## F I L E D United States Court of Appeals Tenth Circuit 

### SEP 5 2002 

### PATRICK FISHER Clerk PUBLISH
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

MIDLAND MORTGAGE COMPANY, Plaintiff - Appellee, Nos. 00-6286 01-6179

v. UNITED STATES FIDELITY AND GUARANTY COMPANY, Defendant - Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF OKLAHOMA

(DC. No. 99-CV-589-T)
John B. Hayes (Robert L. Magrini and Evan B. Gatewo od on the briefs), Hayes & Magrini, Oklahoma City, Oklahoma, for Defendant-App ellant. John N. Hermes (John D. Stiner with him on the brie fs), McAfee & Taft, a Professional Corporation, Oklahoma City, Oklahoma, for Plaintiff-Appellee.

Before EBEL , McKAY , and BRISCOE , Circuit Judges.

McKAY , Circuit Judge.-2-

Appellee Midland Mortgage holds and services mortga ge loans. To protect its interests as a mortgage holder, Midland verifie s whether the property owner has secured insurance to protect the property from loss. Insurance providers notify Midland when a policy expires or is cancelle d. Midland then notifies the property owner that the owner is required to secure insurance. If the owner fails to secure the required insurance, Midland obtains apolicy on the owners’ behalf through an insurance carrier under contract with Mi dland. In the industry, this is called “forceplacing” insurance. Forceplaced insurance is more expensive than typica l insurance and provides narrower coverage. The primary purpose of the forceplaced policy is to protect the mortgage holder, not the property owner . Midland collects the premiums for the forceplaced insurance as part of the mortgage payment. If the property owner secures a replacement policy or can prove that coverage has remained in force uninterrupted, Midland refunds any premium collected to the property owner. Midland serviced Eliza Kirkland’s mortgage loan. A llstate erroneously notified Ms. Kirkland’s previous mortgage holder th at it had terminated her coverage. After an extensive delay, this erroneous information was forwarded to Midland. Typically upon receiving notice of the expiration o r cancellation of an-3-

insurance policy, Midland sends two notices to the property owner informing the owner of the need to secure insurance. These notic es indicate that the failure to voluntarily obtain insurance will result in Midlandforceplacing insurance. In the interim, Midland secures a temporary binder of cove rage through its contract provider. Because of the misinformation provided in Allstate’ s notice to Ms. Kirkland’s previous mortgage holder and that holder ’s extensive delay in forwarding the notice to Midland, Midland and its c ontract carrier were under the mistaken impression that Ms. Kirkland’s home had be en uninsured for several months. Midland’s contract carrier refused to issu e a binder but agreed to provide a policy on Ms. Kirkland’s home. Believing the hom e to be uninsured, Midland secured the policy and notified Ms. Kirkland that i t had obtained insurance coverage without sending out the two notices it typ ically sends notifying the property holder of a need to find insurance coverag e. Upon receipt of the notice, Ms. Kirkland contacted Midland and requested that Midland contact her Allstate agent. Midland c omplied. Allstate erroneously “confirmed” that it had terminated coverage under M s. Kirkland’s policy several months prior. Eventually, it was discovered that A llstate’s policy had been in force the entire time. Midland refunded all premiu ms to Ms. Kirkland. Ms. Kirkland, on behalf of a class, brought a lawsu it against Midland and-4-

its contract insurance provider claiming that they had conspired to unnecessarily forceplace insurance. Upon receipt of the Kirklandlitigation, Midland requested that United States Fidelity and Guaranty Company (U SF&G) provide a defense to the litigation pursuant to the Mortgage Holders Err ors and Omissions Policy USF&G had issued to Midland. USF&G refused to defe nd Midland in the Kirkland litigation. Midland moved for summary judgment against USF&G cl aiming that USF&G’s policy potentially provided coverage for Ms . Kirkland’s claim against Midland. The district court granted Midland’s summ ary judgment motion and ordered USF&G to defend Midland in the Kirkland lit igation. The district court also awarded Midland its attorney fees because Midl and was the prevailing party. USF&G appeals to this court arguing that it should not be required to defend the Kirkland litigation and that it should not be oblig ated to pay Midland’s attorney fees because Midland would no longer be the prevail ing party if we resolve the appeal in USF&G’s favor. “We review the district c ourt’s grant of summary judgment de novo, applying the same legal standard used by the district court.” Simms v. Oklahoma ex rel. Dept. of Mental Health & Substance Abuse Servs. , 165 F.3d 1321, 1326 (10th Cir. 1999). Sitting in d iversity, we apply Oklahoma law as if this case had been brought in Oklahoma st ate court. Habermehl v.
Potter , 153 F.3d 1137, 1139 (10th Cir. 1998) (“[U]nless there is a direct conflict-5-

between a federal rule and state law, the state law applies in diversity actions.”). At issue is the scope of Coverage C of USF&G’s poli cy. Coverage C provides: We will pay those sums that you become legally obli gated to pay as damages due to error or accidental omission in the operation of your customary procedure in processing and maintaining “ valid insurance” against the Covered Causes of Loss for the benefit of the mortgagor, in amounts, and under conditions, customarily accep ted by the mortgagor. The damages payable under this Coverage Form must arise out of your capacity as a mortgage holder, mortgage fiduci ary or mortgage servicing agency. Aplt. App. at 42. Typically, this policy provision applies when, thro ugh an error or accidental omission, a mortgage holder’s employee fails to sec ure insurance and the underlying property is damaged or destroyed by a pe ril that would have been covered had the mortgage holder forceplaced coverag e. Thus, the mortgage holder’s policy typically protects the mortgage hol der from the consequences of its own mistakes by paying for losses that the unde rlying insurance policy would have paid if in force. In this manner, the mortgag e holder’s interest in the underlying property is maintained. However, the is sue in this case is not whether Midland’s claim is typical, but whether Coverage C potentially provides coverage for the Kirkland litigation. USF&G’s duty to defend Midland pursuant to its poli cy is broader than its-6-

duty to indemnify. First Bank of Turley v. Fidelity & Deposit Ins. Co. of Md. , 928 P.2d 298, 303 (Okla. 1996). “An insurer has a duty to defend an insured whenever it ascertains the presence of facts that g ive rise to the potential of liabilityunder the policy. Id. at 303 (emphasis in original). Any doubts are resolved in favor of the insured. See Maryland Cas. Co. v. Willsey , 380 P.2d 254, 258 (Okla. 1963). USF&G maintains that the policy only provides cover age in the event that, through an error or omission, Midland fails to forc eplace coverage on a building and that building is subsequently damaged by a peri l that would have been covered by the insurance Midland failed to secure. The policy language USF&G employed, however, permits a broader interpretation . The plain language of the policy does not unambiguously limit coverage to fai lures to process or maintain insurance. Instead, the policy purports to cover any damages caused by an error or omission in processing or maintaining insurance “in amounts, and under conditions[] customarily accepted by the mortgagor. ” Aplt. App. at 42. While there are no prior cases interpreting the sam e USF&G policy provision at issue here, our research reveals that a simple alteration in Coverage C would unambiguously provide coverage only in instan ces where Midland had failed to forceplace insurance. For instance, the inclusion of a phrase such as “if, by reason of such error or accidental omission, req uisite insurance is not in force-7-

at the time of the loss,” would unambiguously limitcoverage to situations where the mortgage holder has failed to forceplace insura nce. American Fin. Corp. v. Fireman’s Fund Ins. Co. , 239 N.E.2d 33, 34 (Ohio 1968); see also Home Fed. Savings & Loan Ass’n of Chicago v. Republic Ins. Co

. , 405 F.2d 18, 20 (7th Cir. 1968) (interpreting policy including language if “r equisite insurance is not in force at the time of loss”). Furthermore, we find persuasive Midland’s argument that procuring too much insurance could potentially trigger coverage u nder the USF&G policy. Customarily, mortgagors require insurance in an amo unt equal to the value of the property insured. In the present case, Ms. Kirklan d’s home had two insurance policies in force at the same time, due in part to Midland’s mistaken belief that Ms. Kirkland’s property was not covered by the Alls tate policy. By forceplacing insurance, Ms. Kirkland’s property was now insured in an amount well in excess of the property’s value. Mortgagors and insurance companies do not customarily permit property owners to secure coverage in excess of the property’s value because this would provide the property owner with an incentive to destroy the property. At best, USF&G can prove that its coverage is ambig uous. Accordingly, we interpret any potential ambiguity against the dr after (USF&G) and hold that USF&G’s policy potentially provides coverage for th e Kirkland litigation. See-8-

Pitchford v. Electrical Workers’ Ben. Ass’n , 113 P.2d 591, 593 (Okla. 1941). We affirm the district court’s grant of Midland’s summ ary judgment motion which requires USF&G to provide a defense to Midland in the Kirkland litigation. Because we affirm the district court’s order, Midland remains the prevailing party and is entitled to its attorney fees as previously ordered.
AFFIRMED

.