Opinion ID: 1358888
Heading Depth: 1
Heading Rank: 5

Heading: schedule b.part ii

Text: Commonwealth then highlights that Part I begins, This policy does not insure against loss or damage ... which arise by reason of, while Part II reads: In addition to the matters set forth in Part I of this Schedule, the title to the estate or interest in the land described or referred to in Schedule A is subject to the following matters, if any be shown, but the Company insures that these matters are subordinate to the lien or charge of the insured mortgage upon the estate or interest. This lead-in language, states Commonwealth, shows that Schedule B, Part I, contains the stuff of exception, while Schedule B, Part II, simply lists those matters referred to in Schedule B as subordinate to the ... insured mortgage. Id. Building on this framework, Commonwealth claims that the instruments in Schedule B, Part I, are expressly excepted from Endorsement coverage because they are the only exceptions from coverage in the policy, whereas the instruments in Schedule B, Part II, fall within the coverage of the Endorsement because they are referred to in Schedule B but not expressly excepted in Schedule B. See id. at 9-10. Commonwealth argues that this construction provides a clear way to identify matters covered by the ALTA 9 Endorsementloss from instruments in Schedule B, Part I, is not covered; loss from instruments in Schedule B, Part II, is covered. And because the Declaration is listed in Schedule B, Part I, Commonwealth concludes that no loss stemming from it is covered by paragraph 1(b)(2) of the Endorsement. See id. Nationwide dismisses Commonwealth's interpretation, and responds that loss resulting from the Declaration is covered by the ALTA 9 Endorsement because the rights of refusal stated within it are not specifically mentioned in Schedule B. Nationwide argues that both parts of Schedule B contain exceptions from coverage and asserts that to signify an exception to ALTA 9 Endorsement coverage, an insurer [must] expand[] the description of the pertinent instrument [i]n Schedule B to describe any included .... rights specified in subparagraph 1(b)(2) ... of the ALTA 9. Nationwide's Br. at 14-15. In other words, it claims, exceptions to the coverage afforded by the ALTA 9 are not made merely by listing a document on Schedule B, coverage is instead negated by specifically referring to and excepting the covenant, condition, or right in question. Nationwide's Supp. Br. at 10; see also Nationwide, 2006 WL 1192998, at . Nationwide argues that this construction of the policy best serves insurers and lenders, and it emphasizes that it is the construction widely followed in the title insurance industry. Nationwide's Reply Br. at 1. The District Court was persuaded by Commonwealth's reasoning, holding that the heading and language of Schedule B, Part I, clearly indicate that the Declaration is `expressly excepted in Schedule B.' Nationwide, 2005 WL 2716492, at . It opined that [t]he Policy would be clearer had [Commonwealth] placed the `Exceptions from Coverage' header under `Part I' instead of under `Schedule B,' but it ruled that the language preceding Part I makes clear that the items listed in Part I are exceptions from coverage ..., while the language preceding Part II indicates that the items listed in Part II are not exceptions from coverage.... Id. (internal citations omitted). We disagree with Commonwealth and the District Court. In our view, concluding that Schedule B, Part II, does not contain exceptions from coverage, and reading the caption and initial language of Schedule B, Part I, to expressly except from ALTA 9 Endorsement coverage loss stemming from all matters in instruments listed therein, runs roughshod over the policy's language, purpose, and usage. We instead adopt Nationwide's construction of the policy and hold that paragraph 1(b)(2) of the ALTA 9 Endorsement extends coverage to loss from an instrument in either part of Schedule B unless the insurer takes express exception to the specific restrictions stated in the instrument. This interpretation fits the textual scheme of the policy, and reflects the purpose and industry custom associated with the ALTA 9 Endorsement. 1. Text Contrary to Commonwealth's interpretation, we think the placement of the line EXCEPTIONS FROM COVERAGE above PART I in the caption of Schedule B is evidence that both Parts I and II contain exceptions from coverage. This interpretation is reinforced by a reading of a blank 1992 ALTA Loan Policy, which shows that the caption's drafting was not an error and indicates that the seeming inapplicability of the line EXCEPTIONS FROM COVERAGE to Part II is the result of nothing more than the page break between Parts I and II of Schedule B. See Gosdin, supra, at 38. It also finds support in an intratextual reading of the policy, which never distinguishes between Parts I and II of Schedule B and instead refers only to the exceptions from coverage contained in Schedule B. A textual comparison of the ALTA 9 Endorsement (which covers an ALTA Loan Policy) to its companion ALTA 9.1 Endorsement (which covers an ALTA Owner's Policy) also rejects Commonwealth's suggestion that paragraph 1(b)(2) of the ALTA 9 Endorsement covers only matters in Schedule B, Part II. An ALTA 9 Endorsement, to repeat, states: The Company insures the owner of the indebtedness secured by the insured mortgage against loss or damage sustained by reason of: 1. The existence at Date of Policy of any of the following: .... (b) Unless expressly excepted in Schedule B .... (2) Any instrument referred to in Schedule B as containing covenants, conditions or restrictions on the land which, in addition,... provides for an option to purchase, a right of first refusal, or the prior approval of a future purchaser or occupant. Similarly, an ALTA 9.1 Endorsement reads: The Company insures against loss or damage sustained by the insured by reason of: 1. The existence at Date of Policy of any of the following unless expressly excepted in Schedule B: .... (b) Any instrument referred to in Schedule B as containing covenants, conditions or restrictions on the land which, in addition, ... provides for an option to purchase, a right of first refusal, or the prior approval of a future purchaser or occupant.... Given the essentially identical language of the two endorsements, one would expect the interpretation of unless expressly excepted in Schedule B to remain constant. In particular, if Commonwealth's suggestion is correct, the ALTA Owner's Policy should list express exceptions in Part I of Schedule B and non-exceptions covered by the ALTA 9.1 Endorsement in Part II of Schedule B. But that is not the case. Rather, the ALTA Owner's Policy does not contain a two-part Schedule B. [5] In the context of language identical to that in an ALTA 9 Endorsement, an insurer drafting an ALTA Owner's Policy thus must do more than simply list an instrument in a part of Schedule B to except all loss related to it from coverage under an ALTA 9.1 Endorsement. It must distinguish between those Schedule B matters that are merely exceptions from coverage, to which the ALTA 9.1 Endorsement applies, and those that are expressly excepted from all coverage. This recognition correlates with interpreting the ALTA 9 Endorsement to cover loss from an instrument in either part of Schedule B unless the insurer explicitly notes the rights or restrictions contained in the instrument. Requiring insurers to take express exception in Schedule B to rights of refusal or other restrictions mentioned in paragraph 1(b)(2) of the ALTA 9 Endorsement, moreover, does not torture[] the language of the Policy. Nationwide, 2005 WL 2716492, at . The Endorsement recognizes a difference between excepted instruments and expressly excepted restrictions. [6] The very term expressly excepted implies as well that an insurer seeking to retract Endorsement coverage of a restriction must do so specifically. 2. Purpose Commonwealth's constrained interpretation of the ALTA 9 Endorsement also flouts the purpose of the Endorsement. Lenders seeking to insure their mortgage interest in a property pay an additional premium for an ALTA 9 Endorsement to cover, among other things, any instrument referred to in Schedule B as containing covenants, conditions or restrictions. See Beatie & Kleven, supra, at 400. We cannot conceive why, as Commonwealth suggests, lenders would do so only to cover instruments in Schedule B, Part II, which already are insured as subordinate to the lien or charge of the insured mortgage upon the estate or interest. More specifically, it surpasses strange to think that Nationwide would pay for an ALTA 9 Endorsement just to cover the matters already listed as subordinate to its interest in Schedule B, Part II, especially where, as here, Nationwide is directly involved in each of those matters [7] and needed no extra assurance that they were harmless to its interest. [8] Additionally, Commonwealth's interpretation would thwart the purpose of the ALTA 9 Endorsement by eliminating the notice benefits it provides. Through its requirement that insurers expressly except[] the restrictions they do not want to cover under paragraph 1(b)(2), the Endorsement gives lenders crucial notice of the specific matters that may harm their mortgage interests. [9] By permitting insurers to except expressly all loss from an instrument simply by listing that instrument in Schedule B, Part I, Commonwealth's interpretation would strip away this notice benefit from the ALTA 9 Endorsement. 3. Custom and Practice The title insurance industry's treatment of the ALTA 9 Endorsement strongly supports our reading of the Endorsement. It is one of the most common endorsements used to insure against the effect or aspects of exceptions, Gosdin, supra, at 257, and the standard endorsement for commercial lending transactions. App. at 60; see also Palomar, supra § 9.3. Industry custom and practice show that both parts of Schedule B contain exceptions over which the ALTA 9 Endorsement insures. No guideline or article produced by a title insurer, including Commonwealth, [10] states that only Schedule B, Part I, contains exceptions from coverage or that the ALTA 9 Endorsement covers only matters in Schedule B, Part II. [11] Indeed, contrary to Commonwealth's claim that Part II of Schedule B does not contain exceptions from coverage, we note that, in an internal memorandum reviewed by the District Court, LandAmerica Financial Group, Inc. (LandAmerica), the parent company of Commonwealth at the time it drafted Nationwide's policy, [12] unambiguously describes the matters in Part II of Schedule B as exceptions: SCHEDULE BPART II: Enter all exceptions to title discovered in the title search and from the survey, if any, that are subordinate to the lien of the insured mortgage.... Schedule BPart II sets out only those matters affecting the title to the insured land that are subordinate in priority to the lien of the insured mortgage. You must take exception to all such defects in title, liens, encumbrances and outstanding interests affecting the title.... The items found in Schedule BPart II are generally lien interests and sometimes leasehold interests.... Probably more often than not, you will have no exceptions for Schedule BPart II. If you have no exceptions, insert the word NONE in the schedule to show that no exception has been taken. App. at 55-56 (emphases added). Industry custom and practice also confirm that the ALTA 9 Endorsement covers loss from matters in instruments mentioned in paragraph 1(b)(2) of the Endorsement unless the insurer explicitly notes those matters in Schedule B. For example, LandAmerica provides the following guidance to agents issuing ALTA 9 Endorsements: Instruments identified in Exceptions in Schedule B[may] also contain any of the following matters which are NOT shown as separate Schedule B exceptions: (1) Easements (2) Liens for liquidated damages (3) Charges or liens for assessments (4) Options to purchase, rights of first refusal, or rights of prior approval of purchasers. If instruments described in Schedule B Exceptions do contain any of those elements, they should be shown as separate exceptions, or stated as separate components of an exception. For example, if a subdivision declaration of ... restrictions also contains grants or reservations of easements, or rights of first refusal, the Schedule B exception should appear as follows: METHOD 1 (Multiple exceptions): Declaration of ... Restrictions for ___ dated ___ recorded at book __ page __ Easements reserved in Declaration of ... Restrictions for ___ dated ___ recorded at book __ page __  Rights of first refusal reserved in Declaration of ... Restrictions for ___ dated ___ recorded at book __ page __ METHOD 2 (Single exception describing several elements): Declaration of ... Restrictions for ___ dated ___ recorded at book __, page __; also, easements and right of first refusal reserved in said declaration.  LandAmerica, https://www.agentxtra.net/Extranet/singlesource/NavMaster.asp?IndexID=3202&IndexTerm=PUD&LinkID=5178317 (last visited Aug. 28, 2009) (emphases added). [13] This guidance document states precisely that the insurer must take separate and specific exception to the matters contained in instruments listed in Schedule B in order to avoid covering them under the ALTA 9 Endorsement. Even Commonwealth appears to follow the interpretive approach we now endorse. In an internal bulletin produced by its D.C. and Maryland Agency Operations, Commonwealth explains that it is OK for its agents to use an ALTA 9 Endorsement if a document with restrictions contains an easement, a lien provision, charge or... option/right of first refusal/future purchase approval ... [b]ut when taking exception to [the document with restrictions], [the agent] must expressly include [the] relevant provision, e.g., `Terms and provisions of a Declaration, including access easement created therein dated ___.' Commw.'s Supp. Br. at 3-4 (quoting Commonwealth, 98-07 Commonwealth Offers ALTA 9 Coverage on Residential Mortgagee Policies, 3-4 (June 22, 1998), https://www.agentxtra.net/extranet/SingleSource/content/State Law/DistrictofColumbia/Bulletins/DC_98-07_CommonwealthOffersALTA9Coverage.htm) (emphasis added). [14] The advice in this bulletin dovetails with the guidance document produced by LandAmerica and contrasts with what Commonwealth now argues. It also appears to be the advice that Commonwealth followed in taking exception to a License Agreement in Schedule B, Part I, of Nationwide's policy: 6. The appurtenant easement rights insured under the License Agreement dated March 4, 1991 between Franklin Mills Associates Limited Partnership f/k/a Liberty Mills Partnership and PMI Associates ..., as located on survey ... Dated March 16, 2001[,] ... are subject to the following: a. Terms and conditions of said Agreement b. Questions of marketability due to the Agreement being unrecorded; and c. All mortgages, easements, covenants, conditions and restrictions affecting the property now or formerly of Franklin Mills Associates Limited Partnership, adjacent to the insured premises and the subject of said Agreement. App. at 35-36. Though not stated in the exact manner suggested by the LandAmerica guidance document or Commonwealth bulletin, this listing follows the industry practice of expressly excepting the rights within an instrument (in this listing, the appurtenant easement rights) so as to remove them from coverage under paragraph 1(b)(2) of the ALTA 9 Endorsement. In fact, industry practice is so settled in favor of requiring insurers to state the specific matters they are excepting from ALTA 9 Endorsement coverage that one industry expert directly criticized the District Court's decision in Commonwealth's favor. Writing in a work published by the American Bar Association's Section of Real Property, Probate and Trust Law, James L. Gosdin detailed the Court's reasoning and concluded: The result of this case is surprising and is inconsistent with the widespread interpretation of the Endorsement in the title insurance industrythat the Schedule B exception must refer at least to the right of first refusal or easement or other such right, although there is no need to refer to the specific paragraph or location in the document of the right. Gosdin, supra, at 258.