In a published opinion, the United States Court of Appeals for the Eighth Circuit recently held, among other things, that a title insurance company may deny coverage of an insured lender’s claim relating to mechanics’ liens under Exclusion 3(a) of the title insurance policy, even if the insured lender’s conduct was not intentional. See Captiva Lake Investments, LLC v. Fid. Nat'l Title Ins. Co., 2018 WL 1076745 (8th Cir. Feb. 28, 2018). In the case, a lender loaned over $21 million to a developer and purchased a title insurance policy to protect its security interest. Before and during the construction, the consultant hired by the lender to monitor the project raised a number of issues with the construction project, including that the developer was not providing detailed cost estimates or project schedules and that the consultant believed there would be insufficient funds to complete the project. Nonetheless, the lender disbursed all but $1.2 million of the total loan balance. The developer later went bankrupt before completing the project, and the lender sold its interest to plaintiff. Plaintiff, as successor-in-interest under the policy, filed a claim with the title insurance company seeking coverage for mechanics’ liens on the property. The title insurance company agreed to defend under a reservation of rights, including the right to deny coverage under Exclusion 3(a), which barred claims for liens “created, suffered, assumed or agreed to by the insured claimant.” While this defense was ongoing, plaintiff entered into an agreement to sell the property but the potential purchaser terminated the agreement, allegedly because of the issues with mechanics’ liens. The insured then made another claim that the title insurance company had rendered title unmarketable because it did not resolve the mechanics’ lien claims in a timely manner. This litigation ensued. Plaintiff sought a declaration that the policy covered the mechanics’ liens, that the liens rendered title unmarketable, and that the title insurance company had tortiously interfered with plaintiff’s relationship with its attorneys.

Before trial, the District Court held that Exclusion 3(a) would not apply unless the title insurance company “show[ed] intentional misconduct, breach of duty, or otherwise inequitable dealings by [the insured], or that recovery for individual lien claims would amount to an unwarranted windfall because [the insured] received the benefit of the work reflected in the liens without disbursing payment.” As the District Court found the title insurance company only showed “negligence, mismanagement, maybe downright stupidity or recklessness, but . . . [not] misconduct,” it refused to submit evidence regarding Exclusion 3(a) to the jury. The District Court also found that the title insurance company had an obligation to indemnify plaintiff for the losses resulting from the unmarketability of title or lack of priority caused by the mechanics’ liens—i.e., $6.2 million for the failed sale of the property. Finally, the District Court granted the title insurance company’s motion for summary judgment that it did not tortiously interfere with plaintiff’s relationship with its attorneys.

On appeal, the Eighth Circuit affirmed in part and vacated and remanded in part, with all findings in favor of the title insurance company. With regard to Exclusion 3(a), the Court held that the District Court erred in not submitting evidence of this exclusion to the jury, concluding that “Exclusion 3(a) can apply under Missouri law even if the insured did not engage in intentional misconduct or inequitable dealings.” Citing to a Seventh Circuit decision, the Court held that “title insurance was not built to bear the risk of insufficient construction funding. Because the lender ‘had the authority and responsibility to discover, monitor, and prevent’ the risk of loss, the lender ‘c[ould] be said to have ‘created’ or ‘suffered’ the resulting liens’ under Exclusion 3(a).” See BB Syndication Servs., Inc. v. First Am. Title Ins. Co., 780 F.3d 825 (7th Cir. 2015). Thus, the District Court erred in not allowing the title insurance company to present this defense to the jury.

The Court also held that the District Court erred in finding that the policy’s unmarketability-of-title provision covered post-policy mechanics’ liens. First, it held that there was no evidence that the contractors who were owed money as of the policy date were not paid the money then due or that they then filed mechanics’ liens to recover that money. Second, although the Court acknowledged the “first-spade rule” that allowed mechanics’ liens to apply retroactively to the date on which the work commenced in actions regarding lien priority, it held that this does not determine when mechanics’ liens render title unmarketable. It stated that plaintiff “has not shown that title was rendered unmarketable by mechanics’ liens filed by contractors and suppliers who were owed money as of the Date of Policy. It thus cannot show that it suffered damages caused by Fidelity’s failure to resolve liens that were inchoate as of [the policy date], and which were later filed against the . . . development.”

Finally, the Court affirmed the District Court’s dismissal of plaintiff’s tortious interference with business expectancy claim. Plaintiff had alleged that the title insurance company had not diligently defended the action and intentionally delayed resolution through its control of assigned counsel, which interfered with plaintiff’s relationship with the attorneys. The Court held that the title insurance company had the right to control the litigation under the policy, and there was nothing to indicate it had acted improperly. Although plaintiff wanted to settle the mechanics’ lien claims quickly, the title insurance company “had the right under the policy to decide whether to settle or litigate the mechanics’ lien claims.” Further, there was no evidence that the attorneys did not keep plaintiff well-informed of the defense.

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