California Appellate Court Affirms Judgment for Title Insurer After Insured Conveyed Its Interest in Foreclosure Sale

In an action brought by foreclosure sale purchasers against the foreclosing bank’s title insurer based on the title insurer’s refusal to defend and indemnify the bank in an underlying action, the California Court of Appeal, Fifth District, recently affirmed summary judgment in favor of the title insurer finding, among other things, that coverage under the policy had terminated upon the conveyance of the property at the foreclosure sale.  See Hovannisian v. First Am. Title Ins. Co., 14 Cal. App. 5th 420 (Ca. Ct. App. 2017).  In the case, plaintiffs purchased property at a foreclosure sale, and subsequently discovered that there was a first priority deed of trust on the property that was not extinguished by the foreclosure.  Plaintiffs sued the foreclosing bank.  The bank made a claim with the title insurer under its title insurance policy, but the insurer refused to indemnify or defend the bank.  After the bank assigned any claim it had to plaintiffs, the plaintiffs brought the instant action against the title insurer.  Plaintiffs asserted two causes of action: breach of contract and bad faith.  The title insurer subsequently filed a summary judgment motion, arguing that coverage had been terminated upon the sale of the property and there were no benefits due under the policy.  The trial court agreed with the title insurer, finding that the policy did not provide the bank a defense or indemnity for the claims asserted in the underlying action, and therefore, the claims failed.  

On appeal, plaintiffs argued that the trial court erred in finding the breach of contract claim lacked merit and that the bank’s title insurance claim fell within the policy’s coverage for losses or damage the bank incurred due to “[t]he priority of any lien or encumbrance over the lien of the Insured Mortgage.”  The Court rejected plaintiffs’ arguments, and affirmed the lower court’s decision.  The policy stated that coverage continued after the conveyance of title “only so long as the Insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money Mortgage given by the purchaser from the Insured, or only so long as the Insured shall have liability by reason of covenants of warranty made by the Insured in any transfer or conveyance of the estate or interest. This policy shall not continue in force in favor of any purchaser from the Insured of either (i) an estate or interest in the Land, or (ii) an indebtedness secured by a purchase money Mortgage given to the Insured.”  Thus, because the foreclosure sale had conveyed the property “without warranty, express or implied,” coverage terminated.  The Court further rejected plaintiffs’ arguments that the loss was still covered because it “occurred” before the conveyance of the property as it concerned a prior-recorded encumbrance.  The bank never made a claim regarding this issue and any loss was suffered by plaintiffs post-conveyance.  Thus, because there is no potential coverage under the policy or a duty to defend, the court found plaintiffs’ breach of contract claim is without merit.  Further, because 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.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com or Clarissa Gomez at cgomez@riker.com.