The United States District Court for the District of Nevada recently dismissed an action brought by an insured lender against a title insurance company because the lender’s loss arising from an HOA lien was a post-policy defect excluded under Exclusion 3(d). See Wells Fargo Bank, N.A. as Tr. for Option One Mortg. Loan Tr. 2007-5 Asset-Backed Certificates, Series 2007-5 v. Fid. Nat’l Ins. Co., 2019 WL 5578487 (D. Nev. Oct. 29, 2019). In 1998, the insured lender issued a loan to a borrower that was secured by a deed of trust on the borrower’s property, and the title insurance company issued a title policy to the lender. In 2014, the HOA recorded a notice of delinquent assessment lien against the property and sold it at a foreclosure sale. The lender filed a claim with the title insurance company, claiming that the purchaser at the sale asserted an interest in the property superior to the lender’s deed of trust. The title insurer denied the claim and the lender brought this action alleging breach of contract and breach of the implied duty of good faith and fair dealing. The title insurer then filed a motion to dismiss.
The Court granted the title insurance company’s motion. It found that Exclusion 3(d) of the title insurance policy prohibited coverage for defects or liens created subsequent to the date of the policy. In doing so, the Court rejected the lender’s argument that the lien was created in 1996, when the HOA’s Declarations of Covenants, Conditions and Restrictions were recorded, and instead found that the lien was not created until 2014 when the HOA recorded this specific assessment. The Court also rejected the lender’s argument that the policy provided coverage based on an endorsement that insured the lender against losses sustained as a result of the existence of covenants, conditions, or restrictions under which the deed of trust could be subordinated. The Court found that “[a] change in controlling law—not the [covenants, conditions, or restrictions]—caused Wells Fargo to risk losing its DOT.” (citing SFR Invs. Pool 1 v. U.S. Bank, 334 P.3d 408, 414 (2014) (in which the Nevada Supreme Court found that an HOA lien constituted a superpriority lien)). Accordingly, the Court found that the lender was not entitled to coverage and granted the motion to dismiss.