California Appellate Court Holds Insured Lender Not Entitled To Coverage in Action Regarding Validity of Subdivision

A California Appellate Court recently affirmed that an insured lender was not entitled to coverage for an action in which a party challenged the validity of a subdivision, and that a court’s determination that the subdivision was invalid did not render title unmarketable under the policy.  See Northern California Comm. Development Corp. v. First American Title Ins. Co., 2019 WL 1397040 (Cal. Ct. App. Mar. 28, 2019).  In 2008, a lender issued two construction loans of $195,500 each, which were secured by deeds of trust on two properties of a new subdivision.  First American issued title insurance policies to the lender.  Through assignments in 2013 and 2014, plaintiff was assigned the deeds of trust and, as part of the assignments, the original lender disclosed that “there are material limitations and conditions to further development of the Property. Development of the Subdivision is not complete in that common area construction and the development and entitlement processes are not complete, and the Subdivision has not received final governmental approval for the sales of lots and homes in the Subdivision to the general public.”  In 2014, a lawsuit was filed against the insured, among others, seeking to declare the subdivision invalid and seeking partition.  The insured tendered the defense to First American, who denied coverage.  In that underlying action, the trial court found that the subdivision was never completed, the properties were “landlocked” because no street was validly dedicated to the city, and that partition by sale was appropriate.  The insured ultimately received $20,000 in total for its two lots, and brought this action against First American for breach of contract and breach of the implied covenant of good faith and fair dealing.  First American moved for summary judgment, arguing that the claim was not a covered claim and that the claim was expressly excluded under the policy, including by exclusions 1(a) (relating to government ordinances and regulations) and 3(a) (relating to defects “created, suffered, assumed or agreed to by the insured claimant”).  The District Court granted First American’s motion for summary judgment.

On appeal the Court affirmed.  In doing so, the Court rejected the insured’s claim that the underlying action established that the property was unmarketable and landlocked and, therefore, that collateral estoppel applied to the coverage determination.  The Court held that the insured “appears to confuse marketability of title, which is covered by the title insurance policy, with marketability of land, which was discussed in the underlying action” and that the diminished value of the properties did not render title unmarketable.  Likewise, the Court found that the trial court only decided that the access road was “not a dedicated city street,” which “is not the same as finding a lack of right of access to the lots.”  Finally, the Court held that the insured failed to address First American’s argument that policy exclusions applied.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Dylan Goetsch at dgoetsch@riker.com.