283 Cal. Rptr. 231 (Cal. App. 1991)
Prior to 1979, corporations operated warehouses and chemical processing plants on approximately 30 acres of land near the Guadalupe River in Santa Clara County.1 These companies maintained underground tanks, pumps, and pipelines for the storage, handling, and disposal of hazardous substances.2 The hazardous substances eventually contaminated the soil, subsoil, and groundwater.3
In 1979, Kimball Small Investments 103 purchased the property.4 Between 1979 and 1981, the California Department of Health Services ordered Kimball Small Investments 103 to remedy the toxic contamination.5 Kimball Small Investments 103 did not comply with the order.6
In early October 1986, plaintiffs Lick Mill Creek Apartments and Prometheus Development Company, Inc. acquired lot 1 of the property from Kimball Small Investments 103.7 In connection with this acquisition, plaintiffs purchased an American Land Title Insurance Association policy from Chicago Title Insurance Company.8 Plaintiffs subsequently acquired lots 2 and 3 from Kimball Small Investments 103 and obtained two additional American Land Title Insurance Association policies from Chicago Title Insurance Company and First American Title Insurance Company.9
Chicago Title Insurance Company commissioned a survey and inspection of the property by Carroll Resources Engineering & Management before issuing the first policy.10 The entire site was surveyed and inspected before the later policies were issued.11 Carroll Resources noted the presence of pipes, tanks, pumps, and other improvements on the property.12 At the time each of the policies was issued, the Department of Health Services, the Regional Water Quality Control Board, and the Santa Clara County Environmental Health Department maintained records disclosing the presence of hazardous substances on the subject property.13
Following their purchase of the property, plaintiffs incurred costs for removal and clean-up of the hazardous substances to mitigate their damages and avoid costs of compliance with government mandates.14 Plaintiffs claimed their expenses were a substitute for restitution to the State Hazardous Substance Account and response costs under the Comprehensive Environmental Response, Compensation, and Liability Act.15 Plaintiffs sought indemnity from defendants for the sums expended in their cleanup efforts, but defendants denied coverage.16
Plaintiffs Lick Mill Creek Apartments and Prometheus Development Company, Inc. appealed from a judgment of dismissal entered after the trial court sustained, without leave to amend, the demurrer of defendants Chicago Title Insurance Company and First American Title Insurance Company to plaintiffs’ first amended complaint.17
Whether the title insurance policies provide coverage for the costs of removing hazardous substances from the property?18
Title insurance under Insurance Code section 12340.1 and the ALTA policies insures against loss from defects in or liens or encumbrances on title, unmarketability of title, or lack of access, but covers only matters affecting title and not the physical condition of the land or cleanup costs absent a recorded lien.19
No. The ALTA policies issued by Chicago Title Insurance Company and First American Title Insurance Company to Lick Mill Creek Apartments and Prometheus Development Company, Inc. following acquisition of lots 1, 2, and 3 from Kimball Small Investments 103 insure only against title defects as set forth in the identical insuring clauses.20 The costs incurred by plaintiffs for removal and clean-up of hazardous substances relate solely to the physical condition of the 30-acre property near the Guadalupe River rather than any defect in title.21 Plaintiffs incurred those costs to mitigate damages and avoid compliance with government mandates under the state Hazardous Substance Account and CERCLA.22 No lien had been recorded at the time the policies issued after the Carroll Resources survey and inspection.23
The title insurance policies do not provide coverage for the costs of removing hazardous substances from the property.24
Whether the presence of hazardous substances on the property renders the title unmarketable?25
Marketable title requires freedom from reasonable doubt such that a prudent person would accept it, but marketability of title is distinct from marketability or value of the land itself, so physical conditions impairing use or value do not render title unmarketable.26
No. The presence of hazardous substances contaminating the soil, subsoil, and groundwater on the property acquired by Lick Mill Creek Apartments and Prometheus Development Company, Inc. from Kimball Small Investments 103 impairs the market value of the land rather than the marketability of plaintiffs' fee simple title.27 The government records disclosing the contamination and the failure of Kimball Small Investments 103 to comply with the Department of Health Services order affect only the physical condition and not the legal incidents of ownership.28
The presence of hazardous substances on the property does not render the title unmarketable.29
Whether the presence of hazardous substances constitutes a defect in or lien or encumbrance on the title?30
An encumbrance consists of taxes, assessments, and liens upon real property or interests held by third parties that are not extinguished by transfer, but the mere presence of hazardous substances or the possibility of a future cleanup lien does not constitute a defect in or encumbrance on title when no lien has been recorded.31
No. The hazardous substances on the property purchased by Lick Mill Creek Apartments and Prometheus Development Company, Inc., with records maintained by the Department of Health Services, the Regional Water Quality Control Board, and the Santa Clara County Environmental Health Department at the time each ALTA policy issued after the Carroll Resources inspection, create no defect in or lien or encumbrance on title.32 No third party holds any right or interest in the land and no lien was recorded or asserted when the policies were issued to plaintiffs.33
The presence of hazardous substances does not constitute a defect in or lien or encumbrance on the title.34