N.J.,2008.
Supreme Court of New Jersey.
Henry J. SHOTMEYER and Charles P. Shotmeyer, partners trading as Beaver Run Farms, a general partnership and Beaver Run Farms, L.P., Plaintiffs-Respondents,
v.
NEW JERSEY REALTY TITLE INSURANCE COMPANY, Defendant-Appellant.
Argued Nov. 28, 2007.
Decided June 5, 2008.
Background: Brothers whose general partnership purchased real property and later conveyed it to a limited partnership consisting of themselves and a corporation they jointly owned brought action against title insurer arising out of insurer's rejection of their claim for compensation resulting from the discovery that nearly half of the property belonged to a neighboring lot. The Superior Court, Law Division, Passaic County, awarded summary judgment to insurer on the ground that the policy lapsed when it was conveyed to the limited partnership. Brothers appealed, and the Superior Court, Appellate Division, reversed and remanded. Insurer petitioned for certification, which was granted.
Holdings: The Supreme Court, Rabner, C.J., held that:
(1)brothers did not have an insurable interest in the property at time of the loss;
(2)fact that brothers maintained beneficial ownership of the property both before and after the conveyance did not allow them to recover under title insurance policy;
(3)transfer of the property from general partnership to limited partnership did not occur by operation of law;
(4)covenant as to grantor's acts in the deed conveying the property to limited partnership did not entitle general partnership to continuing coverage under the policy; and
(5)insurer's offer to settle brothers' claim did not constitute a waiver of insurer's defense that the policy lapsed.
Reversed.
West Headnotes
[1] Insurance 217
217Insurance
? 217IIn General; Nature of Insurance
? 217k1007Types of Insurance
? 217k1013k. Title. Most Cited Cases
A ?title insurance policy? is a contract that protects a landowner against loss caused by defective title to the land.
[2] Insurance 217
217Insurance
? 217XXICoverage--Title Insurance
? 217k2615Title Defects
? 217k2616k. In General. Most Cited Cases
To recover under a title insurance policy, the defect in title must have existed at the time the insurance was purchased; in that sense, title insurance covers a state of ownership at a specific point in time.
[3] Insurance 217
217Insurance
? 217XIVPremiums
? 217XIV(E)Payment
? 217k2014k. In General. Most Cited Cases
?Insurance 217
217Insurance
? 217XXICoverage--Title Insurance
? 217k2613k. Duration of Coverage. Most Cited Cases
?Insurance 217
217Insurance
? 217XXVForfeiture
? 217XXV(B)Particular Kinds of Insurance
? 217k3047Property Insurance
? 217k3051k. Change of Title or Interest. Most Cited Cases
In order to purchase title insurance, buyers make a one-time premium payment at the time of purchase; the policy then continues in force indefinitely until the insured divests title or alters title in a way that terminates coverage.
[4] Insurance 217
217Insurance
? 217XIIIContracts and Policies
? 217XIII(G)Rules of Construction
? 217k1830Favoring Insureds or Beneficiaries; Disfavoring Insurers
? 217k1834Particular Types of Coverage
? 217k1834(1)k. In General. Most Cited Cases
Title insurance is no different from other insurance policies, in that it must be liberally construed in favor of the insured and strictly construed against the insurer.
[5] Insurance 217
217Insurance
? 217XIIIContracts and Policies
? 217XIII(G)Rules of Construction
? 217k1822k. Plain, Ordinary or Popular Sense of Language. Most Cited Cases
In the absence of ambiguity, an insurance policy should be interpreted according to its plain, ordinary meaning.
[6] Insurance 217
217Insurance
? 217XIIIContracts and Policies
? 217XIII(G)Rules of Construction
? 217k1807k. Function Of, and Limitations On, Courts, in General. Most Cited Cases
?Insurance 217
217Insurance
? 217XIIIContracts and Policies
? 217XIII(G)Rules of Construction
? 217k1815Reasonableness
? 217k1817k. Reasonable Expectations. Most Cited Cases
?Insurance 217
217Insurance
? 217XIIIContracts and Policies
? 217XIII(G)Rules of Construction
? 217k1830Favoring Insureds or Beneficiaries; Disfavoring Insurers
? 217k1831k. In General. Most Cited Cases
When an ambiguity exists in an insurance contract, courts should interpret the contract in accordance with the reasonable expectations of the insured; however, courts must guard against rewriting policies in favor of the insured under the guise of interpreting a contract's reasonable terms.
[7] Insurance 217
217Insurance
? 217XIIIContracts and Policies
? 217XIII(G)Rules of Construction
? 217k1830Favoring Insureds or Beneficiaries; Disfavoring Insurers
? 217k1831k. In General. Most Cited Cases
Rules for interpreting insurance contracts tend to favor insureds because policy holders should be protected from technical encumbrances and hidden pitfalls in their insurance contracts.
[8] Insurance 217
217Insurance
? 217XIIIContracts and Policies
? 217XIII(G)Rules of Construction
? 217k1830Favoring Insureds or Beneficiaries; Disfavoring Insurers
? 217k1833k. Status or Bargaining Power of Insureds. Most Cited Cases
Rules for interpreting insurance contracts tend to favor insureds because sophisticated insurers who unilaterally prepare complicated contracts should not be allowed to take advantage of their less sophisticated customers.
[9] Insurance 217
217Insurance
? 217XIVPremiums
? 217XIV(D)Amounts Payable
? 217k2005k. In General. Most Cited Cases
?Insurance 217
217Insurance
? 217XXICoverage--Title Insurance
? 217k2610k. In General. Most Cited Cases
Because insurance premiums and coverage provisions are based on predictable levels of risk, title insurers need to rely on certain consistent conditions in order to calculate premium rates reliably.
[10] Insurance 217
217Insurance
? 217XIIIContracts and Policies
? 217XIII(D)Insurable Interest
? 217k1788Particular Types of Coverage
? 217k1790Property and Title Insurance
? 217k1790(1)k. In General. Most Cited Cases
Brothers whose general partnership purchased real property and later conveyed it to a limited partnership consisting of themselves and a corporation they jointly owned did not have an insurable interest in the property at time nearly half of the property was found to belong to neighboring lot and, thus, could not recover for the loss under title insurance policy issued, at the time the property was first acquired, to the brothers as partners in the general partnership; limited partnership, and not any of its partners, was the owner of the property at the time of the loss. N.J.S.A. 42:1A-11.
[11] Insurance 217
217Insurance
? 217XXICoverage--Title Insurance
? 217k2613k. Duration of Coverage. Most Cited Cases
?Insurance 217
217Insurance
? 217XXVForfeiture
? 217XXV(B)Particular Kinds of Insurance
? 217k3047Property Insurance
? 217k3051k. Change of Title or Interest. Most Cited Cases
Fact that brothers whose general partnership purchased real property and later conveyed it to a limited partnership consisting of themselves and a corporation they jointly owned maintained beneficial ownership of the property both before and after the conveyance of the property to the limited partnership did not allow brothers to recover, under a title insurance policy issued to the brothers as partners of the general partnership, for a loss sustained after the transfer to the limited partnership; transfer of the property from one distinct entity to another provided business and personal advantages to the brothers, and was not done to commit fraud or defeat the ends of justice.
[12] Insurance 217
217 Insurance
? 217XIVPremiums
? 217XIV(D)Amounts Payable
? 217k2005k. In General. Most Cited Cases
Title insurance premiums, unlike regular casualty policy premiums, are based in part on the time of exposure to risk.
[13] Insurance 217
217Insurance
? 217XXICoverage--Title Insurance
? 217k2613k. Duration of Coverage. Most Cited Cases
?Insurance 217
217Insurance
? 217XXVForfeiture
? 217XXV(B)Particular Kinds of Insurance
? 217k3047Property Insurance
? 217k3051k. Change of Title or Interest. Most Cited Cases
Allowing coverage under a title insurance policy to continue when a tract of land is conveyed to a different legal entity effectively extends the time of exposure and the risk to the insurer.
[14] Insurance 217
217Insurance
? 217XXICoverage--Title Insurance
? 217k2610k. In General. Most Cited Cases
Transfer of real property from a general partnership formed by two brothers to a limited partnership consisting of the brothers and a corporation that they jointly owned did not occur by operation of law, and thus limited partnership was not an insured under title insurance policy issued to the general partnership when the property was first acquired; property was simply sold to limited partnership for nominal consideration, and limited partnership did not take over all of general partnership's business, but rather general partnership continued to exist and to carry on unrelated business activities.
[15] Insurance 217
217Insurance
? 217XXICoverage--Title Insurance
? 217k2610k. In General. Most Cited Cases
The continued independent existence of both a named insured corporation and a grantee subsidiary or sister corporation may suggest that the grantee did not take title to granted real property by operation of law as a corporate successor, so as to become an insured under the same title insurance policy.
[16] Insurance 217
217Insurance
? 217XXICoverage--Title Insurance
? 217k2613k. Duration of Coverage. Most Cited Cases
Covenant as to grantor's acts that was included in deed conveying real property from general partnership formed by two brothers to limited partnership consisting of brothers and corporation they jointly owned did not entitle general partnership to continuing coverage under title insurance policy for defect in title that existed before general partnership acquired the property, even though policy stated that coverage would continue so long as the insured had ?liability by reason of covenants of warranty made? in a transfer or conveyance; general partnership had liability under covenant only for defects it might have caused or allowed to occur, rather than defects that already existed. N.J.S.A. 46:4-6.
[17] Insurance 217
217Insurance
? 217XXVIEstoppel and Waiver of Insurer's Defenses
? 217k3105Claims Process and Settlement
? 217k3106k. In General. Most Cited Cases
Title insurer's offer to settle claim asserted by brothers whose general partnership purchased real property and later conveyed it to a limited partnership consisting of themselves and a corporation they jointly owned did not constitute a waiver of insurer's defense that the policy lapsed upon the conveyance to the limited partnership.
[18] Insurance 217
217Insurance
? 217XXVIEstoppel and Waiver of Insurer's Defenses
? 217k3105Claims Process and Settlement
? 217k3110Denial or Disclaimer of Liability on Policy
? 217k3110(2)k. Failure, Delay, or Inadequacy. Most Cited Cases
An insurer's unreasonable delay in disclaiming coverage, or in giving notice of the possibility of such a disclaimer, can estop an insurer from later repudiating responsibility under the insurance policy.
**602 Dennis M. Gonski, Carle Place, NY, argued the cause for appellant (Dollinger, Gonski & Grossman, attorneys).
Melinda B. Maidens, Hawthorne, argued the cause for respondents (Jeffer, Hopkinson & Vogel, attorneys).
Michael J. Fasano, Freehold, argued the cause for amicus curiae New Jersey Land Title Association (Lomurro, Davison, Eastman & Munoz, attorneys).
Chief Justice RABNERdelivered the opinion of the Court.
*77In 1981, a general partnership, comprised of two individual partners, bought a tract of land and obtained title insurance for the property. Ten years later, the general partnership conveyed the property to a limited partnership controlled by the same two individuals. The limited partnership did not obtain a new title insurance policy. Another decade later, when the partners discovered a defect in title, they sued the insurer under the title policy originally purchased by the general partnership.
We now hold that the title insurance policy lapsed when the property was voluntarily conveyed from the general partnership to the separate and distinct limited partnership. As a result, the trial court properly granted summary judgment to the insurer. We therefore reverse the judgment of the Appellate Division.
*78I.
Brothers Charles and Henry Shotmeyer formed Beaver Run Farms, a general partnership, to acquire, hold, and develop real estate in New Jersey. On June 18, 1981, the partnership purchased a tract of farmland in Sussex County from Mabel A. Day for $260,000. The grantees were recorded in the deed as ?HENRY J. SHOTMEYER & CHARLES P. SHOTMEYER, Partners **603 trading as BEAVER RUN FARMS, a General Partnership."
On June 22, 1981, defendant New Jersey Realty Title Insurance Company, now known as New Jersey Title Insurance Company, ("defendant" or "Title Company") provided an owner's policy of title insurance for the property in the amount of $260,000. Schedule A of the policy lists the named insured as "Henry J. Shotmeyer and Charles P. Shotmeyer, Partners trading as Beaver Run Farms, a General Partnership." The policy further defines "insured" as:
the insured named in Schedule A, and, subject to any rights or defenses the Company may have had against the named insured, those who succeed to the interest of such insured by operation of law as distinguished from purchase including, but not limited to, heirs, distributees, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors.
The policy also contained a section entitled "Continuation of Insurance after Conveyance of Title," which reads as follows:
The coverage of this policy shall continue in force as of Date of Policy in favor of an insured so long as such insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money mortgage given by a purchaser from such insured, or so long as such insured shall have liability by reason of covenants of warranty made by such insured in any transfer or conveyance of such estate or interest....
As part of their estate planning, the Shotmeyers formed the limited partnership, Beaver Run Farms, L.P., on December 30, 1991. S.B. Properties, Inc., a corporation owned jointly and exclusively by the brothers, was the general partner; Henry and Charles were the sole limited partners. On January 2, 1992, in consideration of ten dollars, the general partnership conveyed the farmland purchased from Mabel Day on June 18, 1981 to "BEAVER RUN FARMS, L.P., a New Jersey Limited Partnership."
*79About ten years later, in late 2001, Charles Shotmeyer claims he noticed on a tax bill that the acreage for the property had been reduced from 24.7 to 12.68 acres. He later learned that two judgments had been filed with the Sussex County Board of Taxation on April 24, 2000, declaring that the missing 12.02 acres belonged to a neighboring lot.
The Shotmeyers notified the Title Company about the judgments in February 2002 and demanded compensation for their loss. The parties attempted to settle the claim, and in January 2003, the Title Company offered the Shotmeyers $43,000. The Shotmeyers rejected the offer and later forwarded an appraisal valuing the 12.02 acres at $900,000.
On February 18, 2005, Beaver Run Farms, the general partnership, filed a four-count complaint against defendant Title Company. The complaint alleged that defendant breached its obligation under the policy to pay full compensation for the disputed property (Count 1); breached its covenant of good faith and fair dealing (Count 2); violated its obligation to negotiate in good faith pursuant to N.J.S.A.17B:30-13.1(Count 3); and wrongfully refused to pay the full market value of the disputed property (Count 4).
In its answer, defendant denied the claim for relief and stated as a defense that ?[p]laintiff lacks an insurable interest and therefore is not a proper party to make an insurance claim.? In an amended answer, defendant asserted that ?[t]he ?insured? no longer holds title to the land,? which was transferred to a new and separate**604 legal entity, Beaver Run Farms, L.P., a limited partnership.
In response, the complaint was amended to list as plaintiffs ?Henry J. Shotmeyer and Charles P. Shotmeyer, partners trading as Beaver Run Farms, a general partnership, and Beaver Run Farms, L.P.? (The amended complaint was filed on June 30, 2005; Henry Shotmeyer passed away in 2004.) The revised complaint alleged that the Shotmeyers conveyed the Property to themselves as limited partners, and S.B. Properties, Inc. as general partner, *80 in Beaver Run Farms, L.P. As a result, plaintiffs alleged that the policy remained in effect.
Defendant moved for summary judgment on October 31, 2005. It argued that the newly formed limited partnership, which owned the land, was not covered under the original policy bought by the general partnership. The trial court agreed. It ruled that the transfer from the general partnership to the limited partnership was voluntary and intentional and not done by ?operation of law.? The trial court noted that the general partnership continued to exist even after the transfer. Because the named insured-the general partnership-voluntarily conveyed its interest in the property, the trial court concluded that the title insurance policy lapsed and the new owner did not have standing to sue under the policy.
The Appellate Division reversed in an unpublished decision. The panel found that there was never a transfer of the Shotmeyer brothers' beneficial interests in the land, which the title insurance policy was procured to protect. The Appellate Division reasoned that the limited partnership, while a distinct legal entity, was not a stranger to the title insurance policy. Both the general and the limited partnerships were not more than alter egos of the Shotmeyer brothers, who retained control of the property at all times. As a result, the panel concluded that the corporate form of the partnerships should be disregarded in the interests of justice, because to do otherwise would exalt form over substance. The panel also noted that the Shotmeyer brothers did nothing to increase the risk to the insurer, in that the transfer did not adversely affect title to the property. In light of its reasoning, the panel did not focus at length on whether the property was transferred by operation of law. Finally, the Appellate Division rejected plaintiffs' argument that defendant waived its right to disclaim liability under the policy by its settlement offer.
This Court granted defendant's petition for certification. 191 N.J.315, 923 A.2d 230 (2007).
*81II.
Defendant argues that neither Shotmeyer brother held an interest in the land insured by the title policy at any time. Defendant contends that the general partnership purchased the property, took out a title insurance policy, and then conveyed title to a complete stranger to the policy, the limited partnership. The individual brothers were named in Schedule A of the policy only in their capacity as partners, not as additional insureds. In any event, according to defendant, the transfer of property to the limited partnership was a deliberate and voluntary conveyance to a separate legal entity. Defendant argues that the transfer did not occur by ?operation of law,? which would have continued the policy's coverage. Because the policy lapsed, defendant submits that the new owner, the limited partnership, was required to pay a new premium if it wished to maintain coverage.
Defendant argues that the Appellate Division rewrote the policy to extend title **605 insurance coverage to a new entity. According to defendant, the decision's focus on the brothers' ?beneficial interest? in the property deprives the industry of the certainty of knowing the exact identity of the insured. Allowing recovery under a policy after a transfer also increases the time that an insurer is exposed to risk.
Plaintiffs argue that the Shotmeyers were individually insured both before and after the conveyance of the property and that they never relinquished any interest, legal or beneficial, in the property. Rather, plaintiffs contend that the change in the form of their ownership from a general to a limited partnership was a symbolic transfer as part of their estate planning. Therefore, plaintiffs submit that there was no termination in coverage. In essence, the Shotmeyers maintain that they conveyed the property to themselves, and that equity demands the Title Company not be allowed to avoid its obligations under the policy by elevating form over substance. Plaintiffs also contend that the nature of the risk insured by the policy was not affected by the transfer, since any *82 defect in title existed when the Shotmeyers first acquired the property.
We granted amicus curiae status to the New Jersey Land Title Association (?NJLTA?). NJLTA supports defendant's position and argues that the Appellate Division's use of the ?alter ego? doctrine is contrary to precedent, against public policy, and unfair in its allocation of insurance risks. NJLTA notes that principals are shielded from personal liability in a limited partnership, so a transfer from a general to a limited partnership imposes a higher burden on an insurer.
III.
[1] [2] [3] A title insurance policy is a contract that protects a landowner against loss caused by defective title to the land. See Sandler v. N.J. Realty Title Ins. Co.,36 N.J.471, 478-79, 178 A.2d 1 (1962); Joyce Palomar, Title Insurance Law, ? 1:8 (2007). To recover under the policy, the defect must have existed at the time the insurance was purchased. 11 Couch on Insurance 3d, ? 159:5 (1998). In that sense, title insurance covers ?a state of ownership at a specific point in time.? Ibid. In order to purchase title insurance, buyers make a one-time premium payment at the time of purchase. The policy then continues in force indefinitely until the insured divests title or alters title in a way that terminates coverage. Ibid.
[4] [5] [6] Title insurance is no different from other insurance policies, in that it must be ?liberally construed in favor of the insured and strictly construed against the insurer.? Sandler, supra,36 N.J.at 479, 178 A.2d 1. In the absence of ambiguity, an insurance policy should be interpreted according to its plain, ordinary meaning. Zacarias v. Allstate Ins. Co.,168 N.J.590, 595, 775 A.2d 1262 (2001). When an ambiguity exists, courts should interpret the contract in accordance with the ?reasonable expectations? of the insured. Proformance Ins. Co. v. Jones,185 N.J.406, 415, 887 A.2d 146 (2005); Zacarias, supra,168 N.J.at 595, 775 A.2d 1262. However, courts must guard against rewriting*83 policies in favor of the insured under the guise of interpreting a contract's reasonable terms. See Progressive Cas. Ins. Co. v. Hurley,166 N.J.260, 273, 765 A.2d 195 (2001); Di Orio v. N.J. Mfrs. Ins. Co.,79 N.J.257, 269, 398 A.2d 1274 (1979).
[7] [8] [9] The purposes behind those principles are evident. Policy holders should be protected from ?technical encumbrances? and ?hidden pitfalls? in their insurance contracts. Kievit v. Loyal Protective Life Ins. Co.,34 N.J.475, 482, 170 A..2d 22 (1961). Sophisticated insurers **606 who unilaterally prepare complicated contracts should not be allowed to take advantage of their less sophisticated customers. See Progressive, supra, 166 N.J.at 272, 765 A.2d 195. However, because insurance premiums and coverage provisions are based on predictable levels of risk, title insurers need to rely on certain consistent conditions in order to calculate premium rates reliably.
IV.
The insurance policy in this matter provided coverage to two groups: (1) the ?insured named in Schedule A?; and (2) those who succeeded the named insured ?by operation of law.? We analyze each in turn.
A.
The policy itself specifies the named insured: ?Henry J. Shotmeyer and Charles P. Shotmeyer, Partners trading as Beaver Run Farms, a General Partnership.? That language mirrors exactly the ownership listed on the deed when the property was purchased in 1981.
Title 42 addresses questions about the ownership of property by partnerships and draws distinctions between partnerships and the partners that comprise them. Under