The United States District Court for the Northern District of Illinois recently dismissed an insured lender’s bad faith claim against a title insurance company and held that Exclusion 3(a) of the policy may bar the lender’s breach of contract claim.  See Bank of Am., N.A. v. Chicago Title Ins. Co., 2017 WL 2215012 (N.D. Ill. May 18, 2017).  In the case, a developer purchased property to build a shopping center.  As part of the transaction, it sold land to an anchor tenant and entered into an agreement whereby it agreed to reimburse the tenant for a portion of the tenant’s property tax.  The agreement further provided the tenant with lien rights if the developer failed to pay the reimbursement, and that this obligation “shall be a covenant which shall run with the land and bind [the developer’s] grantees, successors and assigns including provisions regarding the . . . tax.”  A separate agreement provided that this lien would be subordinate to any first mortgage on the property.  These agreements were recorded before plaintiff lender’s mortgage on the property, and defendant title insurance company issued a title policy to plaintiff.  After the developer defaulted on its loan with plaintiff, plaintiff initiated a foreclosure action in which it sought to extinguish the tenant’s lien.  Although the trial court granted plaintiff’s motion for summary judgment, an appellate court held that plaintiff’s mortgage had priority over the tenant’s lien but that tenant’s lien was not extinguished by the action and ran with the land because plaintiff had actual knowledge of it before it recorded its mortgage.

Plaintiff then initiated this action against defendant title insurance company, claiming that the existence of the tenant’s lien reduced the value of the property by $1,780,000.  It alleged both breach of contract and bad faith against defendant.  Defendant moved to dismiss the bad faith claim, and plaintiff cross-moved to dismiss defendant’s counterclaim and affirmative defense, both of which alleged that plaintiff’s breach of contract claim is barred by Exclusion 3(a) of the policy, which excludes coverage for defects “created, suffered, assumed or agreed to by the insured claimant.”  First, the Court granted defendant’s motion to dismiss the bad faith claim.  Although Illinois’s Insurance Code has a bad faith provision, the Code specifically exempts title insurance companies, and Illinois’s separate title insurance act does not provide for bad faith claims.  Thus, plaintiff was required to “allege a tort independent from a breach of the policy” but did not do so.  Second, the Court denied plaintiff’s motion to dismiss defendant’s 3(a) counterclaim and affirmative defenses.  The Court held that plaintiff was aware of the developer’s agreements with the tenant and agreed to record its mortgage after the agreements so long as the mortgage had priority.  “[H]owever, priority does not equal extinguishment.”  Moreover, the Court rejected plaintiff’s claim that 3(a) only excludes intentional or wrongful acts, holding that at least one of the cases cited by plaintiff in its cross-motion applied 3(a) when the insured “either expressly or impliedly assumed or agreed to the defects or encumbrances[.]”  Accordingly, defendant pled enough facts to survive the motion to dismiss.

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