The United States District Court for the Eastern District of Texas recently affirmed a bankruptcy court’s holding that an insured’s claim was barred under the title insurance policy’s exclusion for title risks “created, allowed, or agreed to by” the insured. See Moser v. Fidelity Nat’l Title Ins. Co., 2018 WL 1413346 (E.D. Tex Mar. 21, 2018). Kernel and Stanley Thaw (the “Thaws”) were a married couple, and in 2008 a creditor brought an action against Stanley seeking repayment of a debt. In October 2009, the Thaws executed a contract for deed but did not record it, and in November 2009, the court granted the creditor final judgment and the creditor recorded his judgment. In June 2011, the Thaws paid off the contract and obtained and recorded the deed, and the title insurance company issued a policy. In December 2011, Stanley filed for bankruptcy. In 2013, the bankruptcy trustee sold the property at issue, but the bankruptcy court determined that the creditor’s judgment had attached to the property and that the creditor was entitled to a $500,000 lien on the sale proceeds. The trustee and Kernel then both filed claims under the title insurance policy, which the title insurance company denied, and they brought an adversary proceeding against the title insurance company. The bankruptcy court held that coverage was barred under Exclusion 3(a) and Texas’s “fortuity doctrine,” and the trustee and Kernel appealed.
On appeal, the Court affirmed the bankruptcy court’s decision. First, it affirmed that the claim was barred by Exclusion 3(a) of the policy, which excluded title issues “created, allowed or agreed to” by the insured. In doing so, it rejected the appellants’ argument that the insureds needed “full and specific knowledge” of the lien for the exclusion to apply. The Court held that the insureds knew about the debt and the lawsuit, even if they did not know the judgment had been recorded or attached to their property, and that this was sufficient to bar the claim under the policy. Further, it found that the appellants’ interpretation “would essentially make a title insurer the guarantor of an insured’s debt where, as here, an insured who intentionally refuses to fulfill the insured’s financial obligations later denies knowing that a lien would arise as a consequence.” Second, the Court affirmed that the claim was prohibited by the fortuity doctrine, which “relieves insurers from covering certain behaviors that the insured undertook prior to purchasing the policy.” As with the Exclusion 3(a) argument, the Court rejected the appellants’ claim that the doctrine did not apply because the insureds lacked actual knowledge of the recording of the judgment.