Title Insurer's Duty To Indemnify Foreclosing Bank's Loss Claim, Duty To Defend Against Borrower's Affirmative Defense Addressed In Minnesota Ruling

From a newsletter from the law firm Traub Lieberman Straus & Shrewsberry LLP:

• In its recent decision in Associated Bank, N.A. v. Stewart Title Guaranty Co., 2012 U.S. Dist. LEXIS 104528 (D. Minn. July 27, 2012), the United States District Court for the District of Minnesota had occasion to consider when a loss is valued for the purpose of coverage under a title insurance policy.

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• With respect to the indemnity portion [of the litigation], Associated Bank argued that its loss should be measured at the time the loan was initiated, not at the time the foreclosure action concluded.
  
  Stewart Title, on the other hand, contended that Associated Bank did not recognize a loss until the foreclosure action resolved, at which time it was determined with finality that the mortgage would not be repaid. By then, the property had declined in value from $450,000 to $126,000. Stewart Title argued, therefore, that “the loss sustained by Associated Bank on its loan was not due to the invalidity of the Mortgage, but rather due to a decline in the value of the Property securing the loan,” and as such, was uninsurable.
  
  While the court could find no Minnesota case law directly on point, it noted the majority view in other jurisdictions that a mortgagee’s loss cannot be measured until the note has not been repaid and the security for the mortgage is shown to be inadequate. The court found this rule to be consistent with the purpose of title insurance, explaining:
  
  A title insurance policy "does not guarantee either that the mortgaged premises are worth the amount of the mortgage, or that the mortgage debt will be repaid." … Rather, the "insurable value of a mortgage on real estate is the fair market value of the realty which secures the mortgage, and is not controlled by the original purchase-price of the mortgage."
  
  The court observed that had the borrower not challenged the validity of the mortgage, and Associated Bank simply allowed to proceed with the foreclosure, it likely only would have been able to sell the property for $126,000, which was the market value of the property at the time.
  
  Having recovered $175,000 as a result of the settlement, the court agreed that Associated Bank did not sustain a loss for which Stewart Title was obligated to indemnify.
  
  The court nevertheless concluded that Associated Bank was entitled to a defense from Stewart Title [Stewart Title stiffed its insured by never responding to Associated Bank's tender of this matter for a title defense].
  
  Notwithstanding the fact that the borrower questioned the validity of the title in an affirmative defense, rather than a counterclaim or other form of direct claim, the affirmative defense asserted a claim adverse to Associated Bank’s title, thus triggering Stewart Title’s defense obligations under the policy.(1)

Source: Minnesota Court Addresses Coverage Under Title Insurance Policy.

(1) In connection with Stewart Title's stiffing of its insured by failing to step up when Associated Bank tendered the matter to it for a defense, the court made these comments in concluding that Stewart had a duty to defend:

• The parties also dispute whether Stewart Title had a duty to defend against the Arnesons' claim in the Foreclosure Action that the Mortgage was invalid and unenforceable.
  
  Associated Bank contends the Arnesons' Answer raised a claim that was adverse to the Mortgage, and therefore Stewart Title was obligated to defend against the claim. Stewart Title argues the duty to defend was not triggered because the Policy does not require Stewart Title to litigate a foreclosure action voluntarily initiated by an insured, and because the Arnesons' claim was excluded from coverage as a defect created by Associated Bank.
  
  The duty to defend is broader than the duty to indemnify. Enron Corp. v. Lawyers Title Ins. Co., 940 F.2d 307, 310 (8th Cir. 1991); Wooddale Builders, Inc. v. Maryland Cas. Co., 722 N.W.2d 283, 302 (Minn. 2006); Rechtzigel Trust v. Fidelity Nat'l Ins. Co. of N.Y., 748 N.W.2d 312, 320 (Minn. Ct. App. 2008) (citing Franklin, 574 N.W.2d at 406).
  
  Whether a duty to defend exists is determined by comparing the allegations in the underlying claim to the relevant policy language. Garvis v. Employers Mut. Cas. Co., 497 N.W.2d 254, 258 (Minn. 1993). If the pleadings in the underlying action raise a claim arguably within the scope of coverage, the duty to defend applies. Rechtzigel, 748 N.W.2d at 320 (citing Ross v. Briggs & Morgan, 540 N.W.2d 843, 847 (Minn. 1995)). See also Enron, 940 F.2d at 310 (stating an insured "must defend a claim the policy does not cover if the allegations of the complaint state on their face a claim against the insured to which the policy potentially applies") (emphasis in original) (internal quotation marks omitted).
  
  The duty to defend is determined at the time the insured tenders defense of the claim to the insurer. Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d 161, 166 (Minn. 1986). At that time, if the insurer knows of facts indicating there may be a claim, either from what is directly stated or inferred in the underlying complaint, or if the insured tells the insurer of such facts, "the insurer must either accept tender of the defense or further investigate the potential claim." Garvis, 497 N.W.2d at 258.
  
  The insurer bears the burden of proving that the claim clearly falls outside the coverage afforded by the policy. Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 390 (Minn. 1979). "Any ambiguity is resolved in favor of the insured. . . . If the claim is not clearly outside coverage, the insurer has a duty to defend" Id.
  
  Stewart Title first argues the Policy does not obligate it to prosecute a foreclosure action that is voluntarily initiated by an insured, and thus the duty to defend was not triggered here. The Policy's duty-to-defend provision states that Stewart Title "shall provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured. . . ." Policy at AB002701 ¶ 4(a). The Arnesons' Answer challenged the validity of the Mortgage by alleging it was obtained by fraud and misrepresentation. Answer ¶ 8.
  
  Therefore, the Answer raised a claim adverse to Associated Bank's insured interest. The duty-to-defend provision does not contain an exception for adverse claims raised in proceedings initiated by insureds. Thus, the fact that Associated Bank voluntarily commenced the Foreclosure Action does not excuse Stewart Title from the obligation to defend against the adverse claim raised by the Arnesons' Answer. Cf. Enron, 940 F.2d at 309-11 (finding an insurer's duty to defend triggered by a claim raised in an answer to the insured's affirmatively filed action).
  
  Stewart Title also contends an affirmative defense does not give rise to a duty to defend. However, the Policy's duty-to-defend provision does not limit the types of pleadings that will trigger the duty; instead, the provision states generally that Stewart Title shall "provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured." Policy at AB002701 ¶ 4(a) (emphasis added); see also Joyce D. Palomar, 1 Title Insurance Law § 11:2 at 896-97 (2011-2012 ed.) ("Subsequent amendments to a complaint, answers, counterclaims or cross-claims all are included among the pleadings that invoke the insurer's duty to defend.").