I usually focus my posts on Minnesota real estate disputes, but I’ll make an exception if I sense a budding national trend. The trend in this case is that, more and more, title insurers are denying lender’s claims on the basis of the lender’s unwillingness to provide underwriting information to the insurer. In a case of first impression, the Sixth Circuit recently rejected this trend.
Title policies provide coverage for losses that arise “by reason of” a title defect. The policy excludes from coverage any title defect “created, suffered, or assumed by” the lender. In Fifth Third Mortgage Company v. Chicago Title, Chicago Title argued that it shouldn’t have to indemnify a lender for a loss if the loss might be attributable to the lender’s failure to properly underwrite the loan (i.e. review the borrower’s application to make sure the borrower is creditworthy). To anyone with even a passing understanding of title insurance, this is a patently absurd argument, because whether or not an underwriting defect exists has nothing at all to do with (and certainly doesn’t cause) a title defect.
The Sixth Circuit agreed, holding:
Nothing in the policy makes that obligation conditional upon the quality of Fifth Third’s underwriting with respect to the Buford loans. Chicago Title insured against a risk of title defects, not a risk of default. Its argument has no support whatever under the policy’s terms.