The U.S. District Court for the Eastern District of Missouri denied motions for summary judgment filed by a title insurer and it’s insured regarding coverage of mechanic’s lien disputes. The insured brought claims for breach of contract and tortious interference regarding the denial of coverage, while the title insurer claimed the liens weren’t covered under the policy.
The case is Fidelity National Title Insurance Co. v. Captiva Lake Investments LLC (No. 4:10-cv-1890).
On March 13, 2006, National City Bank agreed to loan Majestic Pointe Development Co. LLC $21,280,000 for completion of a condominium project. Majestic Pointe executed a deed of trust in favor of National City Bank, which purchased title insurance to insure the priority of its interest in the deed of trust. Lawyers Title Insurance Co. issued a loan policy on March 16, 2006. National City Bank subsequently increased the amount of its loan to Majestic Pointe and, on Oct. 25, 2007, an amended deed of trust reflecting the increased loan amount was recorded. Lawyers Title issued a modified endorsement to the policy that increased the loan insurance amount to $22,380,000 and amended the date of the policy to Oct. 25, 2007.
The construction project ran into difficulties and, starting in April 2008, several mechanic’s liens were filed. In mid-2009, National City sold Majestic Pointe’s loan to Captiva Lake Investments LLC, which subsequently foreclosed on the property. On July 29, 2009, Captiva made a claim under the policy, demanding that Lawyers Title provide a defense against the mechanic’s lines and pay any resulting claims. On Oct.1, 2009, Lawyers Title notified Captiva that it would provide a defense, subject to a reservation of its right to later deny coverage under the policy. Lawyers Title retained Sauerwein, Simon & Blanchard (SSB) as counsel to defend Captiva in the mechanic’s liens actions. The claims of six contractors have been decided in Captiva, five claimants have obtained a judgment against Captiva and the status of several more liens is not apparent.
On Nov. 3, 2009, Captiva entered into an agreement to sell the property to a third party. It was a condition of the sale that Lawyers Title agree to issue a lender’s policy of title insurance with full mechanic’s lien coverage without exception for liens on the property prior to Captiva’s acquisition of the property, or provide affirmative insurance coverage for the mechanic’s liens. Lawyers Title refused to commit to issuing the coverage. On Nov. 17, 2009, the buyer notified Captiva that it would not complete the purchase of the property. On Aug. 3, 2010, Captiva submitted a claim for unmarketability of title. Captiva alleged that it is unable to sell or obtain a loan on the property, due to the uncertainty created by the question of coverage for the pending mechanic’s liens.
Captiva filed suit, arguing that Fidelity must provide defense and indemnification with respect to the mechanic’s liens, as well as for unmarketability of the title that Captiva asserted arose from the liens.
Fidelity argued that it has provided a defense for the mechanic’s liens, that a policy exclusion bars coverage, and that the policy does not provide coverage for Captiva’s alleged unmarketabilty of title. Both parties brought claims for declaratory judgment. Captiva also brought claims for breach of contract and tortious interference. The parties filed cross motions for partial summary judgment.
The court concluded that factual determinations preclude summary judgment on the parties’ claims, but addressed some of the parties’ arguments regarding interpretation of the policy.
“Multiple mechanic’s liens were filed against the Majestic Pointe development and, while some have been defeated outright and others are being appealed, the status of the remainder is unclear,” the court stated. “In addition, Captiva complains that Fidelity improperly limited the scope of the defense to Captiva’s detriment. Under this circumstance, the Court finds that questions of fact preclude a determination on summary judgment that Fidelity has satisfied its obligations under the policy.
“Captiva asserts additional claims that Fidelity determined that the policy did not afford coverage but concealed this determination from Captiva, thereby breaching its duty to Captiva, and that Fidelity tortiously interfered in Captiva’s relationship with SSB,” the court continued. “These claims will be taken up at trial.”
The court addressed Captiva’s claim that the unmarketability of title is due to the mechanic’s liens on the property and, therefore, covered under the policy, by first noting that the loan policy in the case contains a provision that explicitly excludes coverage for loss or damage arising from defects that attach or are created subsequent to the date of the policy. It said Captiva must show that the condition causing the defect in marketability occurred before Oct. 25, 2007. Fidelity argued that the mechanic’s liens were recorded after that date and that there is no coverage for unmarketability due to these liens.
Specifically, Fidelity argued that, under Missouri law, mechanic’s liens do not encumber title until they are filed. It cited Goodner v. Mosher-Roe Abstract and Guaranty Co., in which the Missouri Supreme Court stated that a mechanic’s lien does not take tangible form as an encumbrance against real estate until set forth in a document, verified and filed in conformity with statutory provisions. The court found, however, that the lien at issue in that case was not filed in the proper office as designated by statute.
“The court is not persuaded by the argument Fidelity has presented here against Captiva’s claim for coverage for unmarketable title,” the court stated. “Nonetheless, the court has been unable to locate any cases finding an insurer liable for unmarketability arising from mechanic’s liens under similar circumstances and thus is not persuaded that the coverage is available. Captiva cites Guernsey Bank v. Milano Sports Enterprises LLC, in which the court held that the insured was entitled to recover the costs it incurred to maintain property it was unable to sell during the pendency of litigation, a situation which Captiva describes as analogous to the present case. However, the damages in Guernsey were awarded for a period of time that began when the trial court ordered the insurer to provide coverage and ended when the insurer finally cleared the title. The court rejects Captiva’s assertion that, under Guernsey, an insured is entitled to all consequential damages, including for unmarketability, that arise before the insurer’s obligations have been determined. Assuming, without deciding, that coverage is available, whether Captiva’s title is unmarketable is a factual determination to be made at trial.”
The court pointed out that Fidelity reserved its right to determine that coverage of the lien claims is barred by exclusion 3(a), which bars coverage for losses that arise by reason of defects, liens, encumbrances, adverse claims or other matters created, suffered, assumed or agreed to by the insured claimant. The insurer argued that National City advanced some loan proceeds without obtaining lien waivers as an accommodation to Majestic Pointe. It argues that without the lien waivers, National City could not know that the contractors were being paid and thus created a risk that mechanic’s liens would be filed. Fidelity asserted exclusion 3(a) applies and bars coverage for the liens. Captiva argued that, as a matter of law, the exclusion does not apply to National City’s alleged conduct.
The court found that Missouri law strictly construes exclusionary clauses against the insurer, who bears the burden of showing the exclusion applies. It said the created or suffered exclusion is a standard one in title insurance contracts, and it is one of the most litigated clauses in the field. It noted that the 8th U.S. Circuit Court of Appeals has held that the exclusion is ambiguous and must be strictly construed against the insurer.
“Exclusion 3(a) will apply if Fidelity can show ‘intentional misconduct, breach of duty or otherwise inequitable dealings by National City Bank, or that recovery for individual lien claims would amount to an unwarranted windfall because National City received the benefit of the work reflected in the liens without disbursing payment,” the court held.