The H ono rab le G ary Feiner m an ofthe N orthern D is tr ic t  ofI l l i noi s , s i t t i ng by des i gna t i on.



## In the 

# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N o. 11

- 3446 H OM E F EDERAL S AV ING S B ANK, Plai nt i f f

-Appe l l ant, v. T ICO R T IT LE I NSURANCE C OMPAN Y, D efend a nt-A pp ellee.

Appeal from the United States District Court fo r the S outhernDi stricto f Indian a, Indian apolisDiv isi on. No . 1:10- cv-0999

—Jan e E . M agnu s- Sti ns on, Judge .

A RG UE D A PRI L 9, 2012

— D ECI DE D S EP TE MBE R 6, 2012

Befo re F L A U M an d H A M I L T ON , C ircu it Judges , a nd F EI NE RMAN, D i s t r i ctJudg e .  H A MI L T ON, Cir cu i tJudg e . T h i s c as e c on c er n s a tit le i ns ur an ce po l i cyc o ve r i nga c o ns truct i o n pr oj ec t. The pla i nti ffi s the i nsured p ar ty, H om e F edera l S avi ngs Bank, wh i ch ag re ed to le n d u p to $95. 5 m i l l i on t o fi nance2 N o. 11

- 3446 the c onst ructi on o f a new ethanolpro du cti on pl ant. W hen t h e d ev elo p er of th e p lan t ra n int o s er iou s t ro u b le fi ni shi ng the proj ect, the bank did notdi sburs e the fi nal $8 m i l l i on o fthe l oan am ount. The devel operdef aul ted on the d ebt to th e ban k an d fi red its gen eral co n t r a c t or, w hi ch then fi l ed a m echani c’ s l ien o n the proper ty to r ec o ve r $ 6 m i l l i o n a l l eg edl y o wed it. W he n the b an k so ug htt o f o r ec l o se o n i ts m o r tg ag e, the g en er alc o ntr acto r counter cl ai m ed, as ser ti ng that it s l i en had pri or i ty ove r, o r at l eas t par i ty w i th, the bank’ s m or tgag e. The pl ai nti ffbankte nd er ed i ts d efe nse t o the defen dan t ti tl e i ns ur erunde r a po l i cythat req ui r ed th e i ns ur ert o de fen d the b an ka g ains t a “ claim

. . . a l l eg i ng a defe c t, l i en o r encum bra nce o r othe r m att eri nsured aga i nst by this pol i cy. ” The pol i cy conta i ned an excl usi on fro m co verag e forcl ai m s “ cre ate d, suffer ed, as sum ed, o r a g r e e d to ” b y th e i n s u r e d

. O n c r o s s - mo t i o n s f o r s u mm ar y j udg m en t, the di st r i ctc o ur t r ul ed i n f av o r o fthe ti tl e ins urer . W e r eve rs e a nd r em and. The und i sputed f acts sho w that the ti tl e i nsurer b re ach ed i ts du ty to defe n d the ba nk o n the contr acto r’ s cl ai m that i ts m echani c’ s l i en had pri ori ty ove r orpari ty w i th the m or tga ge.

I. Fac t ual an d Pr oc e dural Backg r oun d T h e m ate ri alf acts ar e no t in dis pu te. The cas e a ri ses fr o m a c o ns tr uc tion pr oj ec t th atfel l a par t i n 2 00 8. The devel operwas A l tr a, Ind i ana, L L C, w hi ch i n 200 6 obt ai ned a co nstr ucti on l oa n co m m i tm ent forup to $95. 5 m illio n fro m pl ai nti ffH om e F edera l S avi ngsN o. 11

- 3446 3

Th e Mec ha ni c ’ s Li e n En do r s e m e ntpr ov i de d: 1 Anythi ng c ont ai ne d i n s ai d pol i c y t o the c ont ra ry no t withs t anding, the Com pany i ns ur es ag ai ns tl os s or dam age i nc ur re d by the i ns ur ed by re as on ofthe e nf or c em en tor at t em pt ed e nf or c em en tofa ny sta t ut or y l i enf or l aboror m at er i al ar i s i ng fro m c ons t ru c ti on c ont ra c t ed for an d/ or com m en ced o n th e lan d p rior to, at, or su b sequ en t to the effectiv e d a t e o f said p olicy , an d an y exten sion of said date, as ha vi ng pr i or i t y ove r, or s har i ng o n a par i t y with, the l i enofthe i ns ur ed m or t gage f or thatpor t i on ofthe pro c ee ds ofthe l oans ec ur ed the re by adva nc ed f or the purp ose of payi ng the c os t s ofthe ac qui s i t i on ofthe 

### (continued...) B an k t o fin an c e t h e c on st ru c t i o n of an et h an ol p lan t in C love rdal e, I nd i ana. The l oan w as to be disb ursed in i ns t a l l men t s . T o s e c ure i ts l o a n, Ho me F e de r a l h a d a m or tga ge on the pro perty
. To pr otect it s securi ty fro m confl i cting cl ai m s o fo w ners hi p orpri orm or tga ges o r l i ens, H om e F edera l purchase d ti tl e insurance fro m def en d ant Ti co r Ti tl e I ns ur an ce Co m pan y . Underthe pol i cy, Ti corper f or m ed a tit l e s ear ch afterea ch disburse

m ent Hom e F edera l m ade, i nsuri ng ag ai n st any l oss the b an k m i ght incur due to “Lack ofpri or i ty ofthe l i en of the insu red m ortgage ove r any sta t u t o ry l ien for servic es , l ab or or m at er ial.” H om e F edera l al so pai d an extr a pre m i um f ora m ech an i c’ s l i ene ndo r se m en t to i ns ur e ag ains t “e nf o r ce m en t or at te m p t e d en for c em en t” of a m ec h an ic’s lien cla im “havi ng pri or ity o ve r or s h ar i ng o n a par i ty w i th” the m or tga ge. The pol i cy obl i gat ed T ico r to 14 N o. 11

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### (...continued) l an d a nd the deve l opm en tofan d the c ons t ru c t i on of im prov em ents o n the land, i ncluding by [ si c] not l im it ed t o th e c o s to fl a b o r o r ma t e r i a l s i n c u r r e d th e r e wi th

. Att he t i m e of e ach disburs em en tofthe pr oc ee ds ofthe l oan, the t i t l e m us tb e s e a r c h e d b y Ro y a l T i t l e S e r v i c e s , I n c . , d o wn to s uch ti m e, f or poss ib le l ie ns or objec ti ons i nter
ve ni ng be t we e n the da t e he r e of a nd the da t e ofs uch d isbu rsem en t. T his en d or sem en t is m ad e a pa rt of the p olicy or co m m itm en tan d i s s ubj ec tt o a l l th e t er m s an d pro vi s i ons the reo f an d of any p rior end or sem en ts there t o . E xcep t to the e xt en te xpr es s l y s t at ed, i tne i the r m odi fi es an y ofthe t er m s a n d p r o v i s i o n s o fth e p o l i c y o r c o mm i t me n ta nd pri or endo r s e m e nt s , i fa ny n ordo e s i te x t e nd the e ffe c t i ve d ate o f the p olicy or c o m m i t m en t an d p rior end or sem en ts o r in cr ea se th e fa ce am o u n t th er eo f. d efend H om e Fed eral “i n liti gation in w hich any th ird p a r t y a s s e r t s a c l a i m . . . a l l e g i n ga d e f e c t, l i e n o r e n c u mb ra n c e o r ot h e r m at te r in su re d ag ain st by th is p olic y,” an d i ns ur ed H o m e F ede r al to th e ex te nt o f th e am o unt al re ady di sburs ed to A l tr a, up to the $ 95. 5 m illion to tal o fthe l o an . W he n Ho me F e de ra l di s t r ib ut e d a ddi t i o na l fun ds as con stru ction procee d ed , it w ou ld secu re li en w aivers fro m ea ch co ntra cto r pai d w ith t h e funds and askTi cor t o u p d a t e th e p o l i c y, wh i c h T i c o r d i d a ft e r p e r f o r m i ng a new ti tl e s earch and r ecei vi ng the co ntra cto rs ’ l i enN o. 11

- 3446 5

A gStar Fi nancialSer vices , Inc
. act ed as Ho m e Federal’ s loan 2 s e r v i c e r . L i k e w i s e , R o y a l T i t l e S e r v i c e s , I n c . i s s u e d H o me Fed eral ’ s polic y, w hich w as und erwritt en by T ic or, and R oyal p r e p ar ed e a c h t i t l e s e a r c h a n d u p da t e . F o r c o n v e n i e n c e , we r e fe r t o A g s t a r a n d H o me F e d e r a l c o l l e c t i v e l y a s “ H o me F ed er a l,” an d to R o y a l a n d T ic o r a s “ T ic o r.” w ai ver s fro m H om e F edera l

. Thi s ca se centers o n 2 t wo p o l i c y u pd a t e s ma de i n S e pt e mbe r 2 0 0 8
. On Se ptem ber24, 20 08, Ti cori ssued U pd ate 15 pursuant to H o m e F ede r al ’ s requ est. Updat e 15 r ev ea l ed no d e fe c t s, li en s, or encu m bran ces on the est ate th at are relevant to the case . A t that point, m or e than $87m i l l i on of t h e loa n proc eeds had be en di sburs ed and acco unted f orbylie n w ai ver s. A se ri ous di spute the n ar ose betw een A ltra an d th e p roj ect’s gen er a l con tracto r, F
. A. Wi l he l m Co ns t r uc t i o n Co
. ( “ W i l he l m”)
. Al t r a fi re d W i l hel m o n Se ptem ber26
. That s am e day, W ilhel m fi l ed a m echani c’ s l i en o n the proper ty cl ai m in g it was o w ed $6 m i l l i on f orwork on the proj ect. S u s p e c t i n g th a t s u c h a l i e n h a d b e e n fi l e d, H o me F e d e r a l r e q u e s t e d o n O c t o b e r 2 7th a tT i c o r p e r f o r m a ti tl e s ear ch. Ti cor ’ s Octo ber30 upd ate di scl ose d W i l he lm ’s l i en and m ade i t a n expres s e xcepti on fro m co ve r ag e. Cue the l i ti g at i o n. Fi rs t, i n J anuary20 09, H om e F ed er al fi l ed sui t a gainst A l tr a in sta te cour t t o rec over the $ 96 m i l l i on then d ue un d er th e loan and to foreclose H om e Fed eral’s m or tga ge on the pl ant pr oper ty. H om e F edera l nam ed W i l he l m a s a defen dan t be ca us e o fi ts mech an i c’ s l i en .6 N o. 11

- 3446 Th e f o l l o wi ngmo nth, Wi l he l m a ns we re d a nd fi l e d a c o u n t er c laim ag ain st H om e F ed er al a n d a c ro ss -c laim aga i nst Alt ra s eeki ng to f or ecl ose o n i ts $6 m i l l i on m echani c’ s l i en. W i l hel m as ser ted t h at it w as enti tl ed to en fo r ce i ts l i ena g ains t th e en ti r e pr o per ty, c l ai m i ng pri or i ty ove r H om e F edera l ’ s m or tga ge. Ti cori tse l facknow led ged thatW i l hel m was see ki ng a j ud gm ent deter m i ni ng tha t i ts l i en was pri orto and superi orto the inter esto fthe A gst ar/Hom e F edera l m or tga ge. On A pri l 3, 2 00 9, H om e F edera l te nd er ed the defe nse ofW i l hel m ’ s m echani c’ s l i en to Ti cor, se eking defense inth e s u i t a n d ind em n ity for a n y los s s h ou ld W ilh elm preva i l

. A fterco nd ucti ng an i nvest i gat i on, Ti cordeni ed H om e F edera l ’ s r eq u es t fo r defe nse a nd i nd em ni fi cat i o n . L e ftt o fe n d f o r i t s e l fi n s t a t e c o u r t, H o me F e d e r a l mo v e d f o r s u mma r y j u d g me n ta g a i n s tWi l h e l m, assert ing the priori t y o f its m ortgage ove r the m ech an ic’s l i en. H om e F edera l ev entual l y r eached a se ttl em ent b y payi ng W i lh elm $1. 8 m i l l i on o n i ts counter cl ai m , with no con tribution from Ticor. H om e Fed e r a l t he n fil ed this suit in federal cou rt al l eging tha t Ti coract ed i n bad fa ith and br eached i ts dut i es to de fen d a g ains t W i l he l m ’ s co unt er cl ai m a nd to i nde m ni fy Home F ede r alf o r the s et tl ementa nd att or ney fees . On cro ss- m oti ons f orsum m ar y j ud gm ent, th e d istri ct cou rt grante d sum m ary j ud gm en t for T icor. Hom eFe d. Sa v. Bank v
. Tic or Tit l e Ins . Co. , N o. 1: 10- cv- 0999

- JM S-TA B , 2011 W L 447 9 080 (S. D
. Ind

. Sept
. 27, 2011 ). The cour t r el i ed on a pol i cy excl usi on f orany “Defect s, lien s, en c u m b ra n c es , ad ve rs e c laim s o r ot h er m at te rs . . .N o. 11

- 3446 7

cre ate d, suffer ed, as sum ed orag re ed to o r by the Insured cl ai m ant. ” The cour t f ound that the excl usi on ap p l i ed b e c a us e Ho me F e de r a l wi thh e l d di s b ur s e men to fthe fun ds that coul d have s ati sfi ed W i l he lm ’s cl ai m . The di str i ct cour t al so note d that si nce al l $87 m i l l i on in dis burse m ents H om e F ed er alm ade had bee n fully a ccounted f orwith w ai ver s o fm echani c’ s l i ens, “Hom e Fe d er alse eks to ob ta ina w i n d f a ll

— a vo i di ngmor e th an$ 6 m i l l i o n [ i n] c o n s t r u c t i o n b i l l s wi th o u th a v i n gr i s k e d a n y o fi t s o wn fun ds

. ” 2 0 1 1 WL 4 4 7 9 0 8 0 , a t* 6
. Ho me F e deral ha s a ppe a l e d.

II. D i s cu s s i on We r e v i e w deno vo the di str i ct c ourt ’ s deci si on o n cr oss m ot ion s fo r su m m ar y jud g m e n t. E.g
. , Exel on Gen e r at i on C o . v. Lo ca l 15, Int’l B hd
. o f E le c . Wo r k ers , 67 6 F
. 3d 566, 570 ( 7th Ci r. 20 12)
. S ubj ect- m att erj uri sd icti on i s ba sed on di ve r si tyo fc i ti ze ns hi p, s ee 2 8 U. S
. C. § 1 33 2, a nd the par ti es agree t h at I nd i ana l aw appli es to i nter preta
ti o n o fthe i ns ur an ce po l i cy . In Ind iana, the mean i ng of an i nsurance pol i cy i s a m att er of l aw , an d in g en eral the s am e r u les o fco nstr ucti on a pp l y t o i nsurance pol i ci es as to othe r c on tr acts
. S ee C o m m ercia l U nio n In s. v. M o o re, 663 N .E .2d 17 9, 18 0 (In d . A p p . 1 99 6). A n y a m b ig ui ty in the po l i cywi l l b e co ns true d s tr i ct l y a g ains t th e i ns ur er, pa r ti cul ar l y wher e th e sc o pe o fa c o ve r ag e ex cl usi on i s at i ssue. S ee StateA uto. M ut. Ins. Co
. v. Flexda r, Inc. , 964 N
. E.2 d 845 , 84 8 ( I nd

. 20 12)
. A n i nsurer ’ s duty t o defe nd an insured i s br oaderthan i ts du ty to i nd em ni fy,8 N o. 11

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The d is tr ic t c ourt’ s opin io n se em s to have re verse d or at 3 l e a s t c o n fu s e d th i s l o g i c , a d d r e s s i n g fi r s tth e “ D u t y t o I n d e mnify,” find ing no ne , an d then stating in a o ne -senten ce d iscuss i on underthe he adi ng “D u t y t o Defen d”: “Be c aus e, f or re a so n s ex p re sse d ab o v e, T ic o r h a d n o d u ty to in d em n ify H om e F ed era l w ith resp ect to th e W ilhelm c laim , it nece ssarily h a d n o du t y t o i n de mni fy [ sic ] H o me F e d e r a l e i th e r . ” 2 0 1 1 WL 44 79 08 0, at * 6, c i t i ng A ceRe nt

- a - Car, Inc . v. Empi r e Fi r e & M a r i ne Ins. C o. , 58 0 F
. Su pp. 2d 6 78 , 69 0 (N. D. I l l

. 20 08 ) ( appl yi ng Ind ian a law an d stating corr ect l y t h at if insu rer h ad no d u ty to d efe n d , it n ec es sa ri ly h a d n o d u ty to in d em n ify ). so i fan i nsurerh as no d uty to defe nd its i nsured i n a s uit, i t n e c e s s a r i l y d o e s n o t h a v e a d u t y t o i n d e mn i fy t he i nsured f orany l i abi l ity in curr ed ther eby. S ee Tris l e rv. Indi ana Ins . Co. , 575 N
. E
. 2d 1021, 1023 (Ind

. A p p . 1991). 3 T he de cisive i ssu e he re i s the du ty to d efend

. W he re ani ns ur ere l ec ts no t to de fen d i ts i ns ur ed, “S ucha cour se i s t ake n at the insurer ’ s per i l bec ause the insurer w i l l be bound at l eas t to the m atters n ece s s aril y d eterm i ned i n the l aw sui t. ” S t a t e F a r m F i r e & Ca s . Co
. v. T. B. ex rel
. Bruce, 76 2 N
. E.2 d 1227, 12 31 ( I nd

. 20 02) ( i nter nal q u ot at ion m ar ks an d em p h as is om itt ed ); Frankenm uth Mu t
. In s . C o . v . Wi l l i a ms , 69 0 N. E. 2 d 6 7 5 , 6 7 8

- 7 9 ( I nd

. 19 97 )
. W e addr es s fi r stTi co r ’s a r g um en t th atthe W i l hel m c ou n ter cl ai m di d not t ri gge r the duty to defe nd bec ause i t di d not a ctual l y s eek p riori ty ove r or parity w ith th e H om e Fed eral m ortgage. W e turn th ent o the b as i s f o r the di st r i ctc our t’ s dec i si o n, the p oli cy excl usi on f orl i ens c re ate d, suffer ed, as sum ed o r a g r e e d t o o r b y the i ns ur e d.N o. 11

- 3446 9 A
. Wil helm Sought P ri ority or Parity The pol i cy’ s “ Defe ns e an d Pros ecuti on” cl ause re quir ed Tic or t o “p ro vi de f orthe defe nse o fan insured inlitiga tio n in w h ich an y t h ird p ar ty as se rt s a cla im advers e t o the t i tl e o r i nter estas i nsured , b u t o nl y a s t o those state d causes ofact i on a l l eging a defe ct, l i en o r en c u m b ra n c e o r ot h er m at te r in su re d a g a in st by th is po l i cy . ” Un derthe mech an i c’ s l i ene ndo r se m en t, o ne m at te r i ns ur ed a g ains t was a ny l i ti g at i o n in whi cha thi rd party c l ai m ed i ts m echani c’ s l i en had pri or i ty ove r orpari ty w i th H om e F edera l ’ s m or tga ge on the pro pe rty: the C om pany I nsures ag ai nst l oss o r dam age i ncurr ed by th e insu red by reason of th e enforcem en t or att e m pt e d e nf

or ce m e nto fany sta tutory l i en f orl abor o r ma t e r i a l a r i s i n gfr o m co ns t r uc t i on co nt r ac t e d f or and/orcom m e nc e d o n the l a nd pr i ort o, at, ors ub s e q ue nt t o thee f f e ct i vedate o

f s ai d p ol i cy, and any extensi on o f said dat e, as ha ving pr i o r i ty o ve r, o r sh ar i ng o n a pari ty w i th, the l i en o fthe i nsured m or tga ge f orthat p or tio n of th e pr oc ee d s of th e loan se c u re d th er eb y . . . . (E m p h as es ad d ed .) Tw o th in gs are im p or ta n t a b ou t t h is cl au se . F i r st, i t co nfi r m ed th atTi co r mustde fen d and ind em ni fy H om e Feder al aga i nst enf or cem ent or at t e m pt e d enf or cem ent o fa cl aim as ser ti ng pri or i ty ove r or pari ty w i th the m or tga ge. Se cond, th e c ov er ed cl ai m s w ere notl i m i te d t o tho se tha t ar o se pr i o r t o the effect ive d ate o fthe pol i cy, as exte nd ed by up dated en do r se m en ts
. Ra th er, the mech an i c’ s l i ene ndo r se m en t cove re d an y c l ai m “a ri si ng fro m co nstr ucti on co ntra cted f orand/o r com m enced on the l and pri orto , at, orsubse-10 N o. 11

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M a n y ti t l e in su r a n c e p o l i c i e s i n su r e o n l y a g a i n st m e c h a n i c ’s 4 l i en s ar i s i ng before the e ndor s em en tdat e and for whi c h l aboror m ater ial s have alre ady b een furni shed. See J oyce Palom ar, Ti t l e In s u r a n c e L a w § 9:9 (stating tha t A m erica n L an d an d T itle Ass oc iation ( ALT A) Cons t ru c t i on LoanPol i c y Endor s em en t A “does not ins ure the priori ty oft h e m o rtgag e l ie n over m ech an ics’ l iens resu lting fro m w or k p erform ed or m ater ials sup p lied su b sequ en t to th e en d or sem en t d ate” ). S o w hy w ou ld Ti c or i ns ur e H om e Fe der al ag ai ns tl i en s ar i s i ng afte r the effect ive date ofthe l ates t upd ate? T h e a n swer prob ably li es i n I ndi ana c ons t ru c t i on law , whic h gi ves c om m er c i al c onst r u c t i o n m o r t g a g e s p r i o r i t y o v e r a l l la t e r r e c o r d e d m e c h a n i c ’s lie n s. Se e I n d . C o d e § 32 -2 8 -3 -5 (d ); see al so P a lo m a r, sup ra , § 9 : 9 & n
. 6 ( “i n s t at es wher e s t atut es gi ve the c ons t ru c t i on m or t gage l i enpr i or i t y ove r al l m ec ha nics’ l i en s , r eg ar dl es s of w hetherthe i nsured le nd er m ade all disbu rs em ents obligat ory underthe m or t gage doc um en t s , ” the s t anda rd e ndor s em en t c ove rs an y “ l os s or dam age su stained by r ea s on ofl ac k of p rior ity o f the lien .

. . ov er an y statu t o r y l ien for serv ices, lab or or m a t e rial h ereto fore o r he rea fter fu rn ished ”). T his m ean s that T icor cou ld safely insu re H om e F ed era l ag ain st any los s incurr ed d ue to the e nf orcem ent ofa l ater
- rec orded m e c h a n i c ’ s l i e n b e c a u s e th e r i s k o fs u c c e s s fu l e n f o r c e ment w as cl ose to zero. The r isk o f att empt ed enf orcem ent ofs uch a lien w as no tze ro , ho wever, f or e vena f ri vol ous c l aim cou nts as a n “ a t t em p t.” A s w e sha ll see, T icor ’ s refusal to d efend its insu red ag ain st on e suc h ap p are ntly fu tile 

### (continued...) q ue ntt o the e ffe c t i v e da t e . ” W hi l e the po l i cy “ i ns ur e [ d] on ly to th e e x te n t o f th e a m ou n t a c tu ally d isb u rs ed ,” th atc l au se l i m i te d the “ amoun t” o fr ec o ve r y, no t th e tem pora l sco pe ofco ver ed cl ai m s. 4N o. 11

- 3446 11



### (...continued) a t t e m p tw a s a b r e a c h o f i t s d u t i e s u n d e r th e m e c h a n i c ’s lien en d or sem en t. W ilh elm ’s o rig in al c ou n te rc laim st at ed th at W ilh elm w as “enti tl ed to enf or ce i ts m echani c’ s l i en cl ai m . . . aga i nst the ent ire l and .

. . witho ut i m pai rm ent b y m or tgage foreclosure.” D kt. 44-3 at 1 7, ¶ 1 0. T ha t cou nt erclaim w as u na m biguou sly w ithin t h e scop e of T icor’s duty t o de fen d, a nd Ti co r qui ck ly u nd er st o o d a s m uch

. A l ett erfro m Ti cor ’ s cl ai m co unselto an att orney f or Ho me F e d e r a l s a i d , b a s e d o n th e o r i g i n a l c o u n t e r c l a i m: “W i l hel m i s s eek i ng a j ud gm ent det er m in in g that i ts Lie n i s pri or to and s up er i or to the i nter estof th e A gst ar [ i
. e . , H o me F e d e r a l ] Mo r t g a g e a g a i n s tth e s u bj e c tp r o per ty. ” Dkt. 44

- 3 a t 3 2. Y et T ico r n ow co n t e n d s o n ap p ea l th at th e W ilh elm counter cl ai m was not an “attem p ted en forcem en t” of a st atut o r y l i ena ss er ting“ pr i o r i tyo ve r, o r sharing o n a p arity w ith, th e li en of th e insu red m ortgage.” I t offers two r ea so ns , b utb oth s ufferfr o m the s ame u nde r l y i ng m i sta ke. ( The dis tr i ct c ourtdi d not ba se i ts deci si on on these ar gum ents by Tic or . ) Fi rs t, T ico r ass er ts that “W i l hel m di d not a l l ege pri ority overthe M or tga ge” because i t s i m ply“m irro re d the s tatute” that “pro vi des a rig h t o f rem ov al t o a lien cla im an t w i t h i n 90 d ay s if th e la nd i s e ncum ber ed by a m or tga ge. ” Ti corBr. 15 , citing I nd

. Cod e § 3 2 -28-3-2. A ccord ing to Ticor, thi s wa s the “ wr o ng ” s t a t ut e , s o “ no de fe ns e wa s r equir ed. ” Id

. The undi spu te d f ac ts s ho w tha t th i s ar g u-12 N o. 11

- 3446

m ent i s fri vol ous. The d u ty t o defe nd depend s o n w hat the c l ai m ant a l l ege s, notthe ult i m ate m er i t o r lac k of m er it of t h e c laim

. E.g
. , Ter r eHaut eFi rs tNat ’ l Bank v
. P a c. Em pl oye rs Ins . Co. , 6 3 4 N
. E
. 2 d 1 3 3 6 , 1 3 3 9 ( I nd

. A pp . 1 99 3)
. The o ri gi nal co unterc l ai m pl ai nl y a sse rt ed pri or i ty ove r the Hom e F edera l m or tga ge. That i s how Tic orundersto od i t a t the ti m e. Even ifther e had be en an y a m b igu ity th en , W ilh elm ’s a m en d e d co u n te rc laim w a s e v e n mor e e xp l i c i t, o ffe r i ngs e v e r a l the o r i e s f or bar ring H om e F edera l fro m enf or ci ng i ts m or tga ge w ith p r iority over W ilhe lm ’s m ech an ic’s li en . Dk t. 44-4 at 14- 16. S ec o nd, Ti co r argue s, b ec au se the a ppl i cabl e I ndi an a sta tute gi ves pri or i ty to a co m m er ci alco nstr ucti on m or tg a g e o v e r a l l l a t e r- re cor de d me c ha ni c ’ s l i e ns , s e e Ind

. C od e § 32 -28 -3-5 (d ), “th e W ilh elm L ien c ou ld n otat ta in pri or i ty ove r orst and i n p ar i ty w i th the M or tga ge. ” Ti cor B r. 16 . Tic or co m p lim en ts H o m e F ed er al’s effo rt s in th e s ta te co u r t f o re c los u re ca se , say in g it “ p ro p er ly a r gue d tha t the W i l he l m L i e n wa s i nfe r i o r t o the M or tga ge ” i n its m ot ion for s u m m ar y jud gm en t a ga in st W ilhe l m , c o r r ec tly i den ti fy i ngthe s ta tu to r y a utho r i tya nd su p p o r tin g c as e la w . Id. In other w or ds, Ti corar gues th at it h ad n o d u ty to d efe n d H o m e F e d er al fro m W ilhel m ’ s cou nter cl ai m bec ause W i l hel m di dn ’ t hav e a p rayer of p revailing . H om e F ed eral could take care of i tself. That ar gum ent a l so runs fl atl y c ontr ar y t o th e m ost ba si c p r i n c i p l e o fa n i n s u r e r ’ s d u t y t o d e fe n d

. Un d e r the p olic y, T ico r h ad a d u t y t o d efe n d ag ain st an y c laimN o. 11

- 3446 13 “att em pt[ing] ” t o enf or ce a l i en as h avi ng pri or i ty ove r o r p ar ity w ith th e m or tg ag e. W ilh elm ’s c ou n te rc laim p lain ly d id so , eve n if it m igh t h av e b e e n a s u re lose r. “It i s the nature of the cl ai m , not i ts m er i t, w hic h es tabl i shes the i nsurer ’ s duty t o defe nd

. ” Ter reHaute FirstNat’l Bank, 63 4 N
. E.2 d at 1 339, quoting Tris l e rv. Indi ana Ins . Co. , 575 N .E
. 2d 1021 , 10 23 ( I nd

. A pp . 19 91)
. A n “i nsurance c o mpa nyh a s a co nt r a c t ua l du t y t o de fe nd u nfo un de d, f al se a nd fr au dul en t su i ts b as ed up on r i sk s i t ha s i nsure d.” D avi ds on v. Ci nc i nn a t iIns . Co. , 57 2 N
. E.2 d 502, 505 ( I nd

. A pp . 19 91) , ci ti ng Ci n c i n n a t i In s . Co
. v. M al l on , 409 N
. E
. 2d 1100, 1105 (Ind

. A p p . 1980). W ilhe lm ’s cou nt erclaim pres en ted a r is k that H om e Fed eral’s pol i cy speci fi cal l y insured ag ai nst

— a s ta tutory l i en se ek in g p rior ity ov er or p ar it y w i th th e m or tg ag e. W ilhe l m ’ s cl ai m mightha ve b ee n wea k, e ve n h o pel es s, b ut that l ack ofm er i t co uld notabs ol ve Tic oro fi ts du ty to defe nd ag ai nst the at tem pted enf or cem en t of a m echani c’ s l i en with pri or i ty ove r the m or tga ge. Ti co r t r i es to av o i d the se pr i nc i pl es b y quo ting M al l on , wh er e the Indi ana C ourto fA pp eal s wrot e: “when the underl yi ng f actualbas i s o fthe com pla i nt, ev en i fpr o ve d t r ue, woul d no t r es ul t i n l i ab i l i tyunde r the in su ra n c e p olic y, th e in su ra n c e c om p an y c an p ro p er ly r e fu s e t o d e fe n d

. ” 4 0 9 N. E
. 2 d a t 1 1 0 5 , c i t i n g 7 C J
. A. A p p lem an , Insu ran ce La w a n d P r a ctice § 4 683, at50 ( W
. F. B er d al e d ., 19 79 ). M al l on i s per fec tly c o ns i st en t w i ththe pri nci ple s we re l y o n abo ve. A s no ted, the M al l on co ur t st at ed th e g en er alpo i nttha t the duty t o de fen d appli es to “unfo und ed, f al se orfra ud ule nt sui ts base d up o n r i s k s i th a s i ns ur ed. ” Id
. The M al l on cour t ba sed14 N o. 11

- 3446 i ts deci si o n, ho wev er, no t o n the mer i ts o fthe u n d er lyin g c laim bu t o n p olic y e x c lu sio n s t h at w ou ld have appli ed eve n i fthe und er l yi ng clai m had bee n va lid

. Id. T h e c ou rtd id n otsu gg e s t t h at an ins u re r is enti tl ed to i gnor e the r el i efthe cl ai m ant a ctual l y s eek s ag ains t i ts i ns ur ed an d t o refuse t o de fen d o n the theory thatthe cl ai m ant c annot possibl y pr evai l as a m att e r o fl a w. Wi l he l m’ s c o un t e r c l a i m s o ughtt o e nfo r ce a l i e n a s h a v i ngpri or i ty o v e r o r p a r i t y wi th Ho me F e der al ’ s in su red i nter esti n the pla nt’ s m or tga ge. U nl ess a cove ra ge excl usi on a pp l i ed, Ti corbr eached i ts du ty to defe nd under the pol i cy.

B
. The “Cre at e d orSu

f f e r e d” Excl us i on The onl y r el evantexcl usi on, the pa rt ies ag re e, excl ud es fro m co ver age cl ai m s “ c re ate d, suffer ed, as sum ed or ag r ee d t o o r b y the Ins ur ed cla i m an t. ” Cov er ag e ex cl usi o n s a r e c o n s t r u e d s t r i c t l y a g a i n s t th e i n s u r e r, a n d t he i nsurerbea rs the burden ofsho w i ng tha t a n excl usi on appli es. S ee Hoosie r Ins
. Co
. v. Aud iology Found
. of Am er ica , 745 N
. E.2 d 300, 30 9 ( I nd

. A pp . 20 01)
. The “cr eat ed or suffer ed” excl usi on i s a st andard one i n ti tle i nsurance c on tr ac ts , an d it is ap p ar en tly “[o ]n e o f th e m os t litigat ed” cl auses i n the fi el d. Pal om ar , Tit l eIns uranc eLa w § 6 : 10. F r o m Ti co r ’ s br i ef, we ca n di sc ern thr ee s epa r at e ar g um ents i n supp or t o fi ts ass er ti on that the “cr eat ed or suffer ed” excl usi on a pp l i es. Fi rs t, Tic orco ntends that H om e F ederal “ cre ate d, suffer ed, as sum ed, o r agr eed to th e W i l he lm Li en ” be ca us e “Ho m e F ede r almade th eN o. 11

- 3446 15 consci ous deci si on notto di st rib u te the r em ai ni ng l oan fu n d s an d c h os e no t to p ay W ilh elm .” T ico r B r. 2 1 . A lth o u g h T i c o r h a s i d e n t i fi e d n o f a c t u a l e v i d e n c e th a tH o me F ede r al ’ s dec i si o n to wi thho l d the fi na l l o andi sb ur se m en t to its bo rro w er (A ltr a) w as th e c au se of W ilh el m ’ s cla im ( i.e. , the re ason it w as not pai d), we w i l l as sum e that und er l yi ng f act f orthe sake ofaddress i ng Ti cor ’ s l ega l ar gum ent, wh i ch w e r ej ect. Atl e a s to ne j ud i c i a l de c i s i o n s up po r t s T i c o r ’ s a s s umpti o n tha t but

- f or ca us at i o n i s su ffi ci en t to s at i sfy the “cr eat ed orsuffer ed” excl usi on. S ee FirstAm er ican Title Ins . Co. v. Act i on Acq ui s i t i ons, LL C , 1 87 P. 3d 1107, 11 13 ( A ri z. 20 08) ( “w e c onclude thatthe excl usi on . . . appli es whenever the i ns ur ed i nt en ded th e ac t ca us i ngthe defe ct, noto nl y when the i nsured i ntended the defect o r whenthe i ns ur ed en g ag ed i n mi sc o nd uc t”). Butthe o v e r wh e l mi n gwe i g h to fa u th o r i t y i s t o th e c o n t r a r y . As a num bero ffedera l co urts have r eco gni zed, t h e “cre ate d orsuffe red” l anguage i s intended to prot ect the insurer from l iabil ity for m atters ca us ed by the insu red ’s ow n inte n t ion al m iscond uc t, breac h of du ty, or otherw i se i nequit abl e deal i ngs: The c a s e s di s c us s i ngthe a pp l i c ab i l i t y o fthe ‘ c r e a t ed o r s uffer ed’ e xc l us i o n g en er al ly h ave s ta te d tha t th e i nsurercan esca pe l i abi l i ty onl y i fi t i s e stab lish ed that the defect, l i en o r encu m b ra nce r esul ted fro m som e intenti onalm i sco nd uct o r in eq uit abl e deal i ngs by the insured o r th e insured ei therexpre ssl y o r i mp l i e d l y a s s u me d o r a g r e e d t o th e d e fe c t s o r e n c u mbra nces i n the cour se ofp u rchas i ng the pro perty16 N o. 11

- 3446 i nvol ved. The cour ts have not perm i tte d t h e insurer to av o i d l i ab i l i tyi fthe i ns ur ed was i nno ce nto fa ny co nduc t ca us i ngthe l o ss o r was s i m pl y ne g l i g en t i n br i ngi ng ab out the l oss . Brown v. St
. Paul Tit l eIns . Co. , 634 F.2d 11 03 , 1 1 0 7 -08 n .8 (8t h C ir. 1 98 0) (M iss ou ri law ); ac c or d , Chic ago Tit l eIns . Co. v. Re s ol ution Trust Corp
. , 53 F. 3d 899, 90 7 ( 8th Ci r. 19 95) (M in n es ot a la w ); Am e r i ca n Tit l eIns . Co. v. Eas tWe s tFi n. , 16 F.3d 44 9, 455 (1st Cir. 1994) (Rh od e I sland l aw ); Am e r i ca n S av. & Lo an Ass ’ n v . La wye rs Tit l eIns. Corp. , 79 3 F.2 d 7 80 , 784 -86 5(6 th C ir. 19 86 ) (T en n es se e la w ); Fifth Thir d M or tg. Co. v. Chi cago Ti t l eIns . Co. , 758 F. S up p. 2d 47 6, 48 4-8 5 (S.D . Oh io 20 10 ) (O h io law ); M id-South Titl e Ins . C orp. v. R e s ol ut i on Tru s tCorp. , 840 F. S up p. 52 2, 52 9- 30 (W
. D
. Ten n. 1993) (Ten ne ssee law ). N either t h is cou rt norany I nd i ana s tat e co urt has defi ned the “ cre ate d o r s u ffe r e d ” e x c l u s i o n, b u tth e c l e a r maj o r i t y v i e w a m o ng cour ts ofo therj uri sdic ti ons i s that the excl usi on appli es onl y to i ntenti onalm i sco nd uct, breach ofd uty, o r o th e r wi s e i n e q u i t ab l e d e a l i n g s b y th e i n s u r e d

. We p re d ict th at In d ian a c ou rt s w ou ld a d op t th at v iew a s w ell. Tic orhas not ar gued that W i l hel m ’ s l i en r esu lted fro m
“ d e l ib e r a t e , d i s h o n e s t, ” o r “ i l l e g a l ” d e a l i n g s b y H o me Feder al

. S ee Chic ago Tit l eIns . Co. , 5 3 F
. 3d at 907, quo ting Joe l E . Sm ith , A n n ot at ion, Tit l eIns uranc e : Excl us i on of Li ab i l i ty f

orD e f e cts , Li e ns, or Encu m b r anc e s Cr e at e d, Su f f e r e d, A ssum ed, or A greed to by the Insu red, 87A
. L.R. 3d 51 5, 520 ( 1978 )
. N o evi dence w oul d supp or t a fi nd i ng tha t thi s deci si on was i ntenti onalm i sco nd uct. Tic orar gues i nstea d that H om e Federa l breache d a duty to Tic orto di str ibute the ent i re ty ofthe l oan proce eds,N o. 11

- 3446 17

I n B an kers Trust, the default cam e befor e the final d isb urse- 5 m en t
. 594 F. 2d a t23 4. I n B r o wn , the def aul t c am e aft erthe ban k had di s burs ed the whol e ofi t s l oanc om m i t m en t, butthe d ev elop er co ntin u ed to w or k on the p ro jec t after the d efau lt. 634 F
. 3 d a t1 1 0 5

- 0 6
. Co s to ve r r un s , c ombi ne d wi th a de l ay betweenthe d i s burs em en tand the endor s em en t, r es ul t ed i n the p o st-d efa u lt w o rk g o in g u n co m p en sa te d

. Id. at 1107- 08. c itin g tw o c as es fro m th e E igh th an d T en th C irc u its , Br own v. St
. Paul Tit l eIns . Corp. , 63 4 F
. 2d 11 03 ( 8th Ci r . 1 98 0) , a nd Banke rs Tr us tCo. v. Tr ans a m erica Tit l eIns . Co. , 59 4 F
. 2d 23 1 ( 10 thCi r . 1 97 9)
. Both Brown a nd B a nk ers Trust r e fl e c tthe u nd e r s t a nd i ngo fthe “ c r e a t e d o r s uffe r e d” excl usi on we ad opted abo ve

— thati t i s l i m i ted to si tuat i o ns i n whi c h the c l a i m a r i s e s du e t o the i nt e nt i onal m i sco nd uct, br each ofduty, o r i nequit abl e deal i ngs b y th e insured. In each case , a bank fi nanced a co nstr ucti on proj ect w i th a l oan secur ed by a fi rs t l i en m or tga ge on the pr oper ty. Each bank pu rc hased ti tl e insurance, and eac h pol i cy i ncl ud ed both a m echani c’ s l i en endor sem ent a nd a “cr eat ed orsuffer ed” excl usi on sim i l arto the o nes in thi s ca se. A nd i n each case , the devel oper d e f a u l t e d

. A ft e r f o r e c l o s u r e p r o c e e d i n g s w e r e c o m-

5 m en ce d, unpa i d c o ntr ac to r s fi l ed m ec ha ni c’ s l i en s ag ains t the pr o per ti es . In B a nk ers Trust, the con tracto rs preva i l ed, and the bank soughtind em n i fi cati on fro m i ts i nsurer, wh ich r efused on a ccount ofthe “cr eat ed or suffer ed” excl usi on. For the sam e re aso n, the i n su re r i n Brown denie d defens e t o i ts i nsured, wh i ch ul ti m at ely se tt l ed wi th th e co nt r ac to r s. Eac h ba nk su ed on th e ti tl e insura n c e pol i cy, and eac h i nsurerpre vai l ed on18 N o. 11

- 3446 appe al

. In B a nk ers Trust, the Tenth Cir cui t he ld : “ W here , as he r e , wo r k wa s pe r f o r med a nd pa y men t wa s no t m ade up to the a m ount o fthe l ender’ s loan co m m i tm ent, the re sul ti ng m echani cs’ l ien s m ust be co nsi dered to have been c re ate d orsuffer ed by the insured. ” 5 94 F
. 2d at2 34 ( emphas i s o m i tt ed)

. In Br own , the Ei ghth C ircuit l ikew ise held t h a t the m ech an ic’s li en s w ere “crea ted or su ffered by” th e b an k d ue to i ts “fail ure to furni sh

. . . the fund s necess ar y to cove r th e im prove m ents m ade. ” 6 34 F. 2d at 1110
. Tic orco ntends that t h ese cas es ar e ind i stingui shabl e, an d the dist ri ct c ourtgr anted sum m ar y j ud gm ent o n the s tr ength of thei r author i ty. That a pp ro ach o ver l oo ks a f actualdi ffer ence that the B a n k ers Trus t cour t ca l l ed “c rit ical, ” a nd thatthe Brown c o u r ta l s o r e l i e d u p o n: th es e ca se s i nv o l ve d b r ea ch es of a dut y b ec au se the i ns ur ed ba nk s ha d e ac h agre e d t o ma k e a de qu a t e fun ds av ai l ab l e to pa y the de ve l o per s an d th ei r co nt r ac to r s. The par ti es i n B ank ers Trus t a nd Brown had ne got i ated “d i sburse m ent a gr eem ents” wh er eby the title in s urers assu m ed resp ons ibi li ty for both ( a) secu ring l ien w aivers fro m p ot en tia l cla im an ts an d , m or e im p or ta n t, (b ) ac tu ally d isburs ing the l oan fun d s to the va rious con tracto rs as c o ns truct i o n pr o g r es se d. Bo thc i r cuit co ur ts c o nc l u d e d th a tt h e di s b u r s e me n ta g r e e me n t s “ c l e a r l y c o n t e mp lat ed th at ad eq u at e fu n d s w er e t o b e m ad e a va ilab le to [the insurer ] i n or der t o sat i sfy c l ai m s. ” Bankers Trust, 5 94 F. 2d at 233; se e Br own , 6 34 F
. 2d at1 11 0 ( “the pa r t i e s co nte mpl a t e d tha t[ the b a nk ] wo ul d p r o v i de ade qua te funds to p ayf o r wor kc o m pl et ed pr i o r t o theN o. 11

- 3446 19 defa ult ”)
. By r equi ring the ins urer s them sel ves to di s b ur s e fun ds , a nd t o do s o o nly a ft e r r e c e i vi ng l i en w ai ver s fro m co n tr actors , the disb urse m ent a gr eem ents presupposed an obl i gat i on o n the part of th e ba nks t o m ake suffi ci ent fund s avai l abl e. The disb urse m en t agr eem ents w er e “ cri ti cal

. ” B a nk ers Trust, 59 4 F
. 2d at 232. I n this c ase, ther e was no disb urse m ent a gr eem ent, and i t was H om e F edera l r atherthan Tic orthatbo th se cur ed l i en wai ve r s an d di sb ur se d th e funds wh en due unde r the l o ana g r eem en t. Unl i k e i n B ank ers Trus t an d Br own , nothi ng i n the i nsurance pol i cy orthe cour se of deal i ngs ind i cate s that Hom e F edera l was bound to d isburs e the entirety of i ts loan com m it m en t to A ltra ev en if A lt r a was i n de f au l t. In b o th B ank ers Trus t an d Br own , the b an k, the t i tl e i ns ur er, a nd the de ve l o pera nd i ts contr acto rs were i nvol ved i n one com ple x busi ness re lat ion sh ip : th e b an k p u t u p th e loa n, an d th e t itle i nsurerper f or m ed ti tl e s earc hes, se cured l i en waiv er s, an d rel eas e d fun d s to the d evelop er and cont ractors for con stru ction alread y pe rform ed

. H e re, there w ere i nstea d tw o b ilatera l co ntra ctualr el ati onshi ps

— o ne between H om e F edera l and A l tr a, and anoth erbetw een H om e F edera l a n d T i cor . The ti tl e insurance pol i cy provid ed : “ At the ti m e of e ach disb urs em ent o fthe p r o c e e ds ofthe l oan, ti tl e m u st be s ear ched .

. . f orposs ibl e l i ens” fi l ed up to “ the d at e ofsuch di sburs em ent. ” The pol i cy di d no t r equi r e Ti co r to per f o r m a ti tl e se ar chpr i o r t o a ny d i s b u rs em en t, as th e d isb u rs em en t a gr ee m en ts d id in B ank ers Trus t a nd Br own . A n d it d id n oten tr u st th e t itle i nsurerwith the responsibi l i ty to d i sburs e the funds. That20 N o. 11

- 3446

r es po ns ibi l i tyr emai ne d wi thHome Fed er al

. In the abse nce of any i nd i cati on fro m the i nsurance pol i cy th at Ho me F e de r a l w o ul d c o nt i nu e fun di ngthe de v e l o pm ent a ftera defa ultbyi ts bor ro w er ( A l tr a) , H om e F edera l ow ed n o du ty to Tic orto di sburs e the ent i re am ount o f the l oan com m i tm ent t o A l tr a t o pay i ts contractor s. Because o fthe I nd i ana s ta tu te gi vi ng st ro ng pri or i ty to the c onst ructi on l ender’ s m or tgage, i t s houl d have ta k enl i tt l e tr o ubl e o r e xpe ns e f o r Ti co r t o ho no r the prom i se ofi ts m echani c’ s l i en endor sem ent b y defe n d i n ga g a i n s tth e Wi l h e l m c o u n t e r c l a i m. Ourr ea so ni ng he r e tr ac k s th ato fthe c o ur t i n M id-South Tit le, wh i c h di s t i ngui s he d B ank ers Trus t a nd Brown on preci sel y thi s ba si s. W here t he devel operdef aul ted o n th e c o n s t r u c t i o n l o a n a n d th e r e wa s n o d i s b u r s e men t ag r ee m en t, the l en derha d no o bl i g at i o n t o c o nt i nue l e nd i ngg o o d mo ne y a ft e r b a d: The f act that com m i tte d funds und erthe l oan agr eem en t r emai ne d undi sb ur se d ha s no b ea r i ngo n the potenti al or actual l i en l oss es und er the ti tl e pol i cy unles s or unti l an actualo r i m pli ed duty ar i ses be twe enthe pa r ti es t o the t i tl e po l i cy to pr o vi de th e funds

. In B ank ers Trus t a nd Br own , this duty was i m pli edl y c re ate d by th e d i sburs em ent a gr eem ent. H ow ever, absen t a cont ractu al r elationsh ip an cil lary to the i ns ur an ce c o nt r ac t ati ss ue , the re w as no i m pli ed du ty bet w een these parti es that al l co m m i tte d l oan funds mustha ve b ee n e xpe nde d. Her e no s uc h a g r e e men te xi s t e d.N o. 11

- 3446 21

Ti c or s ee ks t o di s t i ngui s h M i d-So u th Ti tl e on the theory that 6 Indiana l aw prov ides greate r prote ct ion t o a cons tr ucti on lender than Tenness ee l aw . Thi s a rg um ent echoes the m is taken ar gum en t, di s c us s ed above , tha tT i c or ow ed no duty t o de fen d or i nd em nify here becaus e the W ilh el m counter cl aim w as d oo m ed on the m erits. 840 F. S up p. at52 8. Thi s ca se i s di stingui shabl e fro m Brown a nd B ank ers Trus t on e xactl y the sa m e g ro und s. 6 Ti c o r ’ s f i nal ar g ume nti s tha tthe “ c r e a t e d o r s uffe r e d” excl usi on a pp l i es because H om e F edera l i s s eek i ng to obt ai n an i nequit abl e windfa l l by first re fusi ng to p ay W ilh elm an d th en se ek in g t o re c ov er on t h e t itle i ns uranc e po l i cy . W e di sa g r ee . Home F ede r alha d no duty t o pa y W i l he l m di r ectly. Bo thc o m pan i es ha d c o ntracts w ith A ltr a bu t not w ith each other, and A ltra ha d de faulted on both

. H o m e Fed eral paid an ex tra prem i um f orthe m echan ic’s l i en endor sem ent, wh i ch speci fi cal l y insured ag ai nst “ att em pte d enf or cem ent o f an y [ m echa ni c’ s] l i en. . . ari si ngfr o m c o ns truct i o n c o ntracte d for an d /or com m en ced

. . . p rior to, at, or s ub s e q ue nt to the effecti ve date ofsa i d pol i cy, and any extensi on ofsa i d date. ” Th i s pro vi si on co ver ed not j ust the r i sk of an u nknow n pri or l i en (ag ain st w h ich all tit le insu ran ce p oli cies i ns ure ), bu t the ri sk t ha t a m ech an ic’s l i e n s e e k i ngs e ni o r i t y wo ul d be fi l e d a fterthe effecti ve date o fthe pol i cy, ev en if th e eff or t t o see k s eni or i ty w as a s ure l ose r. W i l hel m ’ s l i en was ofj ust thi s v ar i ety, filed for w or k p er for m ed aft er th e la te st u p d at e. If W i l hel m ha d e st ab l i sh ed pr i o r i tyo fi ts l i eno ve r the m ortgage, i t w ou ld h ave im p aired H om e Fed eral’s22 N o. 11

- 3446

se cur i tyi nt er es t i n th e m o r tg ag e an d r edu ce d the a m o unt o fi t s r ec ov er y fro m th e p ro c ee d s o f th e fo re c los u re sa le by $6 m i l l i on. H owever dim W i l hel m ’ s pro spects o f succes s, thatwas preci sel y wh at H om e F edera l had i nsured ag ai nst i n the m echani c’ s l i en endor sem ent. Ti cor denie d Hom e Feder al ’ s re quest f or a defe nse, sa ying, effec ti ve l y, “ H an dl e th i s y o ur se lf

— i t ’s a sla m d u n k.” H om e F e d e ra l d efe n d ed its p os itio n bu t e ve n tu ally ch o se t o s et tl e w ith W i l he l m r athe r tha n r i skpa y i ng f orl i ti gat i on a nd poss ibl y l osing pri or i ty ofi ts secur i ty i nter est
. Bear i ng tho se cos ts i s a r i sk ag ai nst which H om e F edera l had a lre ady i nsured thr ough i ts pol i cy w i th Ti corbypayi ng f orthe m echani c’ s l i en endor sem en t. A s w e se e th e ca se , Home F ede r alwas s ee k i ng on ly th e p ea c e o f m i n d it h ad p aid for, n ota w in d fall. T he di st r i ctc o ur t sh o ul d ha ve g r an te d Hom e F ede r al’s m oti on f orsum m ar y j ud gm ent a nd deni ed Tic or ’ s. H avi ng er ro neousl y abandoned its i nsured ag ai nst the W i l hel m co unterc lai m , Ti cori s o fco urse pre cl ud ed from arguing that i t w as u n d e r n o d ut y to i nd em nify H om e F edera l f orl iab il i ty i t incurr ed as a co nsequence o ftha t l i ti g at i o n. Se e F r a n k e n mu t h Mu t
. In s . C o . v . Wi l l i a ms , 6 9 0 N. E
. 2 d 6 7 5 , 6 7 8

- 7 9 ( I n d

. 1 9 9 7 )
. We mu s tr e ma n d the case f orfurtherpro c ee dings o n the i ssue ofdam age s, whi chHome F ede r al ’ s m oti o n f o r s um m ar y j udg m en t did nota d d re ss. A n i nsurerthatr efuses to defe nd i ts i nsured does so “a t i ts peri l,” and w here i t br eaches i ts duty to defen d, “a n i ns ur er i s o r di na r i l y bo und by th e r es ul t o fl i ti g at i o n t o whi chi ts ins ur ed i s a par ty, s o l o ng as the insurerhad n ot ice and the o pp or tuni ty to contr ol the pr oce edi ngs. ” StateFarm Fire & Ca s. Co . v . T .B . ex re l. B ruce, 76 2 N
. E.2 d 1227, 12 31 ( I nd

. 20 02) , quoting L iber tyN o. 11

- 3446 23 M ut. Ins. C o . v. M etzl er, 5 8 6 N. E. 2 d 897, 9 0 0 ( I nd

. App
. 1992 ). W he re the in s ure d elects to settle the th ird-p arty’s cl ai m , the s ettl em en t i s bindi ngo n the i ns ur ers o l o ng as the c l ai m was wi th i n the po l i cy ’ s co vera g e an d the set tl em ent w as r easonabl e a nd m ade i n go od f ai th. S ee M idwest ern Indem
. Co
. v. Laikin , 11 9 F
. S up p. 2d 83 1, 84 2 ( S
. D. Ind. 2 00 0) ( i nt er pr et i ngIndi an a l aw a s su ppo r ting ru le th at a “c onse nt j ud gm ent .
. . bi nd [ s] the i nsurer o n i ss ue s o fi ts i ns ur ed’ s l i ab i l i tya nd the ex te nto fthe inj u re d p ar tie s’ d am ag es , so lon g a s (1 ) th e c ov er ag e is ev en tu al l y s ho wn, a nd s o l o nga s th e co ns en t j udg m en t (2) is n ot th e pr od u c t of b ad fait h or c ollu sio n an d (3) fa lls so m ewhe r e wi th i n a b r o ad r an g e o fr ea so nabl e r es o l ut i o ns of t h e u n d er lyin g d isp u te ”); Cin ci nna t iIns
. C o. v. Young, 85 2 N
. E.2 d 8, 14 ( I nd

. A pp . 20 06) ( endo rsi ng Laikin ’ s a pp ro ac h ); see als o 7 C A p p lem an , Ins urance Law & Pr actic e § 4714 , at 531 (“A settlem en t m ad e by th e insu r ed of a p e n d in g a c tio n m u st be rea so n ab le; an d th e c ou rtw ill exam i ne the m er i ts ofthe cl ai m to deter m i ne thatq u estion.”).

III
. Concl us i on The j ud gm ent o fthe dist ri ct c ou rt i s R EVER S ED a nd R EMAND ED with instr ucti ons (a ) to ente r sum m ar y j ud gm ent fo r pla i nti ffH om e Federa l on the i ssue ofl i abi l i ty on i ts cl ai m that defe nd ant Tic or bre ached i ts du ty to d efe n d u n d er th e p olic y an d on d efe n d an t’s co u n te rc laim f ora decl ar ato ryj ud gm ent, and ( b) to co nd uct further pr o ce eding s co ns i st en t wi ththi s o pi ni o n.

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