The Docket: California Court of Appeals Clearly Explains Post-conveyance Coverage Liability
June 26, 2018
The Docket is a monthly TitleNews Online feature provided by ALTA’s Title Counsel Committee which reviews significant court rulings and other legal developments and explains the relevance to the title insurance industry.
Ron Damashek of the Illinois law firm of Stahl Cowen Crowley Addis LLC provided today’s review of a ruling by the California Court of Appeals, which held that coverage did not continue under a loan policy following the lender’s conveyance of title without warranty. Damashek can be reached at rdamashek@stahlcowen.com.
Citation: Hovannisian v. First American Title Insurance Company, 14 Cal.App.5th 420 (2017).
Facts: A title insurer issued a loan policy insuring the lender’s first lien status under a document titled “First Deed of Trust.” The plaintiffs purchased the insured property at the lender’s non-judicial foreclosure sale, which was a public auction to the highest bidder “without warranty express or implied as to title.” The resulting trustee’s deed was issued “without warranty.” The plaintiffs subsequently learned of a prior first lien against the property and sought recovery from the lender. The title insurer denied coverage both to the lender and to the plaintiffs (as subsequent assignee of the lender’s rights under the policy) because the lender did not have continuing coverage under the policy since it did not retain an interest in the property.
Holding: The title insurer’s liability was governed by the terms of the policy, which is not a representation of the state of title, but rather provides that the insurer will pay for any losses resulting from, or will cause the removal of, a cloud on the insured’s title subject to the policy provisions. The Court found there was not continuance of coverage under Condition and Stipulation (C&”) 2(b) of the policy because the insured lender did not retain an interest in the property or liability by reason of covenants of warranty to the plaintiffs. C&S 7 could not be used to extend coverage beyond that, as it only defined the extent of liability for such continued coverage. Moreover, the court found that the insured lender did not suffer an indemnifiable “loss” under the policy because it recouped its debt through the foreclosure sale and, in the absence of a warranty, had no liability for any loss sustained by the purchasers. Because there was no potential for coverage under the policy, the title insurer did not breach its duty to defend and there was not bad faith.
Importance to the Title Industry: The case contains a clear explanation of contractual liability under a title insurance policy by identifying the purpose of the policy and the nature of the coverage provided, and defining the limited circumstances under which coverage continues following the insured’s conveyance of title.
Contact ALTA at 202-296-3671 or communications@alta.org.