Lipinski v. Title Insurance

NO. 81-37
IN THE SUPREME COURT OF THE STATE OF MONTANA
1982

JOHN Y. LIPINSKI,
Plaintiff and Respondent,

THE TITLE INSURANCE COMPANY, an Idaho
Corporation, and FLATHEAD COUNTY TITLE
COMPANY, a Montana Corporation,
Defendants and Appellants.

Appeal from: District Court of the Eieventh Judicial District,
In and for the County of Flathead
Honorable Robert Sykes, Judge presiding.
Counsel of Record:
For Appellants:

Richard DeJana argued, Kalispell, Montana
For Respondent:
Jonkel and Kemmis, Missoula, Montana
Daniel Kemmis argued, Missoula, Montana

Submitted: May 14, 1982
Decided: December 23, 1982
Mr. Justice Daniel J. Shea delivered the Opinion of the Court.

The defendant title insurance companies appeal a
judgment of the Flathead County District Court in which they
were found liable to Lipinski for damages caused by their
failure to determine and disclose certain ditch rights

easements, and because they failed to defend Lipinski in
lawsuits brought as a result of those undisclosed rights.
Three lawsuits were brought against Lipinski. The insurance
companies defended the first lawsuit under a reservation of
rights, and eventually contributed $2,500 to settle that
lawsuit (referred to as the Maris settlement). Later, two
more lawsuits were filed against Lipinski and the title
companies refused to defend both lawsuits. Lipinski sued the
title companies for damages arising from the existence of
the undisclosed easements, and for punitive damages because the
title companies were in bad faith in refusing to defend the
lawsuits. We affirm in part, reverse in part, and remand

for further proceedings.
Although the issues raised by the title companies are
rambling and disjointed, it appears that their appeal centers

on three areas of the trial court's judgment. The first
area concerns the trial court's ruling that the title companies

were liable to Lipinski up to the face amount of the policy for
their failure to discover and disclose, or insure against,
the existence of the easements. Lipinski paid $46,000 to
purchase the easement rights, and the trial court held that
the amount paid to remove the defect was the measure of
damages. The trial court therefore awarded the damages up
to the face amount of the policy, $25,000. The title companies
pose three arguments as to why Lipinski is not entitled to
damages. We affirm except that we hold that $2,500 paid the
title companies to settle the Maris lawsuit must be deducted
from the amount ordered to be paid.
The second area of appeal concerns the trial court's
assessment of $15,000 punitive damages against the title
companies for their refusal to defend two lawsuits against
Lipinski--referred to as O'Neil - and O'Neil 11.
I The title
companies argue in effect that punitive damages cannot be
imposed against an insurance company based on findings and
conclusions that the companies were in bad faith in refusing
to defend Lipinski. The title companies further argue that

punitive damages could not be imposed because the trial

court failed to find any actual damages, incurred by Lipinslti,
that were separate from the costs incurred in defending the
lawsuits caused by their breach of a contract to defend.
The trial court awarded a lump sum of $15,000 for refusal to
defend O'Neil I and O'Neil -
11. We hold that the title
companies had only a duty to defend O'Neil - and because
I,

the damages were not assessed separately, we remand for a
redetermination of punitive damages for refusal to defend
O'Neil -
I. We further hold that Lipinski can recover his
costs incurred for defending O'fJeil - and that he cannot
I
recover his costs incurred for defending O'Neil - which
11,
defense was occasioned by Lipinski's own refusal to abide by

a settlement he reached in O'Neil -
I.
The third area of damages concerns prejudgment interest
awarded on costs incurred to defend OfNeil - and O'1Jei.l -
I 11,
and surveying and engineering costs incurred in defending
O'Neil - and O'Neil -
I 11. The trial court awarded prejudgment
interest at the rate of 10 percent per annum, and the title
companies argue that 6 percent per annum is the proper
interest rate. Lipinski concedes error on this issue.
Because we have held that costs incurred in defending O'Neil
- are not recoverable, we remand for a redetermination of
I1
interest on costs incurred in defending O'Neil - only.
I
The trial courts also awarded costs for surveying and
engineering expenses incurred in defending O'Neil - and
I
OfNeil -
11--the costs were not apportioned by the trial court
in its findings or in its judgment. Because no costs are
recoverable for defending O'Neil - we remand for a determination
11,
of the survey and engineering costs incurred for defending
O'Lieil - only.
I
The chain of events leading to this appeal started in

1961 when Lipinski purchased land near Kalispell for $25,000.
Before buying the land, Lipinski had the property surveyed.
He knew there were irrigation ditches on the property and

that one of them, known as the " G r i e d j " ditch, had been
repaired recently, but he did not know that easements accompanied
the ditches. He began building a home on the land. Before
the title companies issued him a title policy in February
1963, he knew that a neighbor was using the "Grieg" ditch
which passed through his land. The neighbor, Jack Maris,
was leasing the adjoining property and asked to enter on
Lipinski's land to maintain the ditches. Lipinski denied
him access and relied on the title policy which showed no

easements. This resulted in Maris bringing suit against
Lipinski for interference with the easement.
The lawsuit was settled for $6,000, with the title

companies paying $2,500 of their total $25,000 exposure, and
with Lipinski paying $3,500.
Shortly after the Maris settlement, O'Neil, the owner
of the adjoining property, filed suit against Lipinski for
interference with his easement rights and for other relief.
Lipinski requested the title companies to defend him but
they refused to do so. Lipinski hired his own counsel and
eventually the O1Neil suit was settled, although not for
long. Lipinski refused to abide by the settlement agreement
and O'Neil again sued Lipinski, this time for specific
performance. Lipinski again asked the title companies to
defend the lawsuit but they refused to do so.
The trial court granted specific performance in O'Neil

- and this Court affirmed.
11, OINeil v. Lipinski (1977), 173
Mont. 332, 567 P.2d 909. After remand, Lipinski and O'Neil,
rather than proceed with the terms of the specific performance
agreement, agreed that Lipinski would purchase O'Neil's
ditch rights for $46,000 and the O'Neil's would quitclaim
their interest in the ditch rights to Lipinski. The parties
performed this agreement.
The present litigation involves Lipinski's suit against
the title companies and the resulting judgment against the
title companies. Part of the lawsuit involves the language

of an agreement between the title companies and Lipinski
when the Maris suit was settled. Paragraph two of that
agreement stated:
"2. That the second parties [the title companies]
shall not be liable for any claim or claims brought
directly by first party [Lipinski] as a result of
the presence of either of the two ditches on his lands,
which ditches were the subject of the above referred to
lawsuit. "
Lipinski signed this agreement and sent it back to the title
companies. Before signing the agreement, however, the
title companies inserted the phrase "see insert below" next to
paragraph two and then placed the following insertion under-
neath the signatures:
"Insert: 'except that the payment hereunder
by the [title companies] shall be deemed to be
in full compensation for any reduction in the
value of the insured property of . . .
[Lipinski]
caused by the existence of the two ditches thereon."'
 Lipinski's title policy obligated the title companies
to defend Lipinski at their own cost in any litigation
". . . founded upon a defect, lien, encumbrance, or other
matter insured against by this policy." In checking the
records before issuing the policy, the title companies
failed to find, or note on the policy, that a 1944 warranty
deed existed in Lipinski's chain of title which contained

the recital: ". . . subject - rights established by
to -

irrigation ditch . . ." the Maris lawsuit and the O'Neil
lawsuits were based on an underlying easement relating to

the irrigation ditch and the rights of the owner of the
easement to maintain and repair the irrigation ditch.
The first OINeil suit was based on contentions that
Lipinski had wrongfully interfered with the O'Neil's primary

easement to transport water across Lipinski's lands and a
secondary easement to maintain a dam and two irrigation
ditches. The title companies refused to defend Lipinski in
that action. We hold that the title companies were obligated
to defend Lipinski. The second O'Neil suit, however, was
brought to enforce the agreement reached between O'Neil and

Lipinski to settle the first suit. We hold that the title
companies were not obligated to defend that lawsuit because

Llpinski invited this lawsuit by refusing to abide by the

settlement terms of the first O1Neil suit.
As we have previously stated, the trial court found
that Lipinski had been damaged in the amount of $46,000 (the
amount he paid to buy the easement rights from OINeil), but limited
recovery to the face amount of the policy--$25,000. The
court further ruled that the title companies' refusal to
defend O'Neil - and O'Neil - was both a breach of contract
I I1

and an act of bad faith. The court held that the refusal to
defend "was an act done without justification, was willful,
malicious, oppressive, and constituted bad faith on the part
------
of the
- - defendants." The court assessed $15,000 punitive
damages against the title companies. The trial court also

awarded Lipinski his costs incurred for defending O'Neil -
I
and O'Neil - including attorney fees, survey and engineering
11,
expenses, and prejudgment interest on these amounts from the
time the costs were incurred.
EFFECT OF THE FAILURE TO DISCOVER THE EASEMENTS:

The title companies argue that under the policy terms
they-had no duty to discover the ditch right easements.

First, they argue that the easements were not of record and
therefore they should not be held responsible for reporting
their existence to Lipinski. Second, they argue that the
title insurance contract expressly excludes water rights,
that the basis of the easement is an underlying water right,
and therefore that coverage is precluded. Third, they argue
that Lipinski had or should have had personal knowledge of
the easements and his failure to report them to the title
insurance companies should preclude his right to recover.
A 1944 warranty deed in Lipinski's chain of title
recited that the grant was "subject - rights established -
to by

irrigation ditch." The question is whether this recital put
the title companies sufficiently on notice that a duty was

imposed to further determine the nature of that right recited
in the deed. The policy expressly excludes coverage for
". . . easements . . . not shown by the public records
. . ." Because the warranty deed recital did not state that
an easement existed, the title companies argue that the

policy does not insure against that undisclosed easement.
We hold, however, that the ditch rights were sufficiently

mentioned in the recorded 1944 warranty deed to put the
title companies on notice that there might also be easements
accompanying those ditch rights. These possibilities should
have been brought to Lipinski's attention and either specifically
insured or specifically excluded from insurance coverage.
Nor do we agree that coverage should be denied because
the basis of the easement was an underlying water right
specifically excluded by the policy. Lipinski did not claim
damages and damages were not awarded because of the existence
of an undisclosed water right, but rather for the existence
of an undisclosed easement accompanying those water rights.
The existence of the ditch rights--here accompanied by
easements--is necessarily derived from the existence of the
water rights, and findings and conclusions concerning those
water rights could hardly be avoided. The trial court,
however, awarded damages because there was sufficient notice
of possible ditch rights--accompanied by easements--which
the title companies should have, hut did not, call to Lipinski's

attention.
The title companies next argue that Lipinski should be
denied recovery under the policy because he had actual
knowledge of the easements sufficient to require him to
bring it to the title companies' attention or be excluded
from coverage. Lipinski admitted knowledge of the existence

of the ditches, but he denied having any knowledge that
anyone had a right to enter upon his land. He stated that
he relied on the title report to tell him whether anyone had
such a right to enter his land in order to maintain the
ditches. Lipinslci, as a layman with no knowledge of easements,
could reasonably rely on the specialized knowledge of the

title insurance business to reveal and explain to him any
title defects and their consequences.
 Although t i t l e i n s u r a n c e a p p l i c a n t s a r e i n t e r e s t e d i n

o b t a i n i n g insurance coverage, t h e i r primary i n t e r e s t i s i n

what t h e e x a m i n a t i o n d i s c l o s e s . F o r t h i s t h e y r e l y on t h e

t i t l e companies t o t e l l them o f any r i s k s . Risks u s u a l l y

c o v e r e d by t i t l e i n s u r a n c e p o l i c i e s i n c l u d e e r r o r s i n t h e

t i t l e examination, including t h e n e g l i g e n t f a i l u r e t o n o t e a

t i t l e defect. A t i t l e company, a s i n s u r e r , owes i t s c l i e n t s

t h e duty of conducting a t i t l e search with reasonable care.

Although l i a b i l i t y d o e s n o t a t t a c h f o r f a i l u r e t o d i s c o v e r

d e f e c t s which c a n n o t b e d i s c o v e r e d w i t h r e a s o n a b l e c a r e ,

h e r e a t i t l e examiner conducting a t i t l e s e a r c h should have

been a l e r t e d t o t h e p o s s i b l e c o n s e q u e n c e s o f t h e r e c i t a l i n

t h e 1944 w a r r a n t y d e e d . An e x a m i n a t i o n o f t h e p r e m i s e s

should have r e v e a l e d t h e very r e a l p o s s i b i l i t y t h a t an

easement e x i s t e d t o g i v e e f f e c t t o t h e i r r i g a t i o n d i t c h

r e c i t a l i n t h e 1944 w a r r a n t y d e e d . E x a m i n a t i o n would h a v e

r e v e a l e d t h a t w a t e r on L i p i n s k i ' s p r o p e r t y was b e i n g dammed

a n d c o n d u c t e d away from h i s l a n d t h r o u g h i r r i g a t i o n p i p e s o r

canals leading onto a neighbor's land. A title insurer

c a n n o t s i m p l y i g n o r e a r e c i t a l t h a t p u t s i t on n o t i c e o f a

possible defect i n the title.

W e hold, t h e r e f o r e , t h a t t h e t i t l e p o l i c y covered t h e

existence of the defects.

THE KEASURE OF DAMAGES FOR FAILURE TO DISCOVER OR DISCLOSE

THE DEFECT:

The t i t l e companies a d v a n c e t h r e e a r g u m e n t s on t h e

q u e s t i o n o f damages c a u s e d by t h e e x i s t e n c e o f t h e e a s e m e n t s .

Flrst, they argue t h a t t h e policy covers only pecuniary l o s s ,

t h a t L i p i n s k i s u f f e r e d o n l y a n a e s t h e t i c l o s s , and t h e r e f o r e

t h a t L i p i n s k i c a n n o t r e c o v e r damages. Second, t h e y a r g u e

t h a t a p r o v i s i o n o f t h e Maris s e t t l e m e n t agreement ( t h a t
agreement between the title companies and Lipinski), expressly
precludes any recovery for diminution of value or any other
form of recovery of damages. Third, assuming it was proper
to apply a diminution of value theory, they argue that the
wrong test was used in application of their theory and
therefore that the damages should only be $3,557.50 at most.
I 1 arguing that Lipinski's land sustained only an
1
aesthetic loss as opposed to a pecuniary loss, the title

companies put forth no real argument. While undoubtedly
aesthetic loss was suffered, there is no question that the
undisclosed ditch rights and the attendant right to enter
upon and alter Lipinski's land caused Lipinski to suffer a
substantial pecuniary loss. We note, furthermore, that the
title companies, in making its aesthetic damages argument,
assume that the trial court awarded damages based on a
reduction in value. Although there was evidence that the
value of the land was reduced by $55,000 because of the
existence of the easements, the fact ignored by the title

companies is that the trial court awarded damages based not
on a reduction of value, but on what it cost Lipinski to
remove the title defects. Lipinski paid $46,000 to O'Neil

to remove the title defects (he purchased O'Neil's easement
rights), and the trial court established $46,000 as the

amount of the loss.
The title companies next argue that the ~ a r i ssettlement
agreement (the agreement between the title companies and
~ipinski)precludes recovery for diminution of value of
Lipinski's property caused by the existence of the easements.
They rely on paragraph two of the Maris settlement agreement
that the title companies ". . . shall not be liable for any

claim or claims brought directly by [~ipinski]as a result
of the presence of either of the two ditches on his lands,
which ditches were the subject of the . . . [~aris]lawsuit."

Although the title companies tacitly acknowledge an improper
alteration of the agreement by the insertion without the
knowledge or consent of Lipinski, that no recovery would be
permitted for "diminution of value," they argue that this
alteration does nothing more than clarify paragraph two of
the agreement which precludes any kind of recovery.

Lipinski argues, on the other hand, that the title
companies cannot rely on paragraph two of the Maris settlement
agreement because in altering the agreement without Lipinski's
knowledge or consent, the title companies violated section

28-2-1703(1), MCA. That statute provides:
"The intentional destruction, cancellation,
or material alteration of a written contract
by a party entitled to any benefit under it or
with his consent extinguishes all the executory
obligations of the contract in his favor against
parties who do not consent to the act."

Applied here, this statute makes clear that if the insertion
explaining or expanding on paragraph 2 was a material alteration
the title companies cannot claim the benefit of the P4aris
settlement terms in seeking to avoid damages caused by
their failure to discover the existence of the easements.
The trial court found that in refusing to defend the

O'Neil lawsuits the title companies relied in part on the
altered language contained in the insertion. The title

companies have not appealed from that finding. Lipinski

clearly suffered detriment because had the title companies
not relied on the altered agreement they may have defended
him in the first O'Neil suit. Instead, the title companies
refused to defend and Lipinski was forced to hire counsel
and to pay the costs of litigation. We therefore hold that

the title companies had no right to avail themselves of
paragraph two of the Maris settlement agreement in an

attempt to avoid paying damages caused by their failure to

discover the easements.
We further question, although we do not expressly rule,
whether the title companies could, after issuing the policy
to Lipinski, contract with Lipinski to take away the coverage
already bargained for--the $25,000 limits. Settlement of

the Maris case, with or without a reservation of rights,
should not have affected Lipinski's rights to assert his
rights against the title companies for damages sustained
because of their failure to discover the easements.
In essence, the title companies'agreement with Lipinski was
that it would contribute to the Maris settlement only if

Lipinski gave up his rights under the policy to recover
damages by the title companies' failure to discover the
easements. This agreement may well contravene public policy.
Third and finally, in an argument which assumes the
right to recover for diminution of damages, the title companies

devote seven pages of their brief explaining that the trial
court found the wrong amount. They contend Lipinski would

be permitted to recover $3,577.50 at most. ~ipinski,on the
other hand, devotes several pages of his brief to explaining
why he should be able to recover for diminution of value to
his property and why the amount set by the trial court is

proper. Neither the title company nor Lipinski cite any
authority. However, both parties have missed the basis of
the trial court's decision awarding damages caused by non-
disclosure of the easement: the trial court ruled that the
measure of damages for an undisclosed easement should be
"the amount required - remove such defect."
to
 The p o s t u r e o f t h i s c a s e on a p p e a l , t h e r e f o r e , i s t h a t

t h e measure o f damages f o r m u l a a d o p t e d by t h e t r i a l c o u r t

has n o t been appealed. W e further note t h a t the t r i a l court

had a l e g a l b a s i s f o r t h i s d e c i s i o n . I n a s i t u a t i o n where a

p a r t i a l l o s s h a s r e s u l t e d from a n encumbrance o r e n c r o a c h m e n t ,

c o u r t s have a d o p t e d t h r e e t e s t s f o r t h e measure o f damages.

One o f t h o s e t e s t s i s " t h e amount n e c e s s a r y t o remove t h e

e x i s t i n g encumbrance o r l i e n . " 4 4 Am.Jur.2d Insurance §

1566 a t 573. Whether i t was t h e p r o p e r measure o f l o s s I n

t h i s c a s e i s a n i s s u e t h a t h a s n o t been a p p e a l e d and w e

t h e r e f o r e a f f i r m t h e measure o f damages a d o p t e d .

THE IMPOSITION OF PUNITIVE DAMAGES:

The t i t l e companies a t t a c k t h e i m p o s i t i o n o f p u n i t i v e

damages on two g r o u n d s . F i r s t , they argue t h a t p u n i t i v e

damages c a n n o t b e imposed where t h e u n d e r l y i n g c a u s e h a s

been a b r e a c h o f c o n t r a c t . Second, t h e y a r g u e t h a t b e c a u s e

n o a c t u a l damages w e r e found b e c a u s e o f t h e i r a c t o f bad

f a i t h , t h e r e was no b a s i s t o impose p u n i t i v e damages.

The t r i a l c o u r t found t h a t t h e r e f u s a l o f t h e t i t l e

compa.nies t o d e f e n d O ' N e i l - and O 1 Z \ J e i l -- was n o t o n l y a
I I1

b r e a c h o f c o n t r a c t b u t a l s o was a n a c t o f bad f a i t h . S p e c i f i c a l l y ,

t h e t r i a l c o u r t found t h a t t h e r e f u s a l was:

" a b r e a c h o f c o n t r a c t which s u s t a i n s t h e award
o f a c t u a l damages [and t h a t t h e ] r e f u s a l t o
d e f e n d w a s a n a c t done w i t h o u t j u s t i f i c a t i o n ,
was w i l l f u l , m a l i c i o u s , o p p r e s s i v e , --
and con-
s t i t u t e d bad f a i t h . " (Emphasis a d d e d . )

Based on t h i s c o n c l u s i o n , t h e t r i a l c o u r t o r d e r e d t h e t i t l e

companies t o pay $15,000 p u n i t i v e damages t o L i p i n s k i .

The t i t l e companies have n o t c h a l l e n g e d t h e e v i d e n c e on

which t h e t r i a l c o u r t b a s e d i t s d e c i s i o n t o impose p u n i t i v e

damages. R a t h e r , t h e y a r g u e t h a t p u n i t i v e damages w e r e

imposed f o r a b r e a c h o f c o n t r a c t and t h a t s e c t i o n 27-1-221,
MCA, p r o h i b i t s i m p o s i t i o n of p u n i t i v e damages a r i s i n g from a

breach of c o n t r a c t . That s t a t u t e p r o v i d e s :

" I n any a c t i o n -o- a b r e a c h o f an o b l i g a t i o n
f r --
n o t a r i s i n g from c o n t r a c t where t h e d e f e n d a n t
h a s been g u i l t y of o p p r e s s i o n , f r a u d , o r m a l i c e ,
a c t u a l o r presumed, t h e j u r y , i n a d d i t i o n t o
t h e a c t u a l damages, may g i v e damages f o r t h e s a k e
o f example and by way o f p u n i s h i n g t h e d e f e n d a n t . "
(Emphasis a d d e d . )

The t i t l e companies a r g u e t h a t i f t h e r e had been no c o n t r a c t

t h e r e would have been no b r e a c h , and t h e r e f o r e s e c t i o n 27-

1-221, MCA, p r o h i b i t s t h e a s s e s s m e n t of p u n i t i v e damages.

The t i t l e companies concede t h a t p u n i t i v e damages can

be awarded t o an i n s u r e d f o r b r e a c h of d u t y owed t o i t s

i n s u r e d , b u t t h e y a r g u e t h a t i t can o n l y be done where,

i n d e p e n d e n t o f i t s c o n t r a c t , t h e i n s u r a n c e company h a s

v i o l a t e d a p r o v i s i o n o f t h e i n s u r a n c e code. Because no

i n s u r a n c e code v i o l a t i o n e x i s t s h e r e t h e y a r g u e t h e r e f o r e

t h a t p u n i t i v e damages c a n n o t be imposed. But t h i s C o u r t h a s

n e v e r h e l d t h a t p u n i t i v e damages can be imposed a g a i n s t an

i n s u r a n c e company o n l y i f it h a s v i o l a t e d a p r o v i s i o n o f t h e

i n s u r a n c e code. The t r i a l c o u r t h e l d t h a t t h e t i t l e companies,

i n r e f u s i n g t o d e f e n d L i p i n s k i , a c t e d i n bad f a i t h . W e hold

t h a t t h i s i s a b a s i s , i n d e p e n d e n t o f c o n t r a c t , and i n d e p e n d e n t

of t h e i n s u r a n c e code, on which p u n i t i v e damages can p r o p e r l y

be a s s e s s e d .

I n s e e k i n g t o d i s t i n g u i s h F i r s t S e c u r i t y Bank v. Goddard

( 1 9 7 9 ) , 181 Mont. 407, 593 P.2d 1040, t h e t i t l e companies

f a i l t o m e e t t h e i s s u e of whether t h e y have an i n d e p e n d e n t

d u t y of good f a i t h . i n d e a l i n g s w i t h t h e i r i n s u r e d s . In

Goddard, w e s t a t e d : " I t i s t h e b r e a c h of t h e s t a t u t o r y

requirement, a duty independent of t h e insurance c o n t r a c t ,

t h a t g i v e s r i s e t o t h a t l i a b i l i t y - -e c -e- t b a r . "
i n th - as a 533
P.2d at 1047. (Emphasis added.) From this holding the
title companies jump to the unsupportable conclusion that
punitive damages can only be assessed against an insurance
company where, aside from a contract breach, there has been

a violation of the insurance code. But that is not our
holding in Goddard. In fact, we clearly sent a message in

Goddard that an insurer may well have a duty independent
- statute, to act in good
of contract, and independent of -
faith with its insureds. 593 P.2d at 1047. Further we held
in Weber v. Blue Cross of Montana (1952), - Mont . - 643
,
P.2d 198, 39 St.Rep. 245, that Blue Cross, technically -
not
an insurance company under the majority analysis, had a duty
of acting in good faith with those for whom it provided

coverage. 643 P.2d at 203, 39 St.Rep. at 252. It would be

nore than anomalous to now hold that insurance companies do
not have this duty of good faith when dealing with their
insureds. Should there be any doubt, we now expressly hold

that insurance companies have a duty to act in good faith
with their insureds, and that this duty exists independent
of the insurance contract and independent of statute. Any
statements in our cases, to the extent they may be or appear

to be in conflict with this holding, are expressly overruled.
The title companies' second argument is that punitive

damages could not be awarded because the trial court did not
find separately as a result of a prima facie tort arising
from an act of bad faith that Lipinski had sustained any
actual damage. Rather, the trial court found the actual
damages based on a breach of the contract. The trial court's

conclusion of law stated:
 "The refusal to defend . . . constituted a
breach of contract, which sustains the award
of actual damages granted above [the court
allowed recovery of costs incurred in defending
O'Neil I and O'Neil 111. In addition, said
refusal-to defend w a s a n act done without
justification, was will.fu1, malicious,
oppressive, and constitu,tedbad faith on the
part of the Defendants . .."
Because the award was based on actual damages the title

companies argue that punitive damages cannot be sustained
because there was no actual damages flowing from the prima
facie tort of bad faith.
We note first that the statute section 27-1-221, sugra,
does not require actual damages to flow from the commission
of the tort before punitive damages can be assessed. Nor
have the title companies cited any authority for their
argument. It is true here that the trial court awarded

actual damages based on a breach of contract; however, the
court could as easily have held that the damages flowed from
the commission of the prima facie tort of bad faith, and
therefore a basis for actual damages would clearly exist from
the commission of the tort. It is likewise clear that if a
basis for actual damages exists in the record, the fact that
none are awarded, does not prevent the assessment of punitive

damages. Brown v. Grenz (1953), 127 Mont. 49, 257 ~ . 2 d
246.
Also see Fauver v. Wilkoske (1949), 123 Mont. 228, 211 P.2d

The title companies' argument exalts form over substance.
The trial court did not simply hold that the title companies
had breached their contract with Lipinski; the trial court
held that the title companies were in bad faith in refusing
to defend Lipinski. In other words, the title companies by
the terms of the contract, had a clear duty to defend Lipinski,

and in breaching that clear duty the title companies acted in
bad faith. The damages which Lipinski incurred in defending
OINeil - surely flowed from that act of bad faith.
I The
simple fact is that there would have been no damages if the
title companies had acted in good faith, for if they acted

in good faith they would have defended O1Neil - and Lipinski
I
would have incurred no costs.

Despite our holding on the issue of punitive damages,
we must vacate the award and remand for a further determination
of the amount of damages to be assessed. The trial court in
assessing punitive damages, awarded a lump sum of $15,000 as
damages for refusal to defend OINeil - and O'Neil - The
I 11.
O'Neil - lawsuit was prompted by Lipinski's failure to
I1
honor the terms of the OINeil - settlement, and we hold that
I
the title companies had no duty to defend that lawsuit.

Accordingly, punitive damages must be assessed based on the
refusal of the title companies to defend OINeil - only.
I
ACTUAL DAMAGES, SURVEYING AND ENGINEERING EXPENSES, AND
PREJUDGMENT INTEREST:
We have held that the title companies had no duty to

defend O'Neil - and therefore Lipinski had no right to
11,

recover for costs incurred (actual damages) in defending
that action.
The court awarded surveying and engineering expenses to
be paid as actual damages, but did not apportion the expenses
between O'Neil - and OINeil --
I 11. We therefore remand for a

redetermination of survey and engineering expenses incurred
in defending O'Neil - only.
I
In awarding all costs incurred for defending the actions,
the trial court awarded prejudgment interest at 10 percent

per annum. The title companies argue, and Lipinski concedes,
that 6 percent per annum is the proper interest rate.
Accordingly, we vacate that part of the judgment and remand
 for a proper determination of the interest amount, to be
applied only to the costs of defending O'Neil -
I.
The judgment of the District Court is affirmed in part,
reversed in part, and remanded for further proceedings
consistent with this opinion.

We Concur:

- --
Chief Justice

l
,
."_> . a & +
i
I
- *-

Justices 0

Hon. LeRoy McKinnon,
District Judge sitting
for Mr. Justice Frank B.
Morrison
Mr. Justice Fred J. Weber concurs and dissents as follows:

Except as herein specifically mentioned, I concur in
the foregoing majority opinion.

With regard to the first issue, I agree that the title
insurance policy covered the existence of the ditch rights,
resulting in an obligation to pay damages to Lipinski. The

majority opinion states that a primary interest of a title

insurance applicant is in what the examination discloses,
and that applicants rely on the companies to tell them
of any risks and that the risks covered by policies include
errors in title examination, including negligent failure to
note a title defect. The majority also states that a title

company, as insurer, owes its clients the duty of conducting
a title search with reasonable care, and then points out

how the title examiner should even have examined the premises,
concluding with the statement that a title insurer cannot
ignore a recital that puts it on notice of a possible defect
in title.

The relationship between the parties is determined by
the title insurance policy. In this instance, the policy
in pertinent part states:
"The Title Insurance Company . . . does
hereby insure John J. Lipinski . ..
against loss or damage not exceeding
$25,000, which the insured shall sustain
by reason of:
1. Title to the land . . . being vested
. . . otherwise then as herein stated; or

2. Any defect in . . .said title existing
at the date hereof, not shown or referred to
in Schedule B;"
Schedule B does not contain any reference to ditch rights,
as mentioned in the majority opinion. The ditch rights
therefore fall within the foregoing provisions of the policy.
The policy provides that the company shall defend the insured
in all litigation founded upon a defect, lien, encumbrance

or other matter insured against by this policy. Among other
contract rights, the Company reserves the option to pay or
compromise any claim or pay this policy in full at any time.

Payment of the full amount of the policy "shall terminate

all liability of the Company". The contract does not contain

a requirement that the insurance company examine the title
records nor that the insurance company in any manner examine

the ground itself. I find no basis for the conclusion of the

majority that there is a duty to make a title search, or
that a claim of relief arises from a negligent title examina-

tion. No authority is cited for these conclusions which
certainly do not arise from the title insurance policy. I

would exclude such conclusions from the opinion.

Mr. Chief Justice Frank I. Haswell:
I concur in the foregoing dissent of Mr. Justice
Weber. The majority have created a new duty on the part
of title insurance companies beyond the coverage of the

title insurance policy.

3 ~&W*
4
Chief Justice

I concur in the dissent of Mr. Justice Weber.

Hon. L e N Y L. McKINNON
~istricfJudge sitting for
Mr. Justice Morrison.