Introduction
Northmarq Finance, a Nebraska limited liability company, had a title insurance policy with Fidelity National Title Insurance Company. Northmarq sued Fidelity seeking coverage under the policy after several subcontractors asserted mechanic’s liens on a construction project for which Northmarq was a lender. The District Court granted Fidelity’s partial summary judgment motion, relying on Exclusion 3(d) of the Policy barring claims arising post-policy. NorthMarq Fin., Ltd. Liab. Co. v. Fid. Nat'l Title Ins. Co., Civil Action No. 22-cv-2839-WJM-JPO, 2024 U.S. Dist. LEXIS 82342 (D. Colo. May 6, 2024).
Background
In 2017, Northmarq provided a $25.9 million loan to Ken Caryl Senior Living (“KCSL”) to help build a senior living community in Colorado. Fidelity issued the standard form loan policy but with an ALTA 32.106 Endorsement deleting Covered Risk 11(a) and providing for alternative coverage for mechanic’s claims arising on or before the Date of Coverage. Covered Risk 11(a) provided that:
- The lack of priority of the lien of the Insured Mortgage upon the Title
(a) as security for each and every advance of proceeds of the loan secured by the Insured Mortgage over any statutory lien for services, labor or material arising from construction of an improvement or work related to the Land when the improvement or work is either
(i) contracted for or commenced on or before Date of Policy; or
(ii) contracted for, commenced or continued after Date of Policy if the construction is financed, in whole or in part, by proceeds of the loan secured by the Insured Mortgage that the Insured has advanced or is obligated on the Date of Policy to advance.
The Endorsement also stipulated that, to the extent other parts of the Policy were inconsistent, the Endorsement controlled. The Endorsement did not modify any other “terms and provisions of the Policy,” or any “prior endorsements.”
The Policy also included an ALTA 33-06 Endorsement which provided the Date of Coverage was amended from July 17, 2019 to November 28, 2019 with a current disbursement of $1,562,996,94 taking the disbursed amount to $17,345,534,12.
Finally, the policy also had a merger clause which instructed that the policy was to be read as a whole.
KCSL defaulted on its loan and, beginning in March 2020, the general contractor and several subcontractors recorded mechanic’s liens on the property. On September 16, 2020, NorthMarq tendered a claim for defense and indemnification to Fidelity under the policy. Fidelity denied the claim on October 20, 2020, pursuant to Exclusion 3(d) of the Policy which barred coverage for liens “attaching or created subsequent to Date of [the] Policy.”.
Northmarq filed a breach of contract action in the District Court of Colorado on September 27, 2022. Fidelity removed the action on October 28, 2022. Two months later, Northmarq filed an amended complaint alleging specifically breach of the duty to defend, breach of the duty to indemnify, and a breach of good faith and fair dealing.
Decision
The Court granted Fidelity’s partial summary judgment motion. Northmarq argued that Covered Risks 10, 11(a), and 12, as well as the Endorsement, provided coverage for the mechanic’s liens at issue. Covered Risk 10 provided coverage as to the priority of the insured mortgage over liens and Covered Risk 12 addressed the validity of assignments of the insured mortgage. However, the Court found that Exclusion 3(d) excluded coverage as the mechanics liens were filed subsequent to the policy. Important to the Court’s analysis was that Exclusion 3(d) expressly named the other sections of the policy that it did not modify and included Covered Risk 11 but not 10 or 12. As such, the Court found that Exclusion 3(d) applied to any provision not explicitly mentioned in it, including Covered Risks 10 and 12.
As to Covered Risk 11 (a), the Court relied on the Fifth Circuit’s decision in Hall CA-NV, L.L.C. v. Old Republic Nat'l Title Ins. Co., where the parties similarly deleted the standard form Covered Risk 11. 990 F.3d 933, 935 (5th Cir. 2021). Since the parties had expressly agreed to modify the standard form contract and remove the provision which would otherwise have provided coverage in that case, the court refused to construe the remaining contractual provisions as nevertheless providing coverage in that situation. The court emphasized that Colorado law required the contract to be read as a whole.
The Court also rejected Northmarq’s arguments regarding ambiguities in the policy. Northmarq argued that the Endorsement affected the other sections of the policy because it contained the phrase “this policy,” but the Endorsement specifically stated that it did not modify other provisions in the contract. Northmarq also argued that the Endorsement improperly contradicted Exclusion 3(d) because the Endorsement did provide some coverage for events subsequent to the policy. However, this argument also failed because the Endorsement itself provided that, to the extent it contradicted any other parts of the policy, the Endorsement controlled.
Takeaway
This case highlights the importance of understanding endorsements to a title insurance policy and understanding that, unless the right endorsement is acquired, title insurance does not provide for post-policy events that cause the liens.
For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com, Kori Pruett at kpruett@riker.com or summer associate Brandon H. Li, a law student at Seton Hall University School of Law.
