Lender’s Title Insurance Coverage Does Not Extend to Lender Liability Claims

The decision of the Massachusetts Supreme Judicial Court (“SJC”)  in Deutsche Bank National Association v. First American Title Insurance Company, decided in July 2013, confirmed that mortgagee title insurance does not cover defects arising out of invalid loan arrangements. Plaintiff Deutsche Bank (trustee of a mortgagee assignee) sued the defendant title insurance company seeking a judgment that First American was required to defend in a borrower’s suit seeking rescission of the promissory note and mortgage originated by the Deutsche Bank’s predecessor-in-interest. Deutsche Bank argued that its title insurance covered losses sustained due to the invalidity or unenforceability of the lien of the insured mortgage.  First American rejected Deutsche Bank’s demand that it provide a defense, contending that the allegations in the underlying suit did not trigger the insurer’s duty to defend.

Both the Superior Court and SJC agreed with the title insurer that its duty to defend arises only where the title policy specifically envisioned the type of losses sustained.  The SJC held that title insurance does not cover defects in the promissory note unless the policy so specifies.  The underlying complaint was concerned not with the validity of the mortgage lien, but challenged the underlying loan as having been procured by a “predatory lending scheme,” rather than a title issue relating to whether the mortgage was improperly executed or recorded.  As such, the underlying claims were not envisioned by the terms of the title policy, and the title insurer thus had no duty to defend.

The SJC decision distinguishes the mortgage lien from the actual mortgage debt as two entirely distinct legal concepts.  The court held that the guaranty contained in the title insurance policy of the validity of the mortgage lien should not be construed as a guaranty that the insurer has made a careful investigation of the origin of the mortgage debt and its validity.  If such coverage is contemplated, the policy should have specifically provided.  “Given that Deutsche Bank and its predecessors-in-interest, rather than First American, were in the best position to insure that the underlying debt was valid, it is for them to bear the burden of any loss.  It would be unreasonable to expect First American to insure a debt about which it typically would have only limited knowledge and over which the lender would have sole control.”

The takeaway is that unlike a general liability insurer, title insurers are not obligated to defend claims outside the scope of the title insurance policy even where the insurer may be required to defend another  claim that is covered by the title insurance policy.  The SJC explicitly recognized the “unique purpose of title insurance,” noting that a title insurance policy is merely an agreement to indemnify a policy holder against loss occasioned by title defects.