What you need to know:
The Massachusetts Supreme Judicial Court ruled that a title insurer’s duty to defend is triggered only where the policy specifically envisions the type of loss alleged—a standard narrower than the duty to defend applicable to a general liability insurer. It ruled that a title insurer had no duty to defend where a third party alleged that the insured participated in a “predatory lending scheme,” because the allegations focused on the validity of the loan, not defects concerning the execution of the mortgage lien.
What you need to do:
Companies should consider the impact of the SJC’s ruling in assessing the duty to defend under title insurance policies.
The predecessor-in-interest of Deutsche Bank National Association issued a loan, secured by a first mortgage, to Karla Brown to enable her to purchase a home. Brown alleged that she was the victim of a “predatory lending scheme” and sued Deutsche Bank to void the debt and rescind the mortgage. She alleged that the defendants misrepresented her income to justify higher interest rates and higher monthly payments, and coerced her into accepting loans that she could not afford.
Deutsche Bank sought a defense from its title insurer, First American Title Insurance Company. The title insurance policy covered “loss or damage . . . sustained or incurred by the insured by reason of . . . [t]he invalidity or unenforceability of the lienof the insured mortgage upon the title.” First American promised to 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.” First American refused to defend because Brown did not challenge that she granted the mortgage, but instead claimed that she was misinformed as to the terms of the note. The state trial court granted summary judgment to First American. The Supreme Judicial Court affirmed, after transferring the case from the Appeals Court. See Deutsche Bank Nat’l Ass’n v. First Am. Title Ins. Co., SJC-11265, 2013 Mass. LEXIS 573 (Mass. July 11, 2013).
The Court’s Ruling
The Supreme Judicial Court held that:
Standard for Title Insurer’s Duty to Defend. A title insurer’s duty to defend is triggered only where the policy specifically envisions the type of loss alleged. Unlike a general 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.” The purpose of title insurance is to indemnify the insured against loss through defects in title. Title insurance is thus “fundamentally different” from general liability insurance, which is directed at future risks.
First American’s Duty to Defend. Title insurance protects against defects in, or liens or encumbrances on, title. First American had no duty to defend because Brown alleged defects with the underlying mortgage debt (i.e., that it was obtained through a predatory lending scheme), rather than defects concerning the execution of the mortgage lien. “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.”
The SJC ruled that a title insurer’s duty to defend is triggered only where the policy specifically envisions the type of loss alleged—a standard narrower than the duty to defend applicable to a general liability insurer. It held that the title insurer had no duty to defend the insured against a predatory lending suit because the allegations focused on the validity of the loan, rather than the specific risk insured under a title insurance policy—namely, defects concerning the execution of the mortgage lien.