Rhone v. First American Title Insurance Company ( 2010 )

FIRST DIVISION
May 17, 2010
No. 1-09-1216
RAY H. RHONE and DENISE RHONE, ) Appeal from the
) Circuit Court of
Plaintiffs-Appellants, ) Cook County.
)
v. )
) No. 08 CH 20714
FIRST AMERICAN TITLE INSURANCE )
COMPANY, a California )
Corporation, ) The Honorable
) Daniel A. Riley,
Defendant-Appellee. ) Judge Presiding.
JUSTICE GARCIA delivered the opinion of the court.
The plaintiffs, Ray and Denise Rhone (the Rhones), filed a
two-count complaint against defendant First American Title
Insurance Company (First American), the issuer of a title
insurance policy on the townhome they purchased in 2006. Count I
sought a declaration that the policy covered unassessed property
taxes for the years 2004 and 2005; count II sought special
damages because First American's denial of the Rhones' claim for
reimbursement of those taxes was "vexatious and unreasonable."
The parties filed cross-motions for summary judgment. First
American contended the policy did not cover the taxes because
they were levied after the date the policy was issued and, in any
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event, the policy specifically exempted such taxes. Judge Daniel
A. Riley granted First American's motion and denied the Rhones'.
We hold that the unassessed taxes did not constitute liens
or encumbrances until the bills for the unassessed property taxes
were issued in 2008, well after the effective date of the title
insurance policy of August 31, 2006. Consequently, we affirm.
BACKGROUND
On August 31, 2006, the Rhones closed on their $800,000
purchase from the original owners of a three-year-old townhome at
1417 South Campus Parkway in Chicago. At the closing, First
American issued an owner's title insurance policy. The policy
insured the Rhones against losses caused by "[a]ny defect in or
lien or encumbrance on the title" as of August 31, 2006, subject
to several specified exceptions and exclusions. Although the
policy listed several "standard exceptions" to coverage,
including "Taxes, or special assessments which are not shown as
existing liens by the public records," First American waived
those exceptions through an endorsement.
In her deposition, Denise Rhone testified that at closing
she and her husband were aware that Cook County had assessed the
townhome as "vacant land" from 2004 through 2006, the years the
sellers lived in the home. Based on the improper assessment, the
Rhones were well aware that the property taxes "were going to
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increase." However, Denise Rhone testified that she "didn't know
anything about omitted taxes."
Concerned with the potential property tax increase because
the townhome was not assessed as improved property at the time of
their purchase contract, the Rhones had their attorney contact
Kent Novit, the sellers' attorney and "issuing agent" on the
Rhones' title commitment policy. In their letter to Novit, dated
August 14, 2006, 17 days before closing, the Rhones pointed out
that a neighboring "comparable property" was assessed for nearly
$9,000 more in property taxes for the tax year 2005 than the
townhome to be purchased. To assuage the Rhones' concerns, at
closing the parties signed a "tax reproration agreement," which
required the sellers to place $10,000 in escrow to cover the
sellers' share of any additional taxes due for 2006. Under the
agreement, a tax reproration between the parties would occur if
the townhome were reassessed as improved property before March
31, 2008. However, the agreement did not address any additional
real estate taxes that might arise from reassessment for 2004 and
2005, when the property was also taxed as vacant land. In other
words, the agreement did not apportion any additional property
tax liability should the property be reassessed as improved land
for the years prior to 2006 (the unassessed taxes).
In February 2008, the Rhones received two tax bills from the
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Cook County assessor titled "2007 Omitted Assessment Property Tax
Bill." The bills indicated that the townhome was not assessed as
improved land in 2004 and 2005 and sought, from "D. Rhone or
Current Owner," additional unassessed taxes for the two years.
The tax bill for 2004 sought $2,763.58; the tax bill for 2005
sought $6,600.09. Each bill indicated the amount due was
"entered as a warrant [in the County Collector's warrant book] in
Tax Year 2007 [payable in 2008]."
On February 12, 2008, the Rhones' attorney filed a claim
with First American under the title insurance policy seeking
indemnification for the unassessed taxes. First American denied
the claim, explaining in a letter dated April 4, 2008, that the
unassessed taxes "are not due and payable until 2008 and are
therefore, not a matter covered by the title policy."
On June 10, 2008, the Rhones filed a two-count complaint
against First American, seeking a declaration that the title
insurance policy covered the unassessed taxes and special damages
under section 155 of the Illinois Insurance Code (215 ILCS 5/155
(West 2008)). The parties filed cross-motions for summary
judgment. Judge Riley granted summary judgment in favor of First
American; the Rhones timely appeal.
ANALYSIS
Summary judgment is warranted when "the pleadings,
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depositions, and admissions on file, together with any
affidavits, when viewed in the light most favorable to the
nonmovant, reveal there is no genuine issue of material fact and
that the movant is entitled to judgment as a matter of law."
Midwest Trust Services, Inc. v. Catholic Health Partners
Services, 392 Ill. App. 3d 204, 209, 910 N.E.2d 638 (2009),
citing 735 ILCS 5/2-1005(c) (West 2000). Our review of a grant
of summary judgment is de novo. DeSaga v. West Bend Mutual
Insurance Co., 391 Ill. App. 3d 1062, 1066, 910 N.E.2d 159(2009).
Because the facts are not in dispute, this case presents
only a question of law as to which party is entitled to summary
judgment. See Liberty Mutual Fire Insurance Co. v. St. Paul Fire
& Marine Insurance Co., 363 Ill. App. 3d 335, 339, 842 N.E.2d 170(2005) ("where the parties file cross-motions for summary
judgment, they invite the court to decide the issues presented as
a matter of law"). In their declaratory judgment count, the
Rhones contend that Judge Riley should have granted their motion
because the unassessed taxes constitute a defect, lien, or
encumbrance under the Rhones' title insurance policy. First
American responds that under the Property Tax Code (the Tax Code)
(35 ILCS 200/1-1 et seq. (West 2008)), the unassessed taxes
reflected in the two tax bills become liens against the property
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only as of the year the taxes are levied. In other words, the
unassessed taxes for 2004 and 2005 become liens only "in Tax Year
2008," as First American asserts; it is illogical to treat the
unassessed taxes as levied in 2004 and 2005, when actual taxes
were levied, albeit as vacant land, and fully paid in those
years. According to First American, because the unassessed taxes
did not achieve lien status until 2008, the unassessed taxes do
not fall within the ambit of the policy, which insured only
against "any defect in or lien or encumbrance on the title" as of
the date the policy was issued, August 31, 2006. First American
adds, even if the unassessed taxes constituted a defect, lien, or
encumbrance before the policy was issued, the policy specifically
excluded such taxes from coverage.
"Real estate taxes can only be levied, assessed and
collected in the manner expressly required by statute." In re
County Collector of Will County for Judgment for Taxes for the
Year 1988, 229 Ill. App. 3d 641, 643, 593 N.E.2d 1134 (1992),
citing People ex rel. Pickerill v. New York Central R.R. Co., 391
Ill. 377, 63 N.E.2d 405 (1945). In Illinois, the Tax Code
controls "the basis upon which real property is valued for
purposes of collecting property tax revenue." Walsh v. Property
Tax Appeal Board, 181 Ill. 2d 228, 230, 692 N.E.2d 260 (1998).
The Tax Code provides that "the taxes upon property *** shall be
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a prior and first lien on the property *** from and including the
first day of January in the year in which the taxes are levied."
35 ILCS 200/21-75 (West 2008). Thus, property owners are issued
a tax bill at the beginning of each year for taxes owed for the
preceding year; pursuant to the Tax Code, the tax bill is a lien
as of January 1 of the year in which it is issued.
Pursuant to statute, the Cook County assessor has the
authority, as a county with a population of 3 million or more, to
"assess properties which may have been omitted from assessments
for the current year or during any year or years for which the
property was liable to be taxed, and for which the tax has not
been paid." 35 ILCS 200/9-260(a) (West 2008). Such an "omitted
assessment tax bill is not due until the date on which the second
installment property tax bill for the preceding year becomes
due." 35 ILCS 200/9-260(b) (West 2008). Thus, for years when
taxes have been paid, the property may nonetheless be subject to
additional taxes if no taxes were assessed on land improvements.
People ex rel. McDonough v. Birtman Electric Co., 359 Ill. 2d
143, 145, 194 N.E.2d 282 (1934) ("if no assessment was made[,]
*** an assessment of the omitted property [may be made] in a
subsequent year"). As a safeguard against unforeseen additional
taxes, " 'the legislature has provided that no charge for tax for
previous years shall be made against any property prior to the
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date of ownership of the person owning such property at the time
the liability for such omitted tax was ascertained.' " Inland
Real Estate Corp. v. Oak Park Trust & Savings Bank, 127 Ill. App.
3d 535, 545, 469 N.E.2d 204 (1983), quoting McDonough, 359 Ill.
2d at 148. The section insulating a new owner from unassessed
taxes prior to ownership requires ownership be of "bona fide
legal and equitable titles or interests acquired for value and
without notice of the tax." (Emphasis added.) 35 ILCS 200/9-270
(West 2008).
The Rhones do not claim to be without notice that the
property was improperly assessed as vacant land at the time of
purchase, nor can they. In a letter to the sellers' attorney
dated August 14, 2006, the Rhones, through their attorney,
asserted that the townhome "is not currently assessed properly.
*** Attached is [a] data sheet from the [Cook County] Assessor's
web site showing the Unit as being taxed as vacant land. *** I
have attached the Assessor's data sheet for and the most recent
tax bill ($10,990.33) for the neighboring unit[, 1415 S.
Campus]." In a similar letter dated October 24, 2006, to the
Cook County assessor, the Rhones gave notice that "the Property
is currently being taxed as vacant and unimproved property when
in fact it is improved with a [townhome] residence." It appears
the Rhones sent notice to the Cook County assessor in an attempt
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to shield themselves against any "charge for tax of previous
years *** [by giving] notice of subsequent improvements." 35
ILCS 200/9-270 (West 2008). However, the "no charge" provision
only applies if "reassessment of the property was not made within
the 16 month period immediately following the receipt of that
notice." 35 ILCS 200/9-270 (West 2008). The Rhones make no
claim that the reassessment of the property resulting in the
charge for unassessed taxes covering 2004 and 2005 fell outside
the 16-month period. Nor does it appear the Rhones qualify as
good-faith purchasers regarding the unassessed taxes because they
had "notice of the possibility of [unassessed] taxing" when they
purchased the townhome. Inland, 127 Ill. App. 3d at 546; 35 ILCS
200/9-270 (West 2008). It is this knowledge that spurred the
Rhones to enter into a tax reproration agreement with the sellers
regarding an increase in property taxes for the year 2006.
Lien or Encumbrance
Upon receipt of the "2007 Omitted Assessment Property Tax
Bill[s]," the Rhones paid the unassessed taxes. They are now
seeking indemnification from First American. We initially
address whether the unassessed taxes covering 2004 and 2005
constitute a "lien or encumbrance" under the policy. If the
title was so clouded on the date the policy was issued, August
31, 2006, the Rhones are entitled to summary judgment if none of
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the exceptions or exclusions apply. If the unassessed taxes do
not constitute a "lien or encumbrance" as of the date of the
policy, Judge Riley properly granted First American's summary
judgment motion.
As noted above, the Tax Code provides that property taxes
constitute "a prior and first lien on the property *** from and
including the first day of January in the year in which the taxes
are levied." 35 ILCS 200/21-75 (West 2008). The Tax Code makes
plain that a bill for unassessed taxes "is not due until the date
on which the second installment property tax bill for the
preceding year becomes due." 35 ILCS 200/9-260(b) (West 2008).
It is undisputed that the Rhones' unassessed taxes were added to
the tax bill for 2007 and were not due until the second
installment came due in 2008. Thus, under the Tax Code, the
additional taxes based on the reassessment constituted liens in
the year in which they were levied, 2008, rather than the years
for which they were levied, 2004 and 2005. The Rhones do not
dispute that the tax liens arose long after the First American
title policy was issued in 2006 and, as liens, are not covered by
the policy.
The Rhones contend, however, that the title was "encumbered"
on or before the title insurance policy was issued. They contend
that at the time they purchased the townhome, although Cook
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County had not exercised its authority to recalculate the 2004
and 2005 real estate property taxes based on a new assessment of
the property as improved land, it was virtually certain to do so.
Additional taxes would be due because the land was improved as
the sellers lived in the townhome in 2004 and 2005. According to
the Rhones, the authority of Cook County to reassess the
property, though unexercised on the day of closing, nonetheless
constituted an encumbrance on the property separate and distinct
from any future tax liens. While the liens arose in 2008 when
the county issued the corrected tax bills based on the proper
assessment for the years 2004 and 2005, the Rhones allege that an
encumbrance for unassessed taxes existed at the time the policy
was issued on August 31, 2006.1
We acknowledge the distinction in case law between a lien
and an encumbrance. A lien is a " 'legal right or interest that
a creditor has in another's property, lasting usu[ally] until a
debt or duty that it secures is satisfied.' " Compton v. Country
1
The Rhones do not provide a precise date on which they
claim the encumbrance arose; presumably, the encumbrance existed
as of the date of the letter to Novit, the sellers' attorney and
the "issuing agent" of the First American title commitment, on
August 14, 2006, detailing that the property was assessed as
vacant land.
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Mutual Insurance Co., 382 Ill. App. 3d 323, 329, 887 N.E.2d 878(2008), quoting Black's Law Dictionary 933 (7th ed. 1999). An
encumbrance is broader. It may include " 'any right to, or
interest in, land which may subsist in a third party to the
diminution of the value of the estate, but consistent with the
passing of the fee by conveyance.' " Village of Buffalo v.
Illinois Commerce Comm'n, 180 Ill. App. 3d 591, 597, 536 N.E.2d
438 (1989), quoting Monti v. Tangora, 99 Ill. App. 3d 575, 580,
425 N.E.2d 597 (1981). Encumbrances " 'include not merely liens
such as mortgages, judgment liens, [or] taxes *** but also
attachments, leases, inchoate dower rights, water rights,
easements, restrictions on use, or any right in a third party
which diminishes the value or limits the use of the land
granted.' " Village of Buffalo, 180 Ill. App. 3d at 597, quoting
Monti, 99 Ill. App. 3d at 580-81.
Together with the broad scope of "encumbrance," the Rhones
rely on express language in Inland to support their claim that
the unassessed taxes fall within the title policy coverage.
In Inland, Stanley DeFurgalski entered into an agreement to
sell an apartment building to individuals that eventually
conveyed their interest into a land trust (collectively, the
owner-defendants). In December 1972, DeFurgalski agreed to
convey fee simple title "free and clear of all liens,
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encumbrances, restrictions, easements and leases of any nature
whatsoever" (Inland, 127 Ill. App. 3d at 537), in exchange for a
15-year note, which DeFurgalski "sold and assigned to Inland Real
Estate Corporation." Inland, 127 Ill. App. 3d at 538.
In October 1978, the Cook County assessor billed the owner-
defendants $128,584.51 in taxes, interest and penalties triggered
by omitted assessments for the three years preceding the sale.
Inland, 127 Ill. App. 3d at 538. The property had been assessed
as improved with single-family residences, rather than with the
63-unit apartment building located on the property at the time of
sale. Inland, 127 Ill. App. 3d at 544. Believing these taxes
constituted a violation of the agreement to convey the property
"free and clear" of all liens and encumbrances, the owner-
defendants stopped making payments on the note, and Inland, as
the then noteholder, filed suit to foreclose. Inland, 127 Ill.
App. 3d at 538. Numerous counterclaims, setoffs, and third-party
actions, including against the county assessor and collector,
substantially enlarged the original foreclosure action. Inland,
127 Ill. App. 3d at 538-39. Ultimately, the circuit court
granted summary judgment to the owner-defendants on their setoff
claims and counterclaims, and Inland appealed. Inland, 127 Ill.
App. 3d at 539-40.
This court reversed that portion of the circuit court's
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judgment in favor of the original buyers, which, in part, granted
a setoff of the additional taxes of $128,584.51 against the
balance of the purchase price of the property. We issued a
remand to resolve a material question of fact. Because the
record was barren of any evidence that the owner-defendants had
notice that the property was improperly assessed for the three
years preceding sale of the property by DeFurgalski, remand was
required to determine whether the buyers were good-faith
purchasers under then section 221 of the Revenue Act of 1939 and
thus insulated from the additional taxes. Inland, 127 Ill. App.
3d at 544-45, citing Ill. Rev. Stat. 1979, ch. 120, par. 702.
The court added its view that if the additional taxes were "a
lawful claim or demand enforceable against [the original buyers],
then the unexercised authority of [the county assessor and
collector] to impose the back taxes constituted an incumbrance on
the property at the time of transfer" from DeFurgalski to the
original buyers. Inland, 127 Ill. App. 3d at 541. It is this
language that the Rhones rely upon to assert their claim of the
existence of an "incumbrance" on or before the date of purchase
regarding the unassessed taxes by the Cook County assessor.
Inland is plainly distinguishable from the case at bar. The
Inland court had no occasion to address the meaning or purpose of
the term "encumbrance" in a title insurance policy. Instead,
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Inland dealt with an appeal from the grant of summary judgment in
favor of the property buyers, granting the buyers a setoff and
counterclaim for their payments of back taxes for the time the
seller retained ownership of the property. Inland, as plaintiff
and assignee of the seller, stood in the shoes of the seller
regarding the claims of the buyers that the back taxes on the
property encumbered the title the buyers obtained from the
seller. Inland, 127 Ill. App. 3d at 541-42, citing King v.
Harpster, 306 Ill. 202, 209, 137 N.E. 823 (1922), and Miller v.
Frederick's Brewing Co., 405 Ill. 591, 596, 92 N.E. 108 (1950).
The guarantee in Inland to convey clear title bears no
resemblance to an indemnification title insurance policy
protecting buyers against unknown defects in title as of the date
of its issuance.
Nor are we persuaded that the dictum in the Inland decision,
that the "unexercised authority" of a county assessor to charge
unassessed taxes constitutes an "incumbrance" prior to the tax
lien that arises when omitted taxes are levied, should be
extended to the use of "encumbrance" in a title insurance policy.
The dissent questions our determination that the "unexercised
authority" language is dictum. Slip op. at 30. The holding of
Inland is that a material question of fact mandated further
proceedings in the circuit court. The characterization of the
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"unexercised authority" on the part of the collector regarding
the unassessed taxes as an "incumbrance" was unnecessary for this
court's remand of the matter to the circuit court. The Inland
court itself noted that if, on remand, the claim of the county
defendants for back taxes was determined to be an "[un]lawful
claim" against the original buyers, then the property was not
encumbered at the time of sale. Inland, 127 Ill. App. 3d at 541.
Hence, whether the "unexercised authority" of the county
defendants constituted an encumbrance would turn on the
lawfulness, or not, of the claim for unassessed taxes upon
remand; the "unexercised authority" language in the Inland
decision was obiter dictum. See Excelon Corp. v. Department of
Revenue, 234 Ill. 2d 266, 277, 917 N.E.2d 899 (2009) (" 'A dictum
is "any statement made by a court for use in argument,
illustration, analogy or suggestion. It is a remark, an aside,
concerning some rule of law or legal proposition that is not
necessarily essential to the decision" ' "), quoting United
States v. Crawley, 837 F.2d 291, 292, (7th Cir. 1988), quoting
Stover v. Stover, 60 Md. App. 470, 476, 483 A.2d 783, 786 (1984).
Consistent with our view is the absence of cited authority
following the "unexercised authority" language in Inland.
Because the question pending before the Inland court was a
narrow one, which mandated a remand, we are unpersuaded that its
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language should reach beyond its facts. See Temesvary v. Houdek,
301 Ill. App. 3d 560, 567, 703 N.E.2d 613 (1998) ("the statements
contained in [cited] cases limiting the authority of the trial
court to reduce the amount of a lien are dicta insofar as the
present case is concerned and are not binding on the decision we
reach on the issue before us in this case").
The Rhones' reliance upon McLaughlin v. Attorneys' Title
Guaranty Fund, Inc., 61 Ill. App. 3d 911, 378 N.E.2d 355 (1978),
is also misplaced, though the case provides guidance on the duty
of a title insurer to discover a lien. In McLaughlin, Minnie
Witte Knuppel granted the plaintiffs an option to purchase
certain property she owned upon her death. McLaughlin, 61 Ill.
App. 3d at 913. Following Ms. Knuppel's death, the plaintiffs
exercised the option. Pursuant to court order, the estate, at
its expense, retained the defendant to issue a policy of title
insurance. McLaughlin, 61 Ill. App. 3d at 913. When inheritance
taxes were later charged against the plaintiffs, they filed suit
against the defendant, "alleging a defect in title which was
covered by the policy." McLaughlin, 61 Ill. App. 3d at 914. The
judgment in the plaintiffs' favor after a bench trial was upheld.
McLaughlin, 61 Ill. App. 3d at 917. The court of review
determined the title insurer assumed "a duty to search the
records and examine the applicable law before issuing its
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commitment or policy." McLaughlin, 61 Ill. App. 3d at 916.
"[T]he failure of the defendant to specify the inheritance tax as
an exclusion to the coverage of the policy [left] the defendant
open to liability for the undiscovered defect in title."
McLaughlin, 61 Ill. App. 3d at 916.
We agree with the holding in McLaughlin that a title insurer
has a duty to search the public records and, when presented with
a request for a title insurance policy by an estate, the issuer
of the policy must take note that a "distribution out of *** [an]
estate" may trigger an inheritance tax. McLaughlin, 61 Ill. App.
3d at 913. As the McLaughlin court made clear, "The lien for
inheritance tax was determinable by the defendant, and it should
have been determined." (Emphasis added.) McLaughlin, 61 Ill.
App. 3d at 916.
So too here, had the unassessed taxes given rise to liens at
the time of closing, First American would bear the duty to
discover such liens. However, as we made clear, no liens for
unassessed taxes existed at the time of closing. The McLaughlin
court also expressed that "the lien was not created, suffered or
permitted by the plaintiffs." McLaughlin, 61 Ill. App. 3d at
916. By virtue of their letters to the sellers and the Cook
County assessor, in which they acknowledged the townhome had been
improperly assessed in 2004 and 2005 as vacant land, it is
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doubtful that what the McLaughlin court expressed about the
plaintiffs can be said of the Rhones.
In any event, we find McLaughlin to be of no aid to the
Rhones as it involved a defect in title based on the existence of
a lien and no such claim can be made here. We decline the
Rhones' invitation to read McLaughlin to imply a broad duty on
the part of First American to discover not only potential
unassessed taxes, of which the Rhones were admittedly aware, but
also to treat taxes not yet levied as liens that should have been
"determined" by the title insurer.
Rather, we look to cases involving a contest of title
insurance coverage based on a claimed encumbrance to determine
whether the "unexercised authority" of a county assessor to
charge unassessed taxes should give rise to an encumbrance as
that term is used in a title insurance policy. The specific
question before us is whether unassessed property taxes may
constitute an encumbrance prior to the taxes being levied; that
is, whether an encumbrance exists before a lien arises from a tax
levy, as provided by the Tax Code.
For the reasons we make clear below, in the context of a
title insurance policy, we reject the Rhones' reliance on a broad
use of the term "encumbrance" to bring their claim regarding
unassessed and unlevied taxes within the title policy. We hold
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that by operation of the Tax Code, the bills regarding the
unassessed taxes acquired status as tax liens on January 1, 2008.
The additional tax bills for 2004 and 2005, based on the 2007
reassessment of the property as improved, could not constitute an
encumbrance on the title by way of any "unexercised authority" of
the Cook County assessor on or before August 31, 2006. To hold
otherwise would so enlarge the term "encumbrance" to make it
virtually impossible to determine whether an encumbrance exists
at the time a title insurance policy is issued.
While we do not find any Illinois cases that address the
precise issue before us, courts in other states have rejected
similar claims seeking indemnification for unassessed taxes under
title insurance policies. See Butcher v. Burton Abstract Title
Co., 52 Mich. App. 98, 216 N.W.2d 434 (1974); Edwards v. St. Paul
Title Insurance Co., 39 Colo. App. 235, 563 P.2d 979 (1977).
Although the decisions of foreign courts are not binding, "the
use of foreign decisions as persuasive authority is appropriate
where Illinois authority on point is lacking or absent." Carroll
v. Curry, 392 Ill. App. 3d 511, 517, 912 N.E.2d 272 (2009); see
also People v. $111,900, United States Currency, 366 Ill. App. 3d
21, 30, 851 N.E.2d 813 (2006) (in the absence of Illinois cases
setting forth guidelines to analyze the issue in the case, "cases
from other jurisdictions [are] instructive").
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In the Michigan case, the defendant issued a title insurance
policy on property the plaintiffs purchased in 1966. Butcher, 52
Mich. App. at 99, 216 N.W.2d at 434. The policy covered any
" 'failure or unmarketability of the title *** excepting only
such liens, incumbrances and other matters as set forth' "
elsewhere in the policy. Butcher, 52 Mich. App. at 99, 216
N.W.2d at 434. Fourteen months after the policy was issued, the
plaintiffs were billed by their township for several ad valorem
taxes and a special assessment. The plaintiffs filed suit
contesting the charges and made a demand under the title policy
that the defendant enter the litigation initiated by the
plaintiffs "and defend their property against the alleged
encumbrances not excepted by the policy." Butcher, 52 Mich. App.
at 101, 216 N.W.2d at 435. The Michigan court determined the
question before it to be "whether the charges placed against
plaintiffs' property by the township *** constitute encumbrances
within the meaning of that term as used in the title insurance
policy contract." Butcher, 52 Mich. App. at 101, 216 N.W.2d at
435-36.
The Butcher court held that the charges did not constitute
an encumbrance at the time the title insurance policy was issued
and hence were not covered by it. Butcher, 52 Mich. App. at 102,
216 N.W.2d at 436. "Granting that the broadest definition of the
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word 'encumbrance' might include prospective charges, the general
rule is that a special assessment does not become an encumbrance
until it has achieved lien status. [Citations.] Furthermore, ad
valorem taxes not yet due are not liens or encumbrances within
the meaning of a title insurance policy." Butcher, 52 Mich. App.
at 101-02, 216 N.W.2d at 436. The Michigan court quoted language
from a New York case:
" 'Title insurance operates to protect a
purchaser or a mortgagee against defects in
or incumbrances on a title existing at the
date of such insurance. It is not
prospective in its operation and has no
relation to liens or requirements arising
thereafter.
It follows, we think, that [the title
insurance company] no more agreed with
plaintiff to protect him against liability
for the unpaid assessment in question than it
undertook to indemnify him for taxes to be
levied against the premises after delivery of
its certificate of title insurance.' "
Butcher, 52 Mich. App. at 101, 216 N.W.2d at
436, quoting Mayers v. Van Schaick, 268 N.Y.
221-09-1216
320, 323-24, 197 N.E. 296, 297-98 (1935).
Consistent with the New York case, the Butcher court concluded,
"Since none of the charges *** were either due or liens at the
date of the issuance of the title insurance policy, they do not
constitute liens or encumbrances within *** the policy terms."
Butcher, 52 Mich. App. at 101, 216 N.W.2d at 436.
In the Colorado case, the plaintiff obtained a title
insurance policy from the defendant covering " '[a]ny defect in
or lien or encumbrance on the title' " as of the date the
plaintiff purchased the subject property in 1967. Edwards, 39
Colo. App. at 236, 563 P.2d at 980. In 1969 and 1970, a water
and sanitation district levied ad valorem taxes against the
property. Edwards, 39 Colo. App. at 236, 563 P.2d at 980. The
plaintiff filed suit, contending the "assessment for district
taxes was a 'defect in or lien or encumbrance on the title' "
rendering the defendants liable under the policy. Edwards, 39
Colo. App. at 236, 563 P.2d at 980.
The Colorado Court of Appeals found no basis to hold the
title insurer liable. Edwards, 39 Colo. App. at 237, 563 P.2d at
980. The court reasoned that "in 1967, when [the plaintiff]
purchased [the] property and the policy was issued, there were no
district taxes or assessments due or payable or certified to the
treasurer's office, and thus there was obviously no lien against
23
1-09-1216
the property for such taxes." Edwards, 39 Colo. App. at 237, 563
P.2d at 980. Those taxes, which were "certified and levied two
years after the date of the policy," did not fall within its
coverage because "the mere existence of the [water and
sanitation] district and the prospect of taxes in the future was
not a lien, encumbrance, or defect as of the date of issuance of
the policy." Edwards, 39 Colo. App. at 237, 563 P.2d at 980.
The court expressly noted that the title insurance company "did
not contract to indemnify [the plaintiff] against loss due to
district taxes or assessments to be levied against his property
after the date of the policy." Edwards, 39 Colo. App. at 237,
563 P.2d at 981. The court affirmed summary judgment in the
title insurer's favor.
Against these cited authorities, the Rhones present us with
no authority addressing the scope of the term encumbrance in a
title insurance policy, which supports their position. We agree
with the assertions in both the Butcher and Edwards decisions:
although the term "encumbrance" includes a tax lien, it does not
include the mere prospect of future taxes. Butcher, 52 Mich.
App. at 102, 216 N.W.2d at 436; Edwards, 39 Colo. App. at 237,
563 P.2d at 980.
A property tax bill arising from a reassessment is a tax
lien in the year the tax is levied pursuant to the Tax Code; the
24
1-09-1216
previously unassessed taxes do not constitute an encumbrance
prior to acquiring the status of a tax lien. In other words, the
prospect of a future tax lien does not give rise to an
encumbrance on the title before the tax is levied. Butcher, 52
Mich. App. at 101-02, 216 N.W.2d at 436. To be clear, unassessed
property taxes cannot constitute an encumbrance on title at any
point before the tax is levied pursuant to statute, at which
point the tax constitutes both a lien and an encumbrance, as each
term is used in a title insurance policy. Put another way, a
title insurance policy " 'operates to protect *** against defects
in or incumbrances on a title existing at the date of such
insurance.' " Butcher, 52 Mich. App. at 102, 216 N.W.2d at 436,
quoting Mayers, 268 N.Y. at 323, 197 N.E. at 297.
The Rhones had knowledge that the townhome had been wrongly
assessed as vacant land from 2004 to 2006. They protected
themselves against any additional taxes due in 2006 in the event
of a reassessment of the property as improved land. The Rhones
properly concluded that the sellers should bear their share of
any additional taxes due for 2006 while the sellers were owners.
It would have been a simple matter to have altered the proration
agreement to include the sellers' liability for additional taxes
based on that very same reassessment for tax years 2004 and 2005
when the sellers resided in the townhome. Yet, inexplicably, the
25
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Rhones did not. To paraphrase the New York case quoted in the
Michigan case, First American no more agreed with the Rhones to
protect them against liability for the unpaid assessment in
question than it undertook to indemnify the Rhones for taxes to
be levied against the premises after delivery of the policy.
Butcher, 52 Mich. App. at 101, 216 N.W.2d at 436, quoting Mayers,
268 N.Y. at 324, 197 N.E. at 298. Because the unassessed taxes
in this case became liens and encumbrances only after the Rhones'
title insurance policy was issued, the unassessed taxes were not
defects of title covered by the Rhones' title insurance policy.
We hold the unassessed taxes for 2004 and 2005 were neither
liens nor encumbrances on or before August 31, 2006, when the
title insurance policy was issued. Therefore, First American
cannot be held liable for their payment. Based on our holding,
we do not address First American's fallback contention that the
unassessed taxes are excluded from coverage by any of the special
exclusions or exceptions of the policy.
Special Damages
Because we hold that the potential unassessed taxes did not
constitute a covered encumbrance under the Rhones' title
insurance policy, the Rhones' claim does not fall within the
policy. Where the policy is not triggered, there can be no
finding that the insurer acted vexatiously and unreasonably in
26
1-09-1216
denying the claim. Westchester Fire Insurance Co. v. G. Heileman
Brewing Co., 321 Ill. App. 3d 622, 638, 747 N.E.2d 955 (2001).
We affirm summary judgment on count II, seeking special damages
against First American.
CONCLUSION
First American issued an insurance policy to the Rhones that
covered "[a]ny defect in or lien or encumbrance on the title" to
the townhome as of the date it was issued, August 31, 2006. It
was not until the Rhones were billed in February 2008 for the
omitted assessment taxes covering tax years 2004 and 2005, that
the unassessed taxes obtained lien status by operation of the Tax
Code. No separate and distinct encumbrance arose based on the
unassessed taxes prior to the issuance of the tax bill due in
2008. The unassessed taxes were not covered by the Rhones' 2006
title insurance policy. We affirm Judge Riley's summary judgment
order in all respects.
Affirmed.
PATTI, J., concurs.
LAMPKIN, J., concurs in part and dissents in part.
27
1-09-1216
JUSTICE LAMPKIN, concurring in part and dissenting in part:
I agree, but for different reasons, that the circuit court
correctly granted summary judgment in favor of First American on
the Rhones' claim for special damages under section 155 of the
Illinois Insurance Code (215 ILCS 5/155 (West 2008)). However, I
disagree with the majority's conclusion that the unassessed
property taxes for the years 2004 and 2005 did not constitute
encumbrances until the tax bills were issued in 2008. In my
view, the majority fails to decide this dispute according to the
terms of the parties' contract, i.e., the title insurance policy,
and then misapplies Illinois precedent concerning what
constitutes an encumbrance. The interpretation of the terms of
that contract, rather than the Property Tax Code (Tax Code) (35
ILCS 200/1-1 et seq. (West 2008)), should determine the outcome
of this dispute. I conclude that the title insurance policy
issued to the Rhones covers the 2004 and 2005 back taxes, which
constituted encumbrances when the policy was issued.
There is no dispute that, prior to the real estate closing
on August 31, 2006, both the buyers and sellers had notice that
the condominium was improperly assessed and being taxed as vacant
land. Specifically, on August 14, 2006, the Rhones, through
their attorney, wrote the sellers' attorney, Kent Novit, who also
served as First American's issuing agent for the title insurance
28
1-09-1216
policy issued to the Rhones. The Rhones requested several
modifications to the parties' real estate sales contract. The
Rhones asked, inter alia, that paragraph 5 concerning the deed be
modified to strike language allowing the sellers to deliver a
warranty deed subject to any "special taxes or assessments." The
Rhones requested that the "deed should also be subject to real
estate taxes for only 2006 taxes, not 2003 and subsequent years."
Furthermore, the Rhones attached a data sheet from the Cook
County assessor's Web site, which showed the condominium was
being taxed as vacant land and a neighboring, comparable property
was correctly assessed in 2005 for nearly $9,000 more in property
taxes. The Rhones suggested that the tax proration be based upon
110% of the most recent ascertainable tax bill for a correctly
taxed neighboring unit of comparable value.
At the real estate closing, the Rhones and the sellers
entered into a tax reproration agreement that addressed the 2006
taxes only; it did not address the potential back taxes or any
other taxes for any year before 2006. Under that agreement, if
the condominium was assessed as vacant property for the 2006 tax
year, the Rhones would pay the tax bill but Novit would hold
$10,000 from the sellers in escrow. If the property was
reassessed properly as improved property before March 31, 2008,
the escrow would be applied toward any additional taxes for 2006.
29
1-09-1216
The First American title insurance policy issued to the
Rhones on August 31, 2006, listed Novit & Novit as the issuing
agent on schedules A and B of the policy. The policy generally
insured the Rhones against losses caused by "[a]ny defect in or
lien or encumbrance on the title," subject to the specified
limitations on coverage. The policy listed five standard
exceptions to coverage, including one noting that the policy
provided no coverage for "[t]axes, or special assessments which
are not shown as existing liens by the public records." First
American, however, signed an endorsement that deleted the five
standard exceptions from the policy.
A special exception stated that the policy did not insure
against loss or damage which arose by reason of "[g]eneral taxes
for the year, [sic] 2006 and subsequent years which are not yet
due and payable." Relevant to this appeal, the policy also
expressly excluded from coverage:
"3. Defects, liens, encumbrances, adverse claims
or other matters:
(a) created, suffered, assumed or agreed to
by the [Rhones];
(b) not known to [First American], not
recorded in the public records at Date of Policy, but
known to the [Rhones] and not disclosed in writing to
30
1-09-1216
[First American] by the [Rhones] prior to the date the
[Rhones] became an insured under this policy;
***
(d) attaching or created subsequent to Date
of Policy."
The majority undertakes a broad analysis that encompasses
issues of statutory interpretation of the Tax Code, the levying
of property taxes, and policy considerations. This case,
however, does not hinge upon the status of back taxes as liens or
encumbrances under the terms of the Tax Code. Rather, the
dispositive issue here is whether the Rhones' claim for back
taxes was covered under the terms of their contract with First
American.
"The interpretation of a party's agreement is a
question of law to be determined by the appellate court
de novo. [Citation.] Whether a contract is clear or
ambiguous also is a question of law for the court.
[Citation.] When interpreting a contract, the primary
objective is to give effect to the parties' intentions.
[Citation.] If a contract is clear and unambiguous,
the court must determine the intent of the parties
solely from the plain language of the contract.
[Citation.] However, where the contract is ambiguous,
31
1-09-1216
evidence outside the document may be considered to
discern the parties' intent. [Citation.] The meaning
of the contract can be determined by the court as a
matter of law if the parties' intent may be determined
from undisputed facts. [Citation.]" C.A.M.
Affiliates, Inc. v. First American Title Insurance Co.,
306 Ill. App. 3d 1015, 1020 (1999).
Moreover, it has been consistently held that any ambiguity or
inconsistent or conflicting provisions in insurance contracts
must be construed in favor of granting coverage to the insured.
National Discount Shoes, Inc. v. Royal Globe Insurance Co., 99
Ill. App. 3d 54, 60 (1981).
The content of the contract concerning the standard
exceptions, special exception and exclusions is not ambiguous.
The plain language of the contract establishes that the Rhones
are covered for encumbrances on the title unless an exception or
exclusion listed in the policy applies. Although the contract
does not define the term encumbrance, this court has recognized
that encumbrances may include broad categories of inchoate rights
that cloud title, including potential back taxes even if they
have not yet obtained statutory lien status. Inland Real Estate
Corp., 127 Ill. App. 3d at 541 (holding that if the assessment of
back taxes was lawful and enforceable, the unexercised authority
32
1-09-1216
of the county assessor to impose back taxes constituted an
encumbrance on the property at the time of transfer). The
majority attempts to detract from Inland's relevance to the
present case by characterizing Inland's holding and analysis as
mere dictum entitled to little weight. Contrary to the
majority’s characterization, Inland's discussion concerning
unassessed back taxes constituting encumbrances was neither
obiter dictum nor judicial dictum because it was necessary to the
decision in the case and therefore precedential. See Lebron v.
Gottlieb Memorial Hospital, Nos. 105741, 105745 cons., slip op.
at 12-13 (Ill. February 4, 2010) (obiter dictum is not essential
to the outcome of the case, not an integral part of the opinion
and generally not binding authority or precedent within the stare
decisis rule; judicial dictum, which is entitled to much weight
and should be followed unless found to be erroneous, expresses an
opinion upon a point in a case argued by counsel and deliberately
passed upon by the court, though not essential to the disposition
of the cause). In Inland, there would have been no reason for
this court to remand the cause for a fact determination on
whether the buyers had notice of the back taxes unless this court
had determined that the county's unexercised authority to impose
the back taxes constituted an encumbrance. Inland Real Estate
Corp., 127 Ill. App. 3d at 541-45.
33
1-09-1216
The majority also asserts that Inland's holding should not
extend beyond its facts because the question before the Inland
court was a narrow one. According to the majority, the guarantee
in Inland to convey clear title is a far cry from an expressly
limited insurance policy protecting against title risks as of the
date of its issuance. Although I do not agree with the
majority's characterization of Inland, even assuming, arguendo,
that the Inland court addressed a narrow question, the issue here
is certainly narrower where this court is called upon to simply
construe and apply the terms of the parties' contract.
The majority's reliance on foreign precedent is problematic.
Specifically, the Edwards case from Colorado is readily
distinguishable. In Edwards, the defendant title insurance
company issued a policy in 1967 to the plaintiff property owner
but did not mention that the property was situated within a water
and sanitation district (district), which had been formed in
1965. Edwards, 39 Colo. App. at 236, 563 P.2d at 980. The
district first levied ad valorem taxes against the owner's
property in 1969 and 1970, and the owner sued the title insurance
company, claiming that inclusion in the district and the
consequent taxes was a defect in or lien or encumbrance on the
title. Edwards, 39 Colo. App. at 236, 563 P.2d at 980. The
court found no basis for liability because there were no district
34
1-09-1216
taxes or assessments due or payable when the policy was issued.
Edwards, 39 Colo. App. at 236, 563 P.2d at 980. The court
reasoned that "the mere existence of the district and the
prospect of taxes in the future" was not an encumbrance, and
there was "nothing in the record to show any foreseeable
challenge" to the owner's title. Edwards, 39 Colo. App. at 237,
563 P.2d at 980-81. Here, in contrast, the Rhones' claim under
their policy did not involve the mere prospect of future taxes
being levied by a taxing authority. Rather, the Rhones' claim
involved back taxes, and the public records revealed that those
back taxes were a foreseeable encumbrance on the Rhones' title.
I do not find the majority's reliance on the Butcher case
from Michigan to be persuasive. The Butcher court referred to
the trial court's "thorough, scholarly, 17-page opinion," and
agreed with its decision to grant the title insurance company's
motion for summary judgment. Butcher, 52 Mich. App. at 101, 216
N.W.2d at 436. The Butcher court then characterized the
plaintiffs' claims of encumbrances on their title "as either
special assessments (the connection charges and possibly the ad
valorem sewer taxes) or prospective general ad valorem taxes (the
school taxes and the ad valorem sewer taxes)." Butcher, 52
Mich. App. at 101, 216 N.W.2d at 436. The Butcher court
summarily concludes that "a special assessment does not become an
35
1-09-1216
encumbrance until it has achieved lien status," and "ad valorem
taxes not yet due are not *** encumbrances within the meaning of
a title insurance policy" (Butcher, 52 Mich. App. at 101-02, 216
N.W.2d at 436), but the court offers sparse analysis to support
those conclusions. I see no reason to abandon this court's more
recent and thorough analysis in Inland for that of Butcher.
Inland is relevant to the present case. Just as the seller
in Inland promised to convey title to the property free and clear
of all encumbrances (Inland Real Estate Corp., 127 Ill. App. 3d
at 537), First American's title insurance policy assured the
Rhones that the condominium was free from any "encumbrance on the
title." Although the promise in Inland arose in the context of a
warranty deed, whereas the promise here arose in the context of
title insurance, both related to an encumbrance on title. There
is no valid reason to apply a different definition of the term
encumbrance to real estate sales contracts versus contracts for
title insurance. In each case, the property was transferred in
reliance upon a promise that there were no clouds upon title
despite the fact that the county tax assessor maintained the
unexercised authority to impose back taxes based upon previously
omitted assessments. Inland Real Estate Corp., 127 Ill. App. 3d
at 541. Although those back taxes were not levied against the
buyers in each case for several years, that unexercised authority
36
1-09-1216
" 'diminishe[d] the value' " of the property and, if the taxes
could validly be assessed against the buyers, constituted an
encumbrance on title. Village of Buffalo, 180 Ill. App. 3d at
597, quoting Monti, 99 Ill. App. 3d at 581. The record
establishes and the majority acknowledges that the taxes for 2004
and 2005 could validly be assessed against the Rhones because
they had notice when they purchased the condominium that it was
improperly assessed in those years as vacant property.
The majority speculates that the Rhones' knowledge of the
possibility of back taxing for 2004 and 2005 "spurred" them to
enter into the tax reproration agreement with the sellers, yet
the majority wonders why the Rhones "inexplicably" did not
require the sellers to escrow additional money to cover the 2004
and 2005 taxes in addition to the 2006 taxes. The majority,
however, overlooks the fact that this condominium sale was
accomplished not only by utilizing the tax reproration agreement
to cover the future bill for the 2006 taxes, but also by
obtaining a title insurance policy that waived its exclusions for
the back taxes. The record indicates that any concerns about the
possibility of back taxes for 2004 and 2005 were addressed by
First American's endorsement of the provision that deleted the
standard exception for taxes and special assessments not shown as
existing liens by the public records.
37
1-09-1216
The Rhones have explained that the reproration agreement
addressed only the 2006 taxes because those taxes were
straightforward. Moreover, the Rhones thought they would be
considered good-faith purchasers under section 9-270 of the Tax
Code (35 ILCS 200/9-270 (West 2008)) and, thus, not subject to
any back taxes. It was not until the Rhones contacted the
assessor after the closing (so that their future property taxes
would be properly assessed) that they learned the assessor relied
on Inland for the proposition that a purchaser's notice of an
improper assessment constituted notice of the tax.
Furthermore, the Rhones had requested modifications to the
terms of the parties' sales contract so that the sellers would
convey title subject to taxes for only 2006 and subsequent years.
The sellers came to the closing with a title insurance policy
that (1) deleted the exception for taxes not shown as existing
liens by the public records, and (2) limited the special
exception for general taxes to the year 2006 and thereafter. The
Rhones reasonably relied on those provisions in the title
insurance policy as evidence that First American accepted the
risk of the possibility of back taxes by insuring over that
defect in title.
Because the back taxes were an encumbrance on title when the
policy was issued, it is necessary to address First American's
38
1-09-1216
arguments that the policy’s terms specifically excluded such
taxes from coverage.
Initially, First American contends the potential back taxes
were not covered because the policy listed a special exception,
which noted that it did not insure against a loss or damage which
arose by reason of "[g]eneral taxes for the year, [sic] 2006 and
subsequent years which are not yet due and payable." First
American's argument lacks merit because the timing of the levying
of the taxes by the assessor is not relevant to this exception as
drafted in the parties' contract. Although the taxes at issue
here were not due and payable until they were assessed and a tax
bill was issued in 2008, there is a distinction between the year
in which taxes are assessed and the year for which taxes are
assessed. The special exception did not exclude general taxes
that were assessed or levied in 2006 and subsequent years.
Rather, the plain language of the insurance policy excluded taxes
only for the year 2006 and subsequent years. The back taxes at
issue here definitely were not for 2006 and after because they
were for the years 2004 and 2005. Consequently, the special
exception did not exclude coverage for the back taxes.
Next, First American contends that exclusion 3(a) in the
policy, which excludes coverage for encumbrances assumed by the
Rhones, applied to the potential back taxes. First American
39
1-09-1216
argues the Rhones assumed the encumbrance because they
voluntarily gave Cook County notice that the property was
improperly taxed as vacant land and then paid the bill for the
2004 and 2005 back taxes. First American asserts the Rhones were
protected from that debt as good-faith purchasers under section
9-270 of the Tax Code (35 ILCS 200/9-270 (West 2008)). This
argument lacks merit. As stated above, the taxes for 2004 and
2005 could validly be assessed against the Rhones because they
had notice when they purchased the condominium that it was
improperly assessed in those years as vacant property.
Consequently, the Rhones' claim for coverage is not defeated by
exclusion 3(a) of the policy.
Next, First American contends that exclusion 3(b) in the
policy applied to the potential back taxes. Exclusion 3(b)
stated that First American did not provide coverage for defects,
liens or encumbrances "not known to [First American], not
recorded in the public records at Date of Policy, but known to
the [Rhones] and not disclosed in writing to [First American] by
the [Rhones] prior to the date the [Rhones] became an insured
under this policy." This exclusion is not applicable. First
American knew or should have known as much about the tax
discrepancy as the Rhones, who knew the property taxes assessed
on the condominium in the previous years were unusually low for
40
1-09-1216
developed property located in that neighborhood. See Inland Real
Estate Corp., 127 Ill. App. 3d at 546 (abnormally low taxes for
the neighborhood in which a property was located or for the level
of improvement on the property could constitute notice of the
possibility of a back tax); McLaughlin, 61 Ill. App. 3d at 916(the insurer has a duty to search the records and examine the
applicable law before issuing its commitment or policy, which
must be predicated upon a careful examination of the documentary
evidence of title and the exercise of expert contract
draftsmanship). Furthermore, the tax discrepancy was easily
determinable through the public records where the Cook County
assessor's website revealed that the condominium was assessed as
vacant land. Moreover, the Rhones disclosed the encumbrance to
First American in writing prior to the issuance of the policy
when their attorney sent the August 14, 2006 letter to Novit, who
was First American's issuing agent. See McLaughlin, 61 Ill. App.
3d at 917 (where the commitment for title insurance was issued to
the plaintiffs by the insurer through its agent, notice to the
agent was imputed to an insurer). Because the encumbrance was
disclosed in writing to First American, exclusion 3(b) did not
apply and the potential back taxes were a covered encumbrance.
First American complains the Rhones failed to establish any
agency relationship between Novit and First American because
41
1-09-1216
Novit was never deposed to establish the scope of his authority
and no agency contract between Novit and First American was
submitted into the record. First American's arguments concerning
agency lack merit.
Notice to or knowledge of an agent, while acting within the
scope of his authority and with respect to a matter over which
his authority extends, is notice to a principal. Mitchell Buick
& Oldsmobile Sales, Inc. v. National Dealer Services, Inc., 138
Ill. App. 3d 574, 582 (1985). The party asserting the agency
relationship has the burden of proving the agency's existence by
a preponderance of the evidence. FDL Foods, Inc. v. Kokesch
Trucking, Inc., 233 Ill. App. 3d 245, 256 (1992). Although the
existence and scope of an agency relationship are generally
questions of fact, a court may decide the issue if the
relationship is so clear as to be undisputed. C.A.M. Affiliates,
Inc., 306 Ill. App. 3d at 1021. An agent's authority may be
either actual or apparent. FDL Foods, Inc., 233 Ill. App. 3d at
256. Whereas actual authority may be granted either expressly or
impliedly (FDL Foods, Inc., 233 Ill. App. 3d at 256), apparent
authority exists in a person who, whether authorized or not,
reasonably appears to third persons, because of the acts of
another, to be authorized to act as the agent for such other
person (Mitchell Buick & Oldsmobile Sales, Inc., 138 Ill. App. 3d
421-09-1216
at 582). The authority of an agent, whether actual or apparent,
can only be established by the words or conduct of the alleged
principal, not the alleged agent. First American Title Insurance
Co. v. TCF Bank, F.A., 286 Ill. App. 3d 268, 274 (1997).
First American’s relationship with Novit is so clear that
this court may decide the issue. Title insurance companies
commonly contract with title insurance agents to sell their title
insurance. In this case, the record establishes that the Rhones
reasonably believed Novit possessed apparent authority to act as
First American's agent because First American held itself out to
the public as providing title insurance services through issuing
agents. Here, First American signed the Rhones' title policy,
which listed Novit & Novit as First American's "issuing agent."
The ordinary meaning of the words "issuing agent" reasonably
conveyed to the Rhones that First American had authorized Novit
as its agent to issue title insurance policies on its behalf.
Furthermore, the record indicates that the only contact the
Rhones or their attorney had with First American prior to
issuance of the title insurance policy was through First
American's issuing agent Novit. Consequently, notice to Novit
was notice to First American, and the Rhones therefore gave
notice to First American prior to the closing about the omitted
taxes for 2004 and 2005.
43
1-09-1216
Finally, First American contends exclusion 3(d) applied to
the potential back taxes. Exclusion 3(d) stated that the policy
did not apply to defects, liens or encumbrances "attaching or
created subsequent to Date of Policy." First American reiterates
the argument that the back taxes did not become a statutory lien
until they were included in the 2008 tax bill, which was well
after the policy was issued in 2006. However, as explained
above, Inland, which is relevant precedent here, held that the
potential for the county assessor to impose a lawful claim for
back taxes constituted an encumbrance on the property "at the
time of transfer" from the seller to the buyer. Inland Real
Estate Corp., 127 Ill. App. 3d at 541. The insurance policy
therefore covered that encumbrance, and exclusion 3(d) did not
apply.
Because the potential back taxes constituted a covered
encumbrance under the Rhones' title insurance policy, I would
reverse the circuit court's grant of summary judgment on count I
in First American's favor and remand with directions to enter
summary judgment for the Rhones on that count. First American
complains this decision would chill sales because title insurers
would be forced to conduct open-ended searches to discover any
potential property tax that could ever be assessed. I disagree.
If First American wished to place the burden of potential back
44
1-09-1216
taxes on the Rhones, it simply should have refrained from
endorsing away the standard exception that excluded taxes or
special assessments that are not shown as existing liens by the
public records. Alternatively, First American could have
modified the policy's terms to exclude coverage for potential
back taxes when it learned that the condominium was improperly
assessed for years prior to closing. Such precautionary steps
are not so onerous as to chill the issuance of title insurance
policies or the sale of real estate.
Although I would reverse the circuit court's order
concerning count I, I would affirm the circuit court's order in
favor of First American on count II of the Rhones' complaint. In
count II, the Rhones argued they were entitled to special damages
under section 155 of the Illinois Insurance Code (215 ILCS 5/155
(West 2008)) because First American's denial of their claim under
their title insurance policy was vexatious and unreasonable.
Although the granting of section 155 attorney fees and
penalties is usually entrusted to the sound discretion of the
trial court (Meier v. Aetna Life & Casualty Standard Fire
Insurance Co., 149 Ill. App. 3d 932, 940 (1986)), the awarding of
section 155 fees and penalties as a judgment on the pleadings is
reviewed de novo (Employers Insurance of Wausau v. Ehlco
Liquidating Trust, 186 Ill. 2d 127, 160 (1999)).
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The question of whether the insurer's acts are unreasonable
and vexatious is one of fact. Green v. International Insurance
Co., 238 Ill. App. 3d 929, 935 (1992). A court may award
reasonable attorney fees and other costs for a vexatious and
unreasonable action by a company where there is an issue of the
liability of a company on an insurance policy or the amount of
the loss payable thereunder, or for an unreasonable delay in
settling a claim. 215 ILCS 5/155 (West 2008). A court should
consider the totality of the circumstances when deciding whether
an insurer's conduct is vexatious and unreasonable, including the
insurer's attitude, whether the insured was forced to sue to
recover, and whether the insured was deprived of the use of his
property. McGee v. State Farm Fire & Casualty Co., 315 Ill. App.
3d 673, 681 (2000). If a bona fide coverage dispute exists, an
insurer's delay in settling a claim will not be deemed vexatious
or unreasonable for purposes of section 155 sanctions. Baxter
International, Inc. v. American Guarantee & Liability Insurance
Co., 369 Ill. App. 3d 700, 710 (2006).
Section 155 fees are not automatically awarded simply
because an insurer fails to prove its coverage position. Mohr v.
Dix Mutual County Fire Insurance Co., 143 Ill. App. 3d 989, 999
(1986). The record here is silent on the circuit court's
specific findings concerning the Rhones' claim for section 155
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fees. Nevertheless, the Rhones have not met their burden to
prove that First American acted with improper intent in refusing
payment, and the record indicates that First American did have a
bona fide coverage dispute. In considering the totality of the
circumstances, the court could reasonably conclude that First
American's denial of the Rhones' claim was not unreasonable or
vexatious.
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REPORTER OF DECISIONS - ILLINOIS APPELLATE COURT
______________________________________________________________________
RAY H. RHONE and DENISE RHONE,
Plaintiffs-Appellants,
v.
FIRST AMERICAN TITLE INSURANCE CO.,
a California Corporation,
Defendant-Appellee.
________________________________________________________________
No. 1-09-1216
Appellate Court of Illinois
First District, First Division
Filed: May 17, 2010
_________________________________________________________________
JUSTICE GARCIA delivered the opinion of the court.
PATTI, J., concurs.
LAMPKIN, J., concurs in part and dissents in part.
_________________________________________________________________
Appeal from the Circuit Court of Cook County
Honorable Daniel A. Riley, Judge Presiding
_________________________________________________________________
For PLAINTIFFS- Michael J. Sreenan
APPELLANTS 853 North Elston Avenue
Chicago, Illinois 60622
For DEFENDANT- Jeffrey D. Corso
APPELLEE Cooney & Corso, LLC
4925 Indiana Avenue, Suite 101
Lisle, Illinois 60532
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1-09-1216
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