Recently, the Massachusetts Supreme Judicial Court considered the standard for determining when a title insurer’s duty to defend is triggered. Finding that the scope of the title insurer’s duty to defend is narrow, the court concluded that a title insurer owes a duty to defend only where the title insurance policy at issue specifically envisions the type of loss alleged. The decision establishes a standard for the duty to defend that is different from the broad duty typically owed by general liability insurers.
In Deutsche Bank National Association v. First American Title Insurance Company, No. SJC-11265 (Mass. Jul. 11, 2013), the insured bank instituted an action seeking a declaration that First American, which had issued a title insurance policy to the insured’s predecessor in interest, owed a duty to defend the insured in an underlying action in which the claimant alleged that she had been the victim of a predatory lending scheme. The claimant sought rescission of a note and an accompanying first mortgage. First American took the position that the underlying action did not trigger its duty to defend because the claimant merely alleged that she had been misinformed as to the terms of the note, and was not challenging the validity of the mortgage itself.
Before reaching the question of whether First American owed a duty to defend the insured bank, the Supreme Judicial Court considered whether a title insurer, like a general liability insurer, must undertake a defense where the allegations of the underlying complaint are “reasonably susceptible” to an interpretation that they state or adumbrate a claim that would fall within the policy’s coverage. Answering this question in the negative, the Court determined that a title insurer’s duty to defend is narrower than that owed by a general liability insurer. It noted that, unlike general liability insurance, which is directed at future risks, title insurance only covers defects in, or encumbrances on, titles that are in existence when a policy issues. In light of the limited purpose of title insurance, the Court held that a title insurer’s duty to defend is triggered only where the policy specifically envisions the type of loss alleged.
With this standard in mind, the Court considered whether the terms of the title insurance policy at issue specifically envisioned the type of claims set forth in the complaint against the insured bank. The policy provided coverage against loss or damage sustained by an insured by reason of “the invalidity or unenforceability of the lien of the insured mortgage upon the title.” Adopting the reasoning of other courts, the court held that a mortgage lien and a mortgage debt are two distinct legal concepts, and title insurance does not cover defects in the underlying note. Because the substance of the underlying complaint concerned the validity of the underlying loan, not whether the mortgage was improperly executed or otherwise procured by fraud, the court determined that the claims asserted in the underlying complaint were not specifically envisioned in the terms of the title insurance policy. As the allegations of the underlying complaint fell outside the scope of the policy, First American owed no duty to defend.