The United States District Court for the Northern District of Texas recently held that an insured's claim regarding a mechanic's lien was excluded from coverage under the title insurance policy under Exclusions 3(a) and 3(d). See Hall CA-NV, LLC v. Old Republic Nat'l Title Ins. Co., 2020 WL 869722 (N.D. Tex. Feb. 20, 2020). In the case, the insured lender agreed to loan money to the owner of a hotel for renovation purposes. Although the contractor began work before the lender issued the loan, it agreed to subordinate any potential mechanic's liens to the lender's deeds of trust. The defendant title insurance company then issued loan policies to the lender. After the renovation costs exceeded the loan commitment, the lender declared the owner in default and stopped making loan advances. The contractor then stopped work, recorded a lien and sought to foreclose.
Eventually, a bankruptcy court found that the subordination agreement between the lender and the contractor was not enforceable in Nevada and awarded the mechanic's lien priority. Although the title insurer defended the claim, it refused to indemnify the insured lender for the loss caused by the mechanic's lien's priority. The lender then brought this action for breach of the insurance policy, among other claims. The parties cross-moved for summary judgment.
The Court granted the insurer's motion and denied the lender's motion. The Court first found that any construction work that was completed but unpaid as of the policy date could constitute a title defect under the policy. Nonetheless, the Court found that, even if such defects existed, they would be barred under Exclusions 3(a) and 3(d). First, Exclusion 3(a) bars any losses "created, suffered, assumed or agreed to by the Insured." The Court held that Exclusion 3(a) excludes any claims for unpaid, post-policy work because the lender effectively caused them by cutting off the funding. In this case, the Court found that all of the unpaid work at issue all occurred after the policy and was barred. In doing so, it rejected the lender's argument that the renovation project began pre-policy and therefore was not subject to this exclusion: "this argument conflates the statutory framework for lien prioritization with title insurance coverage." Likewise, Exclusion 3(d) bars claims for defects "attaching or created subsequent to Date of Policy." Under the same analysis, the Court found that the liens for post-policy work were barred under Exclusion 3(d).
Michael R. O'Donnell, Esq., is a co-managing partner of Riker Danzig Scherer Hyland & Perretti LLP. He provides a range of commercial litigation services to clients, particularly financial institutions, title insurance companies and reinsurers. He authors Riker Danzig's Banking, Title Insurance, and Real Estate Litigation Blog along with attorneys Michael Crowley and Anthony Lombardo.