Hovannisian v. First American Title: Ryan Squire wins appeal in title insurance bad faith case; court holds no continuation of title policy coverage after lender's foreclosure
Hovannisian holds that coverage under a lender’s policy terminates after the lender’s foreclosure—where the lender sells to a third party bidder, does not provide warranties in the foreclosure sale, and does not carry back a note. It also holds that certain claims asserted by buyers at a foreclosure sale did not and could not challenge the lender’s title. As a result, there was no duty to defend against a suit by the buyers against the lender.
The buyers’ suit alleged the insured lender misrepresented that its deed of trust was in first position. The DOT had been insured in first position, but the buyers learned after they bought PIQ that there was a senior lien. The claim of misrepresentation was based on the fact the recorded DOT stated it was a first-position lien.
The court of appeal held there was no duty to defend the lender against the buyers’ suit and no coverage. The lender’s coverage had terminated. The lender did not carry back a note, and had sold PIQ at foreclosure without warranty.
Further, the court held the buyers did not challenge the lender’s title. Indeed, the buyers’ suit could not challenge the lender’s title because the lender no longer held any estate or interest in the land. For this same reason, the senior lien did not and could pose a threat to the lender’s title.
The court also explained that there was no coverage for an additional reason: the lender did not suffer a loss. A lender’s policy insures the lender if the lender is unable to recoup its debt because of a covered matter. However, the buyers did not sue the lender for damages resulting from a covered matter; the buyers sued the lender for the buyers’ own damages.
Note another wrinkle. The buyers dismissed their suit against the lender in exchange for an assignment of the lender’s rights under the title policy. It was the buyers that then sued our client, the title insurer. Among other things, the court explained that the buyers were improperly trying to circumvent the fact they were not insureds, and they should have purchased their own title policy and/or done their own due diligence before buying PIQ at foreclosure. Nevertheless, the buyers had no greater rights than did the insured lender, and for the reasons discussed above, the insured lender was not entitled to defense or indemnity.