On Friday the 13th (3/13/2015), the Court of Appeals for the 7th Circuit decided that a title insurer did not have to provide coverage to its insured – the perfected, first lien lender – for priming mechanics' liens that – but for the Insured/Lender's decision to cease funding, may not have occurred. In BB Syndication Services v. First American Title Insurance Co., Case No. 13-2785 (7th Cir.), the Lender, exercising its contractual rights to cease funding, did so because of expected cost overruns. Mechanic's liens arose once the funding ceased, and the developer filed a bankruptcy petition. Under the applicable state law, the mechanics' liens primed the Lender's lien, and the developer's bankruptcy left the Lender's claim against the developer (and the project) worthless. The Lender then sought recovery under its title insurance policy. Title insurance covers losses from defects in title and lien priority, and is "retrospective, rather than prospective; it generally protects against defects in title that arose prior to the issuance of the policy, allowing the insurer to reduce or eliminate risk by conducting a careful title search to identify defects. These features, however, cause complications in construction–loan context," where most states provide priming liens to unpaid contractors and suppliers. The Title Policy in question contained a coverage exclusion for defects in a lender’s title and lien priority when the defect is related to third party liens "created, suffered, assumed or agreed to" by the insured. The Court of Appeals focused its determination of coverage, on whether the lender or the insurer "bore the risk of liens arising from the cessation of loan funds due to cost overruns." "The question is whether this exclusion applies to the liens at issue here, which resulted from the lender's cutoff of loan funds. We hold that it does, and thus the title insurer owes no duty to indemnify."
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