United States: Hovannisian V. First American Title Insurance Company

In Hovannisian v. First American Title Insurance Company, 14 Cal.App.5th 420 (2017), the Court of Appeal of California, Fifth Appellate District affirmed grant of summary judgment to First American Title Insurance Company ("First American") on assigned claims brought by the Hovannisians based on their purchase of foreclosed property from Wells Fargo, First American's insured.

In 2006, Wells Fargo's predecessor made a loan secured by a deed of trust to the property. The deed of trust stated that it was a "FIRST DEED OF TRUST" and First American issued a lender's title insurance policy. In 2012, the Hovannisians purchased the property at a nonjudicial foreclosure sale by Wells Fargo. The notice of the trustee's sale and the trustee's deed issued to the Hovannisians both stated that the conveyance was without warranty, express or implied, as to title to the property. A few months after the Hovannisians purchased the property, they received a letter from Duane Long, who claimed to own a first lien on the property, requesting payment. Duane and Margaret Long, as trustees of the Duane Long and Margaret A. Long Family Trust dated April 5, 1993, held a note secured by the property, which was recorded in 2003. 

The Hovannisians made demand on First American for either for Wells Fargo to present clear title or as a claim on the title policy. First American responded that it was unable to assist the Hovannisians as they were not insureds under the policy and they would need to contact Wells Fargo directly to make a claim against Wells Fargo. First American also noted that there were no deed warranties provided to the Hovannisians and they therefore took the property subject to any encumbrances on title. Wells Fargo made a written claim to First American, based on the Hovannissians' demand that Wells Fargo pay the balance on the Long note and present clear title. First American denied this claim, explaining there was no merit to the Hovannisians' claims as they purchased the property without any express or implied warranty and Wells Fargo was no longer covered as it no longer had an interest in the property. First American advised Wells Fargo to resubmit should the Hovannisians file suit. The Hovannisians filed suit against Wells Faro, alleging intentional and negligent misrepresentation, which Wells Fargo tendered to First American for defense and indemnity. First American denied coverage as (1) there was no continuing coverage for Wells Fargo and, even if there was, (2) the claims fell outside the policy's provisions. Wells Fargo retendered the claim, asserting the policy provided coverage as Wells Fargo's deed of trust expressly warranted it was the first lien on the property, which was the basis for the Hovannisians' claim and that First American was negligent in investigating title so could not rely on an exclusion to deny coverage. First American denied the retender on the bases that coverage terminated when Wells Fargo sold the property without covenant of warranties, and the statements in the deed of trust were not a warranty. Wells Fargo entered into an agreement with the Hovannisians, wherein Wells Fargo assigned its rights as against First American to them and they agreed to dismiss the underlying complaint. 

The Hovannisians filed suit against First American, alleging breach of contract and bad faith. First American filed a motion for summary judgment, arguing "the breach of contract claim was without merit because (1) Wells Fargo did not have continuing coverage after the foreclosure sale, and (2) there were no policy benefits due and owing either the Hovannisians or Wells Fargo, as the misrepresentations were not covered under the policy and they were based on post policy events, namely Wells Fargo's representations during the foreclosure sale;" and "the bad faith claim failed because (1) there was no breach of contract, and (2) it did not act unreasonably as a matter of law under the genuine dispute doctrine." The Hovannisians opposed the motion. "The trial court agreed with First American that the breach of contract claim was without merit because the policy did not provide Wells Fargo a defense or indemnity for the claims asserted in the underlying action; therefore the bad faith claim also failed." 

The Hovannisians appealed, arguing:

As to the breach of contract claim, the Hovannisians assert First American failed to show that (1) the policy eliminated coverage after the foreclosure sale, and (2) Wells Fargo and the Hovannisians were not entitled to policy benefits. As to the bad faith claim, they assert there are triable issues of fact regarding whether First American engaged in a biased investigation.

The Court of Appeal first identified the standard of review on appeal as de novo, then turned to a discussion of the rules governing interpretation of title insurance. 

The function of title insurance is to protect against the possibility that liens or other items not found in the title search or disclosed in the preliminary report existed. [Citation.] A title insurance policy "does not constitute a representation that the contingency insured against will not occur." [Citation.] Thus, "when such contingency occurs, no action for negligence or negligent misrepresentation will lie against the insurer based upon the policy of title insurance alone. [Citations.] ... '[T]he insurer does not represent expressly or impliedly that the title is as set forth in the policy; it merely agrees that, and the insured only expects that, the insurer will pay for any losses resulting from, or [the insurer] will cause the removal of, a cloud on the insured's title within the policy provisions.'" [Citation.] "'A title policy is not a summary of the public records and the insurer is not supplying information; to the contrary [the insurer] is giving a contract of indemnity. ... Every insurer can and does contract to indemnify against specific risks. ...'" [Citation.]

Title insurance is fundamentally different from other types of insurance because it is not prospective in nature; it does not insure against title defects or liens that arise after the effective date and time of the policy. [Citation.] Moreover, title insurance does not insure against the conduct, or the alleged conduct, of the insured [citation], and does not cover "matters involving personal dealings between individuals." [Citation.]

The Court noted title insurance policies are interpreted under "the well-established rules on interpretation of insurance agreements." 

The Court summarized the pertinent policy provisions: "Thus, the policy provided coverage to Wells Fargo as long as it 'retain[ed] an estate or interest in the land,' held indebtedness secured by a purchase money Mortgage given to it by a purchaser, or had 'liability by reason of covenants of warranty' given in the transfer of the land." The Court determined:

This policy language evinces the parties' intent to limit the scope of title protection to the period running from the effective date of the policy until the insured conveys away its interest in the land unless, in the conveyance, the insured retains a mortgage secured by the land, or the insured gives warranties to the purchaser. If the insured gives a warranty to the purchaser, coverage extends to protect the insured's obligation under the warranty, but if no warranty is given, the insurance ends and any risk of loss for defective title becomes the new owner's problem. [Citation.]

Here, Wells Fargo issued a mortgage secured by a deed of trust on the property after the Long DOT had already been recorded. When Wells Fargo conveyed the property to the Hovannisians in the foreclosure sale, it passed to the Hovannisians with the Long DOT attached. The Hovannisians did not give Wells Fargo a purchase money mortgage and Wells Fargo did not warrant that the property was free of liens. In fact, both the notice of trustee's sale and the trustee's deed issued to the Hovannisians expressly stated that the sale and conveyance were without express or implied warranty. At the point of conveyance to the Hovannisians, any preexisting defect in title became the Hovannisians' problem and would require them to obtain their own title insurance to protect themselves. Following the transfer, had Wells Fargo acceded to the Hovannisians' demands to correct the preexisting defect by paying off the Long DOT, it would have done more than what was promised in the trustee's deed, and incurred expenses not covered by the policy.

The Court rejected the Hovannisians' argument that two separate provisions should be read together to create continuing coverage, finding that the clauses (one pertaining to when coverage shall continue, the other pertaining to limits of continuing coverage) were separate, not inconsistent, and not ambiguous. The Court also rejected the Hovannisians' argument that Wells Fargo suffered a covered loss during the policy period when it failed to disclose the Long deed of trust. The Court found that Wells Fargo did not suffer a covered loss under the policy:

The loss or damage claimed in the underlying action, however, is not a loss or damage covered by the policy. There is no obligation to pay benefits under a title policy unless there is a loss; a secured lender suffers an indemnifiable "loss" under a title policy only if the lender fails to recoup the debt because of an undisclosed senior lien. [Citations.]

Wells Fargo, however, never made a claim for this type of damage and the underlying action did not seek to recover such damages. Instead, in the underlying action, the Hovannisians sought to recover for their own damage, namely for Wells Fargo to reimburse them for the expense of satisfying the Long note based on Wells Fargo's alleged misrepresentations. As we have already explained, because the Hovannisians purchased the property without warranty, they received the property in whatever condition title was in at that time. The Hovannisians could not state a claim that was adverse to Wells Fargo's title or interest because they received an unwarranted deed after a public auction. Their only potential cause of action was for misrepresentations made during the foreclosure process. Since the Long DOT did not pose a threat to Wells Fargo's title or interest, as it no longer had an interest in the property after the foreclosure, the Hovannisians could not state a claim for an insured title loss under the facts and circumstances they raised.

The Court also rejected the Hovannisians' contention that First American failed to show it had no duty to defend, finding First American had shown there was no potential for coverage under the policy and the Hovannisians did not meet their burden of showing that "any of their claims may fall within the scope of the policy." 

As to the Hovannisians' bad faith claim, the Court found: "Since we have determined as a matter of law that the policy provides no coverage for the claims asserted in the underlying action, there cannot be a bad faith claim as a matter of law." 

The Court affirmed the trial court's grant of summary judgment to First American.

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