Monday, July 22, 2013

SJC further limits title insurer's duty to defend

Accredited Home Lenders issued a loan, secured by a mortgage, to Karla Brown for her purchase  of a house, and bought a title insurance policy from First American which provided coverage to it and its successors and assigns.  The mortgage was subsequently assigned to Morgan Stanley, of which Deutsche Bank is the trustee. 

Three years after taking out the mortgage loan Brown filed suit seeking to rescind the mortgage and void her debt.  She alleged that she was the victim of a predatory lending scheme, that the defendants unilaterally misrepresented her income to justify higher interest rates and higher monthly payments, and that they coerced her into accepting loans that she could not afford. 

Deutsche Bank requested that First American defend its mortgage interest.  First American denied the claim.

In Deutsche Bank Nat'l Ass'n v. First Am. Title Ins. Co., 465 Mass. 741 (2013), the court examined First American's duty to defend.  It turned to the very problematic decision in  GMAC Mortgage, LLC v. First Am. Title Ins. Co., 464 Mass. 733 (2013), which I discussed (and strongly criticized) here.  That case held that a title insurer, unlike a liability insurer, does not have duty to defend all claims in a complaint against an insured if less than all the claims are covered by the policy.  

In Deutsche Bank the court further ate away at a title insurer's duty to defend.  It held that unlike a liability insurer a title insurer does not have a duty to defend simply because the allegations in the underlying complaint are reasonably susceptible of an interpretation that they state or adumbrate a claim covered by the policy terms.  "Application of this standard threatens to sweep a whole host of uncontemplated risks into the ambit of title insurance.  . . .  To avoid such an aberration, we conclude that a title insurer's duty to defend is triggered only where the policy specifically envisions the type of loss alleged." 

The supposedly new standard stated by the court for title insurers is not new; it is the standard for liability insurance.  There is no duty to defend where a complaint does not allege a covered loss.  That is the meaning of the "state or adumbrate" standard.  It's odd and disturbing that the court does not understand this.

What the court really meant was that even if a complaint states or adumbrates a covered loss, a title insurer does not have a duty to defend if the covered loss is not the main thrust of the complaint.  That was made clear when the court turned to the allegations asserted by Brown. 

The court noted that the policy covers loss or damage sustained or incurred by the insured by reason of the "invalidity or unenforceability of the lien of the insured mortgage upon the title."  The policy provided that First American would defend the insured "in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against." 

The court held that Brown's allegations did not assert invalidity or unenforceability of the lien.  She alleged the debt should be voided because she was the victim of a predatory lending scheme, and that she was entitled to rescind the security interest and void the loan indebtedness. 

The court held, "Where the substance of Brown's complaint is concerned with the validity of the underlying loan and whether it was procured by a 'predatory lending scheme,' not whether the mortgage was improperly executed, improperly recorded, or otherwise procured by fraud, we conclude that its claims were not specifically envisioned by the terms of the title insurance policy.  Consequently, the allegations of the complaint fall outside the scope of the policy."

In a footnote, the court stated, "We do not construe the complaint to allege that the mortgage instrument itself was forged or that its execution was the product of fraud.  Assuming such a claim had been made in the present dispute, it might have been specifically excluded by Exclusion 3(a), which denies coverage to defects created by the insured."

The court noted that Brown's attempt to rescind the security interest was only a "collateral consequence" of the main relief sought, voiding the loan indebtedness.  "We are aware that, if Brown prevails and her underlying debt is extinguished, this would have the practical effect of dissolving Deustche Bank's mortgage interest, insofar as there would be no debt to secure.  However, given that Deutsche Bank and its predecessors in interest, rather than First American, were in the best position to ensure that the underlying debt was valid, it is for them to bear the burden of any loss."

As a matter of public policy I like the result of this decision.  Predatory lending is a scourge on society, and mortgagees are complicit in its widespread use.  There should not be insurance coverage for claims alleging it.

But the lack of insurance coverage should come from an exclusion, perhaps Exclusion 3(a), referenced by the court, or an intentional acts exclusion or the like.  There is no need to eat away at the duty to defend or to make distinctions without a difference. 

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