Recently, California’s Fifth Appellate District affirmed a judgment holding that a lender’s title insurance policy did not insure it against a lawsuit for a misrepresentation as to title during a foreclosure sale because the policy was terminated when the property was transferred to the purchaser.
In Hovannisian v. First Am. Title Ins. Co. (2017) 17 C.D.O.S. 7857, plaintiffs purchased a home from Wells Fargo at a non-judicial foreclosure sale and later discovered there was a prior deed of trust on the property that was not extinguished by the foreclosure. Plaintiffs sued Wells Fargo for intentional and negligent misrepresentations based on Wells Fargo’s deed of trust stating it held the first deed of trust. Wells Fargo tendered its defense of the action to its title insurance company, First American Title Insurance Company, but First American refused to indemnify or defend Wells Fargo in the action arguing that the policy terminated at the time of sale.
After taking a judgment against Wells Fargo, Plaintiffs sued First American as assignees of the bank’s rights under the policy to sue for breach of contract and breach of the implied covenant of good faith and fair dealing – a technically complex process sometimes known as a “lay down,” explained elsewhere on this blog.
First American moved for summary judgment arguing that the breach of contract claim was without merit because (1) Wells Fargo did not have continuing coverage after the foreclosure sale, and (2) there were no policy benefits due because the misrepresentation claims were not covered under the policy since they were based on past events, namely Wells Fargo’s representations during the foreclosure sale. The trial court granted summary judgment in favor of First American, finding coverage was terminated under the policy when title transferred from Wells Fargo to the Hovannisians.
The court of appeal affirmed. It found that the policy expressly limited coverage to the period running from the effective date of the policy until the interest was conveyed unless, in the conveyance, the insured provided a warranty to the purchasers. A formal warranty of title is used to legally transfer property in a sale that guarantees that the seller has the legal right to transfer the property and that no other entity has a lien against or claim to the property. Because the deed of trust was conveyed by Wells Fargo without either an express or implied warranty, any defect in title became the plaintiffs’ problem. Without coverage of the claims against Wells Fargo under the title policy, the insurer owed no duty to defend Wells Fargo in the action and could not be sued for breach of the covenant of good faith, either.
This case presents important lessons. First, title insurance may not insure against the conduct of the insured after the property is conveyed. Second, it can be beneficial to obtain a warranty in a foreclosure sale. Third, when deciding whether to engage in a “lay down,” the insured should consult an expert in insurance law as to whether there is, in fact, coverage.