The United States Court of Appeals for the Fifth Circuit recently affirmed a District Court’s decision granting summary judgment to a title insurance company, holding that the insured was not entitled to coverage for loss caused by a mechanic’s lien where the insured agreed to remove Covered Risk 11(a) in the title insurance policy. See Hall CA-NV, L.L.C. v. Old Republic Nat'l Title Ins. Co., 2021 WL 912726 (5th Cir. Mar. 10, 2021). In the case, Plaintiff insured agreed to fund renovations for the Cal-Neva Lodge & Casino on the condition that the general contractor on the project agree in writing to subordinate any potential liens in favor of Plaintiff. Plaintiff purchased both California and Nevada Title insurance policies from Defendant and signed standard ALTA Form 32-06. In so doing, Plaintiff agreed to remove the Standard ALTA form’s Covered Risk 11(a), which protects insureds against any “loss or damage . . . by reason of . . . [t]he lack of priority of the lien of 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 . . . contracted for or commenced on or before Date of Policy.” After Plaintiff stopped advancing funds for the project and payments to the contractor ceased, the contractor filed and began foreclosing on mechanic’s liens, claiming that its liens had priority because they related back to the contractor’s initial work performed before Plaintiff provided funding for the project. Defendant hired counsel to provide dual representation to Plaintiff and another lender in the action, which was removed to federal bankruptcy court and eventually settled. Defendant refused, however, to indemnify Plaintiff for the loss incurred as a result of the lien priority. Plaintiff then sued for breach of contract, among other claims. The District Court granted summary judgment in favor of Defendant, finding that although the “unpaid [contractor] pre-policy date work” is a “defect” under Covered Risk 2 and an “encumbrance” under Covered Risk 10, coverage is precluded by Exclusions 3(a) and 3(d) of the policy, as discussed in a prior blog post.

On appeal, the Court affirmed. The Court first noted that the threshold question is whether the policy covered the claimed losses. Plaintiff argued on appeal that the lien losses were insured under Covered Risks 2 and 10, which provided that “Old Republic ‘insures as of Date of Policy’ against losses ‘sustained or incurred . . . by reason of . . . [a]ny defect in or lien or encumbrance on the Title’ or ‘[t]he lack of priority of the lien of the Insured Mortgage upon the Title over any other lien or encumbrance.’” In rejecting this argument, the Court found that Covered Risks 2 and 10 did not cover the lien losses as issue because the parties signed standard ALTA Form 32-06, which not only eliminated Covered Risk 11(a) but “replace[d] the provision with substantially narrower coverage.” Moreover, even if the 32-06 endorsement and the general provisions of the Covered Risks resulted in ambiguity regarding coverage, the specific provision (the endorsement) instructed that no such coverage exists, and under the basic principle of contract interpretation, the specific provisions control. Because the Court found that Plaintiff was not entitled to coverage under the policy, the Court did not address the District Court’s conclusions regarding Exclusions 3(a) and 3(d). Second, the Court found that because Plaintiff was not entitled to indemnification for loss arising from the lien, Plaintiff could not prove that Defendant acted in bad faith by denying its claim. Lastly, the Court found that Plaintiff failed to present evidence of harm resulting from Defendant’s failure to provide Plaintiff with separate counsel. Plaintiff’s vague testimony regarding additional expenses incurred, as well as counsel’s decision to leave the room during one mandatory mediated settlement agreement was insufficient to prove that there was a conflict of interest. Thus, the District Court properly granted summary judgment in favor of Defendant.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.