The United States District Court for the Western District of North Carolina recently granted a title insurer’s motion for summary judgment, holding that the insured’s own actions created the title defect at issue in violation of Exclusion 3(a) of the title policy.  See LJW Land, LLC v. Old Republc Nat. Title Ins. Co., 3:15-cv-190 (W.D.N.C. Aug. 12, 2016).  In the case, an entity used a loan from the insured lender to purchase a property in order to build residential properties.  The insured lender received the first mortgage on the property insured by the title company, and the seller received the second mortgage.  The property owner later defaulted and the insured lender filed a foreclosure action.  The seller then filed a lawsuit against the owner and the insured lender, among others, alleging that both the owner and the lender were alter egos controlled by the same individual and that the default and foreclosure were just a sham to eliminate the seller’s second mortgage.  Among the causes of action alleged was a quiet title claim seeking the extinguishment of the insured lender’s first mortgage and that the seller’s mortgage be given priority.  The insured lender filed a title claim asking the title insured to defend it in the action.  The insurer denied coverage and the insured filed this action.  The insurer filed a motion for summary judgment, arguing that the claim was barred Exclusion 3(a) of the title policy, which excludes coverage for defects “created, suffered, assumed or agreed to” by the insured.  The court granted the motion.  Although it acknowledged that there was no controlling authority in North Carolina addressing Exclusion 3(a), it used decisions from other jurisdictions to find that the insured’s alleged actions, which included unfair trade practices and a conspiracy to eliminate the seller’s interest in the property, was “inequitable conduct” that “created or suffered the defect” under 3(a).  Taking the allegations of the complaint as fact, the insurer properly denied coverage.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.