The Garage That Crosses the Line
Six months after closing, an insured submits a claim on an owner's policy. Two problems: her neighbor's detached garage straddles the boundary by 3.2 feet, and a county notice alleges the prior owner's 2019 rear addition sits 4 feet inside the 25-foot rear setback and may have to be removed. No survey was obtained at closing; the seller gave a "no changes in ten years" affidavit, so the standard survey exception remains in Schedule B. The insured's demand letter accuses the insurer of "insuring a house that was never legal" and threatens a bad-faith action. She also mentions that the seller once commented on "the garage situation."
1. Analyze coverage for each of the two problems, and state the first thing to confirm about the policy.
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First: identify the form actually issued. Whether the encroachment is covered depends on the form and on Schedule B. Some owner's forms (e.g., the ALTA Homeowner's Policy) affirmatively insure certain survey-type risks; an ALTA Owner's Policy with a surviving survey exception does not. Read the jacket and Schedule B before writing anything to the insured.
Problem 1 - the neighbor's garage. If the survey exception is in Schedule B, it excepts "any encroachment, encumbrance, violation, variation, or adverse circumstance affecting the title that would be disclosed by an accurate and complete land survey," and the 3.2-foot crossing is precisely that. It is a matter of record notice only through survey, and the insured bought without one.
Problem 2 - the setback violation. A zoning or land-use regulation violation is generally outside title coverage: title insurance insures title, not compliance with the building code or the zoning ordinance. The county notice is not a lien or an instrument affecting title unless and until it ripens into a recorded lien or a demolition order. Expect no indemnity.
The insured's knowledge. Her recollection that the seller mentioned the garage does not create coverage where an exception applies, and in an owner's policy her own knowledge is not a defense to an otherwise covered claim. It matters only as evidence about the seller's affidavit.
2. The insured demands a defense and threatens bad faith. What does the claims handler do, and when?
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Investigate before denying. Obtain the full policy and Schedule B, the closing file, the seller's affidavit, the plat and any survey, and the county notice. A denial issued without a documented coverage investigation is the fact pattern that supports a bad-faith claim.
Defense obligation. The duty to defend is measured by the allegations, is broader than the duty to indemnify, and attaches if any allegation could fall within coverage. If the neighbor has filed an action (or the county has filed an enforcement proceeding) that includes any potentially covered theory - for example a boundary dispute implicating the insured title - tender a defense under a written reservation of rights and retain counsel. If the only claims are the strictly excepted encroachment and a zoning violation, a clear, prompt written denial citing the specific exclusion and exception is appropriate.
Timing and tone. Acknowledge the claim in writing within the statutory or policy-required period; issue the coverage position letter with citations; explain the remedies the insured does have (a claim against the seller on the deed warranties and on the false affidavit, and her own surveyor's or closing agent's error). Bad faith is generally about unreasonable delay and unreasonable denial, not about the outcome.
Reserve the insurer's rights against the seller/affiant if the insurer relied on the affidavit - for example, if it deleted a survey exception at the seller's request - since a knowingly false affidavit supports a subrogation or fraud claim.
3. Underwriting review asks what should have been done at issuance to avoid this claim, and whether the insurer can now assert the insured's knowledge against her.
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Asserting her knowledge: no. In an owner's policy the insurer runs the risk it chose to underwrite; the insured has no duty to disclose what a survey would reveal, and her after-the-fact recollection does not defeat a covered claim or create an exclusion. The insurer's remedy runs against the party whose misrepresentation it relied on - here the seller/affiant.
What should have been done:
- On a property with a 2019 addition, order a current survey or an ALTA survey endorsement and delete the survey exception with a specific endorsement that schedules the known improvements and excepts specifically described encroachments.
- If the seller's "no changes" affidavit was the basis for deleting the survey exception (as it often is for a resale), the closing file should document the affidavit, the insurer's reliance, and the affiant's identity and creditworthiness.
- Ask for the certificate of occupancy or permit close-out for the 2019 addition; if the file shows an unpermitted addition, quote the policy with an explicit setback/zoning exception rather than pretending the issue does not exist.
Underwriting conclusion. Do not delete a survey exception in exchange for a purchase price. Price the risk with a survey, or except it and let the buyer decide with full information.