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January 14, 1982


The opinion of the court was delivered by: GESELL


 Eureka acquired an interest in this group of rental apartments and town houses with the intention of converting the units into condominiums and selling them to the public. Shortly after Eureka announced its plans to convert, the tenants, relying on certain statutory protections existing under the law of the District of Columbia, mounted a well-organized campaign to block the conversion by litigation and other means. Eureka's title policy specifically insured against loss or damage caused by any attempt by the tenants to enforce their statutory rights. CTI acknowledged that the tenant actions placed a cloud on title and agreed to pay Eureka's legal expenses in opposing the tenants. Over the course of the ensuing months Eureka's representatives held settlement discussions with the tenants and discussed the advisability of settlement and other options with CTI. For reasons that will appear, Eureka and CTI ultimately failed to agree on a common plan of action and Eureka entered into a settlement agreement with the tenants without the consent of CTI.

 Following this rupture CTI filed an action in the Northern District of Illinois for a declaratory judgment that it had met its obligations under the policy and Eureka filed an action in this Court to recover the cost of the settlement and damages due to delay in converting Carrollsburg Square caused by the tenants. CTI's declaratory judgment action was transferred to this Court and the two cases were consolidated for trial. After a bench trial the Court must now determine whether Eureka's unilateral settlement with the tenants was permitted by the terms of the policy or excused by CTI's prior breach of the policy, and, if so, to what extent Eureka may recover the costs of the settlement and on its claim for delay damages.


 The title insurance policy deviated from CTI's standard title insurance form in one respect which is the focus of this litigation. CTI's standard policy contains an exception for claims asserted by tenants. This provision was stricken in favor of a special Note II which provided:

The policy insures against loss or damage arising out of an enforcement or attempted enforcement of the rights, if any, of Tenants in the property pursuant to the provisions of Section 602 of the Rental Housing Act of 1977 (District of Columbia Law 2-54) or the Emergency Multi-Family Rental Housing Purchase Act of 1979, as the same may be amended. *fn1"
Section 602, as amended in October, 1978, provided that an owner of multi-family housing could not sell without giving the tenants advance notice and an opportunity to purchase the building and, where no eligible tenants organization existed, time to form a tenants organization capable of purchasing the building.
Eureka announced on April 30, 1979, that it intended to convert one of the large apartment buildings in the Carrollsburg Square complex. Promptly thereafter the tenants claimed that their rights under section 602 had been violated since the prior owner of Carrollsburg Square had not given the tenants advance notice of the sale to Eureka or the opportunity to organize a tenants association. On May 9, 1979, the tenants asked the District of Columbia Rent Administrator to conduct an investigation to determine whether their 602 rights had been violated. After a hearing the Rent Administrator dismissed the tenant petition. This decision was appealed, and on August 14, 1979, the D.C. Rental Accommodations Commission reversed the decision of the Rent Administrator in part and issued an order enjoining Eureka from proceeding with the conversion. The Commission remanded the matter to the Rent Administrator to consider whether Rozansky & Kay Construction Company, which had assigned the purchase contract for Carrollsburg Square to Eureka, had violated the Rental Housing Act. Eureka then appealed the injunction to the D.C. Court of Appeals. A motion for summary reversal or stay pending appeal was denied and the order remained in effect until January 4, 1980, when the Commission vacated its order following the D.C. Court of Appeals grant of the Commission's request for a remand.
By this time, however, the tenants had raised other legal obstacles to Eureka's conversion plans. The Rent Administrator on remand from the Commission concluded that Rozansky & Kay had violated section 602. Relying on this decision the tenants brought suit in the Superior Court of the District of Columbia to enjoin the conversion pending appeal. In addition, on December 27, 1979, acting on a tenant petition, the D.C. Department of Housing and Community Development sent a letter to Eureka threatening to issue a cease-and-desist order to prevent Eureka from proceeding with the conversion until questions surrounding the title were resolved.
The tenant actions had the effect of making the individual condominium units unmarketable and therefore prevented Eureka from proceeding with the conversion. Eureka vigorously opposed the tenants' actions and kept CTI fully and promptly advised of all the developments described above as they occurred. Upon receiving notice of the tenant actions, CTI promptly agreed that they were within the risks covered by Note II and agreed to pay all of Eureka's legal expenses in opposing the tenants.
As the prospect of a prompt resolution of the dispute with the tenants became more uncertain Eureka became convinced that settlement with the tenants was the wisest solution to its business problem. Eureka had always contemplated a quick sell-out to pay off loans needed for the purchase and to realize quick profit from the venture. While the tenants were not expected to succeed, *fn2" Eureka believed it faced uncertain but potentially serious losses due to delay of its anticipated schedule for converting the apartments.
Commencing in the fall of 1979, Eureka held strenuous settlement negotiations with the tenants. By January, 1980, the tenants had reduced their demands to the point that Eureka believed it could arrange a reasonable settlement. During January and early February representatives of Eureka had several meetings with CTI officials to work out a basis upon which CTI would agree to issue "outsale" policies insuring title to individual condominium units so that closings could commence. CTI objected to the settlement on the ground that the amount Eureka was willing to pay the tenants was unreasonably high and refused to issue outsale policies based on the proposed settlement except on the condition, among others, that Eureka pay the entire cost of the settlement. CTI also refused Eureka's suggestion that it issue outsale policies so that sales of condominiums could proceed during the course of the litigation. Other possible solutions were discussed without agreement. *fn3" CTI instead proposed that the litigation with the tenants be pursued to a final determination. This, like other alternatives, was rejected by Eureka.
Clause 7(c) of the policy reads as follows:
No claim shall arise or be maintainable under this policy ... for liability voluntarily assumed by an insured in settling any claim or suit without prior written consent of the Company.
Despite its failure to obtain CTI's consent to the settlement Eureka argues that it is entitled to recover on the policy under either of two theories. First, Eureka argues that CTI's refusal to consent to the settlement with the tenants negotiated by Eureka was unreasonable and that, notwithstanding clause 7(c), an unreasonable refusal to settle by the insurer constitutes a breach of its duty to its insured. Alternatively, Eureka argues that it was free to settle without CTI's consent because CTI had previously breached the policy by denying liability for damages arising from delay of the project caused by the tenants' attempted enforcement of their rights. *fn4"
A. CTI Had No Duty To Settle
Eureka's argument that CTI had a duty to accept the settlement Eureka had negotiated even though CTI believed the settlement was excessive and inconclusive can be resolved in short order. As stated by the Court in Traders & General Ins. Co. v. Rudco Oil & Gas Co., 129 F.2d 621 (10th Cir. 1942):
It is well settled that if the potential loss is within the limits and coverage of the policy and the insurer accepts liability therefor, by agreeing to defend the claims or suits against its assured, and to pay the losses when established, the insurer is accorded the absolute control of the litigation. It may elect to compromise and settle the claims before suit is filed or after, or it may elect to defend in the name of the assured, and the exercise of its discretion is not subject to challenge by the assured. The assured may not do more than cooperate with the insurer in the defense of the claim or suit. Id. at 626.
See also Fireman's Fund Ins. Co. v. Security Ins. Co., 72 N.J. 63, 367 A.2d 864, 870 (1976); 7C Appleman on Insurance § 4681 (1979). This limitation on the insured's right to settle where the potential recovery remains within policy limits is reasonable since, so long as the insurer acknowledges its liability, only the insurer's economic interest will be affected by the outcome of the litigation.
Eureka did not contend at trial and the evidence does not support the claim that Eureka's potential exposure exceeded the $ 9,000,000 coverage provided by the policy. Eureka's most extravagant claims of delay damages were in the range of several hundred thousand dollars per year and no attempt was made to estimate the size of Eureka's loss, if any, if the tenants were ultimately successful in establishing their claim that their section 602 rights had been violated. Thus, CTI was well within its rights under the policy in refusing to settle.
The numerous cases cited by Eureka for the proposition that an insurer has a duty, notwithstanding policy language similar to clause 7(c), to consider the interests of its insured in determining whether to settle are distinguishable. Obviously, where an insurer has received a settlement offer within policy limits but the potential liability is in excess of policy limits, the interests of the insurer and insured are in conflict. Thus the law imposes on the insurer "a duty ... to settle a claim against its insured within policy limits whenever there is a substantial likelihood of a recovery in excess of those limits." Johansen v. California State Auto Assn. Inter-Insurance Bureau, 15 Cal.3d 9, 123 Cal.Rptr. 288, 538 P.2d 744, 747 (Cal.1975); see also Fireman's Fund Ins. Co. v. Security Ins. Co., 72 N.J. 63, 367 A.2d 864, 870 (N.J.1976); 40 A.L.R.2d 168 (1955 & 1980 Supp.). On the other hand, where no such conflict of interest arises, the law does not eliminate the insurer's absolute contractual right to control the litigation.
B. CTI Denied Its Ultimate Liability Under the Policy
It remains to consider whether CTI breached the policy prior to settlement, justifying Eureka's decision to settle without CTI's consent. This requires a determination of the policy's coverage followed by a review of CTI's statements and actions once the claim for delay damages allegedly caused by the tenant action was presented.
1. Scope of Coverage
The scope of policy coverage hinges on how Note II is reconciled with standard clause 7(b). *fn5" Two alternative interpretations of the policy's coverage were advanced over the course of the trial in an effort to effect this reconciliation. There is no dispute that "loss or damage" within the meaning of Note II encompassed consequential damages arising from delay in the condominium conversion caused by attempted enforcement of tenant 602 rights. Initially, CTI took the position that in the event of litigation of tenant claims the policy protected against "loss or damage" due to delay only if the tenants ultimately obtained a judgment in their favor. Eureka consistently maintained that the policy protects against such "loss or damage" whether or not the tenants' section 602 claims were eventually sustained by a court. On the third day of trial CTI appeared to change its position and acknowledged, in response to questioning by the Court, that the policy covers such "loss or damage" regardless of how the merits of the 602 claims were ultimately resolved. *fn6" The Court is confident that this interpretation fits the facts and the law.
Note II provided novel insurance coverage to deal with a special type of risk. As testified by Singer, counsel for Eureka who negotiated the policy, it was "a novel notion" to deal with the statutory rights of tenants affected by condominium conversions through the vehicle of a title insurance policy. Thus, no past experience or body of interpretation provides guidance. *fn7"
The circumstances at the time the policy was entered into support the interpretation that Note II provides protection against loss or damages due to delay regardless of how the tenant claims were finally resolved through litigation. The conversion of Carrollsburg Square apartments into condominiums was a highly leveraged real estate transaction which contemplated altering the legal form of title to the apartments in as short a time as possible. The financial success of the venture depended on avoiding any serious delays and any tenant challenge to Eureka's title in Carrollsburg Square could obviously lead to delay. Eureka obviously sought the special Note II coverage as the result of a prudent business decision. John Cooney, who signed the policy on behalf of CTI, was aware of the problem of tenant opposition to condominium conversions in the District of Columbia and that Eureka's purpose in acquiring Carrollsburg Square was promptly to convert and sell condominium units. Conscious that a risk of delay existed, he even sought legal advice as to the possibility of tenant action. Under these circumstances, it would be unreasonable to conclude that the parties intended that Eureka would be entirely unprotected for delay damages due to "enforcement or attempted enforcement" of tenant rights if the tenants should ultimately be unsuccessful in court.
It is plain from the language of Note II that it does not merely provide protection in the event the existence of section 602 rights is definitively established but rather protects against "loss and damage" from the risk that the tenants might assert or attempt to assert such rights. In contrast to Note II, other provisions of the policy only protect against losses due to the existence of adverse rights after trial, as for example, the provision insuring against loss or damage incurred by reason of "(any) defect in or lien or encumbrance" on title. The language of Note II is obviously broader in scope.
Thus Note II provides coverage for loss or damage regardless of whether a court ultimately determines that the claims are valid, as both parties now concede. However, under clause 7(b) CTI is apparently relieved of any liability when it successfully removes an adverse claim to title through litigation. Thus, a fundamental inconsistency is introduced into the policy by clause 7(b) since it apparently eliminates coverage specifically provided in Note II.
While the coverage provided by an insurance policy must be interpreted in light of its stated conditions, standard exceptions to coverage must give way when, as here, they conflict with specific coverage negotiated by the parties. See Employers Mut. Ins. Liability Co. v. Pacific Inland Navigation Co., 358 F.2d 718, 719 (9th Cir. 1966); Couch on Insurance § 44:415 (1964 & 1980 Supp.). In attempting to discern the meaning of a policy the expectation of the parties is the primary guide. Keene Corp. v. Insurance Co. of North America, 215 U.S. App. D.C. 156, 667 F.2d 1034, 1041-1042 & n.12 (D.C.Cir.1981). This approach is consistent with the general rules of contract interpretation that specific terms are to be given greater weight than general language and specifically negotiated language is to be given greater weight than standardized terms. Restatement (Second) of Contracts § 229 (Tent. Draft No. 5 1970). Since Eureka here specifically requested the coverage provided in Note II and the parties drafted this provision to cover a particular perceived risk, Note II obviously must take precedence over the general language of clause 7(b). *fn8" Thus there can be no doubt that the policy protected Eureka against loss or damage attributable to attempts to enforce tenants' section 602 rights and that CTI was liable for this amount regardless of how the tenants' claims were ultimately resolved.
2. CTI Wrongfully Denied Liability Prior to Settlement
It is well established that if an insurer wrongfully denies liability when its insured submits a claim, the insurer may be held liable for the costs of a reasonable settlement reached by the insured even if the insurance company has refused to consent to the settlement. See Traders & General Ins. Co. v. Rudco Oil & Gas Co., 129 F.2d 621, 626 (10th Cir. 1942). See generally 67 A.L.R.2d 1086 (1959 & 1978 Supp.). As stated in Franklin v. Oklahoma City Abstract & Title Co., 584 F.2d 964, 968 (10th Cir. 1978), "provisions prohibiting out-of-court settlements between an insured and a claimant without the consent of the insurer are not enforced when the insurer repudiates coverage or denies liability."
An insurance company's actions may amount to a denial of liability if the insurer fails within a reasonable time to advise its insured as to its understanding of the scope of coverage where that understanding conflicts with the claim. In Isadore Rosen & Sons, Inc. v. Security Mut. Ins. Co., 31 N.Y.2d 342, 339 N.Y.S.2d 97, 291 N.E.2d 380 (1972), the Court reversed summary judgment in favor of the insurer where there was evidence that insured was under severe pressure to settle the claim in order to obtain monies owed it and the insurer allegedly refused either to assert or deny coverage. The Court stated,
the insurer's obligation to act in good faith for the insured's interests may be breached in other ways than by refusing or neglecting to defend a suit. It may be breached by neglect and failure to act protectively when the insured is compelled to make settlement at his peril; and unreasonable delay by the insurer, in dealing with a claim, may be one form of refusing to perform which could justify settlement by the insured. Id. 339 N.Y.S.2d at 101, 291 N.E.2d at 382.
See also Otteman v. Interstate Fire & Casualty Co., 172 Neb. 574, 111 N.W.2d 97, 102 (1961); 7C Appleman, Insurance Law ...

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