finding this exclusion applied.

Parties to title insurance c ontracts are free, within th e bounds of public policy, to allocate risks as they see fit. Chicago Title's inability to pigeonhole this unique
Ordinance into an exclusion to coverage is unsurprising. Real estate investors buy title insurance to protect against such unfores een "off the record" risks. Old soldiers say it is the bullet you never hear that k ills you, and the fundamental idea behind
title insurance is to cover rather than exclude unforeseen and unknown risks; otherwise, title insurance would not prov ide the peace of mind it touts.

V. BAD FAITHThe special referee ruled Chicago Title had a reasonable, good faith basis for contesting Appellants' claims. We agree.

Appellants' bad faith cause of action fails because they did not demonstrate Chicago Title acted unreasonably in de nying Appellants' claims. See Crossley v. State Farm

Mut. Auto. Ins. Co. , 307 S.C. 354, 359, 415 S.E.2d 393, 396–97 (1992) ("The
elements of a cause of action for bad faith refusal to pay first party benefits under a
contract of insurance are: (1) the existence of a mutually binding contract of insurance between the plaintiff and the de fendant; (2) refusal by the insurer to pay benefits due under the contract; (3) resu lting from the insurer's bad faith or unreasonable action in breach of an implied covenant of good faith and fair dealing arising on the contract; (4) causing damage to the insured."). The unusual nature of the Ordinance presented close policy inte rpretation issues. Ch icago Title had a reasonable basis for denying the claims, and we affirm summary judgment to them
as to this issue. BMW of N. Am., LLC v. Comp lete Auto Recon Servs., Inc. , 399 S.C. 444, 453, 731 S.E.2d 902, 907 (Ct. App. 2012) ("[W ]here an insurer has a reasonable ground for contesting a claim, there is no bad faith.").

VI. CONCLUSION

Accordingly, we affirm the special referee's grant of summary judgment to Chicago Title on Appellants' cause of action for bad faith, but we reverse the grant of summary judgment to Chicago Title on Appe llants' remaining claims and remand to the special referee for proceedings consistent with this opinion.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

WILLIAMS and KONDUROS, JJ., concur.