Scope of Coverage Limited by Wording Must Be Enforced
Title insurance is different than property, casualty or liability insurance. It provides a coverage limited by its terms. Title insurance is fundamentally different from other types of insurance because it is not prospective in nature; it does not insure against title defects or liens that arise after the effective date and time of the policy. Title insurance does not insure against the conduct, or the alleged conduct, of the insured and does not cover matters involving personal dealings between individuals.
The function of title insurance is to protect against the possibility that liens or other items not found in the title search or disclosed in the preliminary report existed. A title insurance policy does not constitute a representation that the contingency insured against will not occur.
In David Hovannisian, v. First American Title Insurance Company, F072789, Court Of Appeal Of The State Of California, (July 25, 2017), a person with a claim against Wells Fargo accepted an assignment against a title insurer seeking tort and punitive damages and hoping to profit from the assignment. As I have often said, taking an assignment of an i nsured’s claim against its insurer is buying a classic “pig in a poke” and is usually fraught with danger if the assignment is taken without the advice and counsel of a professional insurance coverage lawyer.
David and Linda Hovannisian purchased property from Wells Fargo Bank (Wells Fargo) at a foreclosure sale. Several months later they discovered there was a first priority deed of trust on the property that had not been extinguished by the foreclosure. The Hovannisians sued Wells Fargo for intentional and negligent misrepresentation based on a statement in Wells Fargo’s deed of trust that it was a first deed of trust. Wells Fargo tendered defense of the action to its title insurer, First American Title Insurance Company (First American), which refused to indemnify or defend Wells Fargo.
After Wells Fargo assigned any claim it had against First American to the Hovannisians, the Hovannisians sued First American for breach of contract and breach of the implied covenant of good faith and fair dealing. First American subsequently brought a summary judgment motion, arguing that coverage had terminated, there were no benefits due under the policy, and there was a genuine dispute as to coverage. The trial court granted the motion.
The Hovannisians purchased the property for $28,792 at a non-judicial foreclosure sale by Wells Fargo. The notice of trustee’s sale stated that the property would be sold at public auction to the highest bidder “without warranty express or implied as to title, use, possession or encumbrances ….” The trustee’s deed issued to the Hovannisians stated that the trustee “hereby grants and conveys, but without warranty, express or implied, . . . all of its right, title, and interest” in the property.
After the purchase the Hovannisians received a letter from Duane Long, who claimed to own a first lien on the property and requested payment on the note secured by the property. Investigation revealed that Duane and Margaret A. Long, trustees of the Duane Long and Margaret A. Long Family Trust dated April 5, 1993, held a $38,000 note issued to Golden Trade LLC (the Long note), which was secured by the property through a deed of trust recorded in January 2003 (the Long DOT).
First American informed the Hovannisians that it was unable to assist them, as they were not insureds under the policy and to the extent they were asserting a claim against Wells Fargo, they needed to contact Wells Fargo directly. First American added that even if it had an obligation to the Hovannisians, there were no deed warranties provided to them as a result of the foreclosure, as the property was conveyed “without warranty, express or implied[,]” and therefore they took the property subject to any encumbrances on title.
The Hovannisians sued Wells Fargo alleging two causes of action – intentional and negligent misrepresentation. Wells Fargo tendered the complaint to First American for defense and indemnity. On June 12, 2013, First American denied the tender of defense as it had no duty under the policy to indemnify Wells Fargo for the causes of action asserted in the complaint. First American again asserted there was no continuing coverage under the policy and even if there were, the causes of action related to tortious conduct that fell outside the policy’s provisions.
Wells Fargo and the Hovannisians entered into an assignment agreement by which Wells Fargo assigned and transferred to the plaintiffs only those assignable claims and causes of action that Wells Fargo may now have or hereinafter acquire as against First American. In conjunction with the assignment, the Hovannisians dismissed the underlying action with prejudice.
The Current Action
The Hovannisians filed suit against First American in July 2014. Their claims are based solely on First American’s decision to decline to defend and indemnify Wells Fargo in the underlying action.
First American moved for summary judgment. First American contended the breach of contract claim was without merit because (1) Wells Fargo did not have continuing coverage after the foreclosure sale, and (2) there were no policy benefits due and owing either the Hovannisians or Wells Fargo, as the misrepresentation claims were not covered under the policy and they were based on post-policy events, namely Wells Fargo’s representations during the foreclosure sale.
The trial court agreed with First American that the breach of contract claim was without merit because the policy did not provide Wells Fargo a defense or indemnity for the claims asserted in the underlying action, therefore the bad faith claim also failed. Judgment was entered subsequently in First American’s favor.
An insurance company’s obligation to indemnify an insured depends upon the nature of the risks covered by the insurance policy. Title insurance is defined by statute as “insuring, guaranteeing or indemnifying owners of real or personal property or the holders of liens or encumbrances thereon or others interested therein against loss or damage suffered by reason of: [¶] (a) Liens or encumbrances on, or defects in the title to said property; [¶] (b) Invalidity or unenforceability of any liens or encumbrances thereon; or [¶] (c) Incorrectness of searches relating to the title to real or personal property.” (Ins. Code, §§ 104, 12340.1.)
Policy wording existed that the policy “shall not continue in force in favor of any purchaser from the Insured of either (i) an estate or interest in the Land, or (ii) an indebtedness secured by a purchase money Mortgage given to the Insured.” The policy provided coverage to Wells Fargo as long as it “retain[ed] an estate or interest in the land,” held indebtedness secured by a purchase money Mortgage given to it by a purchaser, or had “liability by reason of covenants of warranty” given in the transfer of the land.
This policy language revealed the parties’ intent to limit the scope of title protection to the period running from the effective date of the policy until the insured conveyed away its interest in the land unless, in the conveyance, the insured retains a mortgage secured by the land, or the insured gives warranties to the purchaser.
First American showed, based on the facts Wells Fargo and the Hovannisians presented to it both before and after the underlying action was filed, that there was no potential for coverage under the policy.
The Hovannisians did not learn about the Long DOT until after they purchased the property at the foreclosure sale without warranty. The only potential claim they had against Wells Fargo was for the alleged misrepresentations for which there is no liability or loss under the policy. As there is no potential for coverage under the policy or a duty to defend, the Hovannisians’ breach of contract claim is without merit. In addition, a claim for breach of the implied covenant of good faith and fair dealing cannot be maintained unless benefits are due under the policy at issue.
Title insurance is different. The suit filed by the plaintiffs did not deal with the difference. Rather, they sued as if a title policy was a third party liability policy. It was not. They made the mistake most parties who take an assignment against a tortfeasor’s insurer often make, they let greed get in the way of insurance coverage and insurance law. They lost because there was no coverage available under the Title policy and gave up their fraud case against Wells.
This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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