James Matison v. Transamerica Title Insurance Company, a California Corporation
Docket: 87-1776
Court: Court of Appeals for the Ninth Circuit; May 2, 1988; Federal Appellate Court
James and Nancy Matison, plaintiffs-appellants, filed suit against Transamerica Title Insurance Company, defendant-appellee, for breach of contract regarding a title insurance policy and for tortious breach of good faith in settling a related claim. The case, rooted in Arizona law, originated from a title insurance policy issued by Transamerica in 1981 for a property sold by the Matisons for $277,500. The property was subsequently sold for $370,500, also insured by Transamerica.
In 1983, Marvin Schwarz and others sued the Matisons and several parties, alleging fraud and breach of fiduciary duty concerning the same property. Transamerica settled with Schwarz without the Matisons' involvement, agreeing to pay $80,000 under conditions that did not dismiss all claims against the Matisons. Specifically, the settlement included a 'Gallagher Covenant' requiring Schwarz to vigorously pursue his claims against the Matisons, with any recovery reducing Transamerica’s payment obligation.
The Matisons contended that this partial settlement constituted a breach of their title insurance contract and the insurer's duty to them. The district court ruled in favor of Transamerica, finding that the insurer had fulfilled its duty by settling the title claim and that the settlement did not violate its contractual obligations. The Matisons appealed the district court's decision.
Transamerica settled claims against itself and its insureds, requiring Schwarz to pursue tort and contract claims against the Matisons, thereby benefiting at the Matisons' expense. Although Transamerica was not a fiduciary and had no duty to prevent all harm to the Matisons or to defend them, it did have a fiduciary-like obligation not to prioritize its own interests over those of its insured. The insurer's actions, particularly entering into a 'Gallagher covenant,' demonstrated a failure to provide equal consideration to the Matisons' interests. Transamerica's arrangement with Schwarz risked leaving the Matisons without compensation while mandating their defense, highlighting a conflict with the fiduciary duty assumed by insurers. While the Matisons may have been aware of negotiations, their exclusion from these discussions rendered the process secretive, further illustrating Transamerica’s unfaithfulness and creating additional harm to the Matisons. Attorney's fees are awardable at the court's discretion, and the judgment is reversed in favor of the appellants, who are instructed to submit a statement of attorney's fees incurred during the appeal.
