The Superior Court of Connecticut recently held that a lender’s loss under its title insurance policy is limited to the amount of a prior undisclosed lien on the property that the lender had to discharge. See RCN Capital, LLC v. Chicago Title Ins. Co., 2018 WL 4655965 (Conn. Super. Ct. Aug. 27, 2018). In 2012, plaintiff issued a $600,000 loan to a borrower that was secured by a mortgage on the borrower’s property. Defendant issued a lender’s title insurance policy to plaintiff. In 2015, after the borrower defaulted and plaintiff commenced a foreclosure action, plaintiff learned that its mortgage was second to a previously-undisclosed $1.4 million first mortgage from 2007. During the foreclosure action, the Court found that the property had a fair market value of $304,000. Later in 2015, the city initiated a tax foreclosure action against the property for unpaid taxes, and plaintiff purchased the property at the city’s tax foreclosure sale. After the sale, plaintiff paid $108,000 to the first mortgagee to discharge the first mortgage. Plaintiff then filed a claim with defendant and, when defendant denied coverage, plaintiff brought this action seeking the damages caused to it by the first mortgage.
After defendant conceded liability, the parties disputed the amount of the lender’s loss under the policy. Defendant argued that the loss was limited to the $108,000 plaintiff paid to the first mortgagee. Plaintiff argued that it was entitled to the full market value of the property minus the amount it paid in taxes because “[b]ut for the . . . first mortgage, the Plaintiff’s strict foreclosure would have vested title in the Plaintiff subject only to the City of Norwich’s taxes.” The Court issued a decision in favor of defendant, holding that “the measure of actual loss where an undiscovered lien damages an insured party is the amount by which the lender’s security is impaired.” (emphasis in original). In doing so, it rejected plaintiff’s expert report and found that plaintiff’s “own self-interested estimate combined with its nebulous connection to anything [defendant] did is too tenuous to be a measure of actual loss.”