The United States District Court for the District of Maryland recently held that an insured lender’s title insurance claim was barred because the insured did not provide notice of the claim to the title insurance company until after the property was sold in a foreclosure sale. See Wells Fargo Bank, N.A., as Trustee for Soundview Home Loan Trust 2007-OPT1, Asset-Backed Certificates, Series 2007-OPT1, 2017 WL 3868693 (D. Md. Sept. 5, 2017). In 1994, the borrowers obtained a loan that was secured by a deed of trust on their home. They refinanced their loan in 2006, and a portion of the proceeds was used to satisfy the 1994 loan and discharge the 1994 deed of trust, which was replaced with a new deed of trust. In 2007, the borrowers again refinanced, this time through the plaintiff insured’s predecessor-in-interest. The 2007 loan proceeds satisfied the 2006 loan, and the 2006 deed of trust was discharged and replaced with a 2007 deed of trust. In connection with the 2007 closing, the defendant title insurance company issued a title insurance policy.
Unbeknownst to the parties, however, a company owned by the borrowers had obtained a loan and executed another deed of trust on the property in 1998, which had not been discovered or discharged (the “1998 Deed of Trust”). In 2008, the lender on this 1998 loan sent a letter to the title insurance company stating, “our mortgage is still in 1st lien position and has not been released” and asking that the issue be “addressed.” The title insurance company investigated the issue and sent a letter to the lender in response, stating that the 1998 Deed of Trust could not encumber the property because the borrowers’ corporation did not have title. That lender did not respond and, in 2011, it commenced a foreclosure action on the 1998 Deed of Trust. Although the insured received notice of the foreclosure, it did not oppose and did not file a claim with the title insurance company until after the property was sold at a foreclosure sale. The title insurance company denied the claim, citing the insurance policy’s notice provision, which requires prompt notice of any title claim and further states that “[i]f prompt notice shall not be given to [the insurer], then as to the Insured, all liability of [the insurer] shall terminate with regard to the matter or matters for which prompt notice is required; provided, however, that failure to notify [the insurer] shall in no case prejudice the rights of any Insured under the policy unless [the insurer] shall be prejudiced by the failure and then only to the extent of the prejudice.” The insured then filed this action, and the parties cross-moved for summary judgment.
The court granted the title insurance company’s motion and denied the insured’s, holding that the claim was barred under the title insurance policy’s notice provision. First, the court held that, if given timely notice, the title insurance company could have challenged the 1998 Deed of Trust on the grounds that the corporation did not have any ownership in the property to encumber. Second, the court found that the title insurance company could have challenged the priority of the 1998 Deed of Trust on the theory of equitable subrogation, arguing that the proceeds from the 2007 loan satisfied the 2006 loan, which had satisfied the 1994 loan. Although the insured argued that the title insurance company had to establish that these defenses would have prevailed “with certainty,” the court rejected this argument, holding that the title insurance company only had to prove that its defenses were “credible” and “potentially outcome-determinative.” Finally, the court held that the title insurance company was not estopped from denying coverage because of the 2008 letter it received, holding: (i) the title insurance company investigated the issue and found the claim to be without merit; (ii) there was no loss suffered by the insured at the time of the letter and no indication that a foreclosure proceeding was imminent; and (iii) the policy did not require the title insurance company to give notice to the insured of a potential loss.