In the case of the Deutsche Bank National Association v. First American Title Insurance Company, No. SJC-11265, heard by the Massachusetts Supreme Judicial Court, the insured bank - that was insured by the title insurance company - pursued an action to declare whether or not the title insurance company owed a duty to defend the bank against the claimant. The claimant, whose mortgage originated from Deutsche Bank, alleged that mortgage officers at the bank distorted her income and other financial factors to push her into a higher interest rate mortgage product. In short, she claimed that she was misinformed about the loan and that she was the victim of a predatory lending scheme.
Assessing Legal Responsibility
However, the title insurance company claimed that its duty to defend did not apply because the claimant was not challenging the validity of the loan itself, but that she was simply misinformed. The Supreme Judicial Court, however, considered whether a title insurer must defend allegations that are "reasonably susceptible," to interpretation falling within the policy's coverage. The court ruled that, unlike general liability insurance, which is designed to cover against potential future risks, a title insurance policy only covers encumbrances on, or defects in, existing titles. Therefore, title insurers are only responsible for the type of loss explicitly envisioned in the policy.
"The importance of this ruling is that the Massachusesetts Supreme Court distinguished general liability insurance from title insurance," explains Tim Donovan, Title Source's Corporate Counsel. "In comparing title insurance (covering risks in existence when the policy is issued) against general liability insurance (which acts to insure against future risks) the court found title insurance to be unique and subject to a more narrow interpretation."
Because First American's policy only covered against loss or damage sustained by the insured party pertaining to the unenforceablility or invalidity of the lien of the insured mortgage tied to the title, the court ruled in favor of the title insurer. The substance of complaint concerned the validity of the underlying loan, not that the mortgage was executed illegally, improperly or fraudulently.
The Supreme Judicial Court stated, "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 significance of the SJC ruling establishes an important and relevant standard for other title insurance companies and those who seek to utilize their title insurance policies, given the narrower field of coverage determined by the court to legally trigger the policies duty to defend.