What You Need to Know

• No Coverage Under Loan Policies When Loans Are Fully Repaid – The Centerpoint case reaffirms that lender title insurance policies provide no coverage if the insured loan is paid in full. Under standard ALTA loan policy provisions (Exclusion 3(c) and Conditions 8(a)(iii) and 10(b)), coverage is expressly limited to actual, unreimbursed indebtedness only.
• Critical Distinction Between Owner and Lender Title Insurance – Owner-insureds are entitled to full market value of property and can claim damages when that value is diminished by title defects. In contrast, mortgagee-insureds can only establish loss when the note remains unpaid and the mortgage security becomes inadequate. The loss must be directly tied to the unpaid debt.
• First-Party vs. Third-Party Agreement Classification Matters – The court distinguished between typical third-party Morris agreements (where liability is to external claimants) and first-party agreements (where liability is to the insured under the policy). In first-party scenarios, coverage and liability determinations become interchangeable, giving insurers stronger grounds to challenge coverage based on policy terms.
• Substance Over Form in Loan Repayment Analysis – Courts will look beyond the characterization of payments to determine their true nature. Here, despite being labeled as a "payment for partners' interest," the court found the transaction was actually a loan repayment because it matched the exact debt amount and the insured had no other obligations.
• Collateral Source Rule Doesn't Apply to Integral Transaction Components – The collateral source rule, typically used in personal injury cases, does not protect loan repayments that are central to the same transaction from reducing an insurer's liability. Payments cannot be treated as "independent" when they are integral to the disputed transaction.
• Bad Faith Claims Require Actual Damages – Even when an insurer acts in bad faith by failing to defend without reservation, insureds cannot recover damages without proving actual economic loss. The Court rejected the notion that liens have intrinsic value absent demonstrated financial harm.

Introduction

The Supreme Court of Arizona recently reaffirmed a critical difference between loan and owner’s policies in granting summary judgment to the title insurer. That is, per Exclusion 3(c) and Conditions 8(a)(iii) and 10(b) of the standard ALTA loan policy, there is no liability if the insured loan is paid in full. Centerpoint Mechanic Lien Cls., LLC v. Commonwealth Land Title Ins. Co., 255 Ariz. 261 (Ariz. June 10, 2025).

Facts

Mortgages Ltd. (“ML”) provided a $165 million loan for the construction of a residential condominium project (“Centerpoint”). The loan was secured with a deed of trust on Centerpoint property (the “Property”), and ML purchased a lender’s title insurance policy from Fidelity National Title Insurance Company (“Fidelity”), insuring the lien priority for the deed of trust. Subsequently, multiple contractors and subcontractors recorded mechanics’ liens against the Property. ML was eventually forced into an involuntary bankruptcy by its creditors. In the reorganization, numerous limited liability companies were created to hold the assets securing ML’s loans, including the loan for Centerpoint, which was held by the Loan LLCs and Pass-Through Investors. The holding companies were managed by ML Manager, LLC (“ML Manager”). The Loan LLCs and Pass-Through Investors foreclosed and purchased the Property, with the mechanics’ liens as encumbrances.

Universal-SCP 1 Limited Partnership (“Universal”) then provided a $20 million loan to ML Manager and Loan LLCs and Pass-Through Investors to cover bankruptcy exit costs, and secured the loan with deeds of trust on Centerpoint, and other assets owned by Loan LLCs. Universal obtained a loan policy from Commonwealth Land Title Insurance Co. (“Commonwealth”), insuring the priority of its deed of trust against any other lien or encumbrance. Meanwhile, Loan LLCs also purchased land next to the Property, and financed it with a $5 million loan from VRCP Funding (“VRCP”), secured by a deed of trust on the Property and the adjacent land. Commonwealth provided a loan policy on that transaction as well. The policy insured priority of VRCP’s deed of trust in second position after Universal’s deed of trust. Commonwealth’s title insurance policies insured that both Universal and VRCP’s mortgage liens had priority over other liens against Centerpoint, although at the time of the issuance of the policies, there was more than $30 million in mechanics’ liens recorded against Centerpoint.

In September 2009, after the holders of the mechanic’s liens brought suit, ML Manager tendered the defense against the mechanics to Fidelity. Fidelity accepted under a general reservation of rights. In September 2010, the court subsequently denied summary judgment, finding a jury could find that the loans were not equitably entitled to priority over the mechanic’s liens.

In September 2010, Universal and VRCP had also entered in a contract to sell the Property for $185 million.  They also notified Commonwealth that they were negotiating with the mechanics’ liens claimants, but would not enter into any settlements unless Commonwealth withdrew its reservation of rights. That demand was not met, and ML Manager, Loan LLCs, Universal, and VRCP eventually, after a failed closing due to the lack of title insurance, entered into a Morris agreement with the mechanics’ liens holders, where the Property would be sold to the buyer for $30 million, and no existing lienholder would foreclose on the Property after the sale. See United Servs. Auto. Ass’n v. Morris, 154 Ariz. 113 (1987) (A Morris agreement is a settlement agreement where an insured defendant admits to liability and assigns to a plaintiff his or her rights against the liability insurer, in exchange for a promise by the plaintiff not to execute the judgment against the insured). To execute the agreement, Centerpoint Mechanic Lien Claims, LLC (“CMLC”) was created, and was required to use $13.5 million of the sales proceeds to buy all of the mechanics’ liens claims. CMLC and the buyer were then required to enter into an agreement not to sue or execute, with CMLC promising not to execute on the Property against the buyer or the buyer’s assigns and successors. Universal and VRCP also agreed not to execute on the buyer or its assigns and successors. In exchange, Universal would be paid about $4 million and VRCP paid about $5 million from the proceeds of the sale. However, VRCP was not directly repaid from the sales proceeds, and its members sold their ownership interests in amounts equal to the principal and interest owed on the VRCP loan. CMLC then substituted itself for the mechanics’ liens claimants in the litigation, and Fidelity and Commonwealth challenged the Morris agreement.

The trial court upheld the agreement, finding that it was neither fraudulent nor collusive, and only Fidelity appealed. The Arizona Court of Appeals invalidated the agreement, finding that the interests of Universal, VRCP, the Loan LLCs, and CMLC were aligned, that there was no risk of excess liability for the insureds once the mechanics’ lien claims were settled for a fixed sum, and the agreement exceeded Fidelity’s indemnity obligation. However, the judgment remained in effect against Commonwealth because it did not appeal.

In the action before this court, Commonwealth brought suit against CMLC, arguing that Universal and VRCP were not covered by the title insurance policy for the purported losses as set forth in the Morris agreement. CMLC counterclaimed, alleging that Commonwealth breached its policies with Universal and VRCP in bad faith by failing to provide full insurance coverage when it failed to settle the lien claims or defend against them. CMLC also argued that Commonwealth engaged in bad faith by refusing to withdraw its reservation of rights, refusing to participate in settlement negotiations, and misrepresenting its insureds’ rights under the policies, among other allegations.

At the trial court, the Morris agreement was upheld. Summary judgment was issued in favor of Commonwealth on a breach of contract claim. The trial court reasoned that based on the policy between the parties, the insured loans were repaid in full, which eliminated damages and therefore precluded coverage. It rejected CMLC’s argument that the collateral source applied and the “payment for partners’ interest” that it received should not be counted as a payoff, finding that this argument was nothing more than an “artful  pretense” because the payments were integral to the transaction. 1  That said, the trial court allowed CMLC to proceed on a claim of bad faith, resulting in a $5 million dollar verdict for CMLC on the claim of bad faith. The Court of Appeals reversed the trial court’s summary judgment decision for breach of contract, finding that CMLC should be awarded summary judgment because the policy at issue was related to liability defenses not coverage defenses. On the issue of bad faith and admission of evidence of the lien repayments, the Court of Appeals affirmed, as the conflicting evidence of whether VRCP was repaid was resolved by the jury.

Decision

The Court addressed three key inquiries in this case. First, the Court reviewed whether the insurer could argue that there is coverage under the policy for damages that exceed the indebtedness owed to the insured.

On this issue, the Court noted that a central factor to its decision is the difference between owner and lender title insurance policies. The Court noted that while an owner-insured is entitled to the full market value of the property, and that value can be diminished by title defects, a mortgagee-insured’s loss cannot be determined unless the note is not repaid and the security for the mortgage becomes inadequate. Under Exclusion 3(c) as well as Conditions 8(a)(iii) and 10(b), the Court stated the policy expressly excluded coverage if the insured suffered no loss or damage, and expressly limited coverage to any actual, unreimbursed indebtedness.

As to the Morris agreement with CMLC, the Court found it was not a typical third-party agreement, but a first-party agreement. The Court clarified that in a typical third-party agreement, the liability is to the third-party claimant, and resolution of that liability in the agreement is then binding on the insurer, and cannot be challenged absent fraud or collusion. In contrast, in a first party agreement, the liability is to the insured under the policy, which can cause an overlap when determining issues of liability and coverage. Under Arizona case law, Morris agreements are binding on the insurer as to the insured’s liability. However, here, in a first-party agreement, the agreement did not resolve a claim as to a third party. Instead, the only liability was Commonwealth’s if it breached the policy terms by failing to defend the insureds. Therefore, the Court found that coverage and liability were interchangeable. As such, looking at the terms of the policy, Commonwealth’s claim that the insured sustained no loss was an argument against coverage.

Because the policy expressly limited coverage to damages sustained due to the subordination of the mortgage to other liens and encumbrances, and only to the extent that the mortgage remained unpaid, the Court then turned to the question of whether the mortgage was fully repaid. The trial court determined that based on the evidence, the mortgage was repaid in full from the purchase of VRCP, which was characterized as a payoff in the draft closing papers, but was later changed to a payment for partners’ interest in VRCP. Notably, the Court highlighted that the payment matched the exact amount of the debt. The Court agreed with the trial court’s conclusion that the purchase of VRCP was actually a loan repayment, as VRCP owed nothing on the loan. As such, the policy precluded coverage, since VRCP suffered no damages. This finding also foreclosed CMLC’s claims that it was entitled to bad faith damages for Commonwealth’s failure to repay the loans, given that the loans were fully repaid.

Next, the Court addressed CMLC’s claim that the value of VRCP and Universal’s liens were diminished. According to the Court, even though Commonwealth engaged in bad faith for failing to defend without reservation, CLMC proved no damages and had no authority for the proposition that the liens had intrinsic value. As such, CMLC could not recover damages, and the Court reversed the bad faith award.

Lastly, the Court affirmed both the trial court and Court of Appeals’ decisions on the issue of the collateral source rule. The Court acknowledged that the rule usually applied to personal injury cases, where the payments by a tortfeasor to an injured party reduces the tortfeasor's liability, but not payments from a third party if those payments are independent of the wrongdoer. Here, the Court agreed with the Court of Appeals that the loan repayments were not from a removed party, but rather, they were an integral part of the same transaction. Since the loan repayments were central to the insurer’s liability, and CMLC sought bad faith damages only to the extent of the economic loss from the liens, the collateral source rule did not apply.

The Court therefore vacated the Court of Appeals’ opinion on the breach of contract claim, reinstated the trial court’s grant of summary judgment in favor of Commonwealth, reversed the decision of the Court of Appeals and trial court’s bad faith damage award, and affirmed both courts on the issue of the collateral source rule.

Takeaways

The main takeaway from this case reaffirms in no uncertain terms that for coverage under a loan policy to attach, the title defect must be a cause for the indebtedness not being paid in full or part. The Opinion also highlights the key distinctions between third party and first party agreements an insured may enter into and not lose coverage when an insurer is defending under a reservation of rights.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com or Shelley Wu at swu@riker.com.

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1  CMLC filed a motion in limine to exclude evidence of the loan repayments, arguing that the collateral source rule applied to bar the evidence from consideration. The trial court rejected the argument because the loan payments were not paid by a third party, but rather as part of the benefit bargained for by the parties.