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. Gatewood on the briefs), Hayes &

Magrini, Oklahoma City, Oklahoma, for Defendant-Appellant.

John N. Hermes (John D. Stiner with him on the briefs), 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 mortgage loans. To protect

its interests as a mortgage holder, Midland verifies whether the property owner

has secured insurance to protect the property from loss. Insurance providers

notify Midland when a policy expires or is cancelled. 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 a policy on the owners’ behalf

through an insurance carrier under contract with Midland. In the industry, this is

called “forceplacing” insurance.

Forceplaced insurance is more expensive than typical 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. Allstate erroneously

notified Ms. Kirkland’s previous mortgage holder that it had terminated her 

coverage. After an extensive delay, this erroneous information was forwarded to

Midland.

Typically upon receiving notice of the expiration or cancellation of an
-3-

insurance policy, Midland sends two notices to the property owner informing the

owner of the need to secure insurance. These notices indicate that the failure to

voluntarily obtain insurance will result in Midland forceplacing insurance. In the

interim, Midland secures a temporary binder of coverage 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 contract carrier were under the

mistaken impression that Ms. Kirkland’s home had been uninsured for several

months. Midland’s contract carrier refused to issue a binder but agreed to provide

a policy on Ms. Kirkland’s home. Believing the home to be uninsured, Midland

secured the policy and notified Ms. Kirkland that it had obtained insurance

coverage without sending out the two notices it typically sends notifying the

property holder of a need to find insurance coverage. 

Upon receipt of the notice, Ms. Kirkland contacted Midland and requested

that Midland contact her Allstate agent. Midland complied. Allstate erroneously

“confirmed” that it had terminated coverage under Ms. Kirkland’s policy several

months prior. Eventually, it was discovered that Allstate’s policy had been in

force the entire time. Midland refunded all premiums to Ms. Kirkland.

Ms. Kirkland, on behalf of a class, brought a lawsuit against Midland and
-4-

its contract insurance provider claiming that they had conspired to unnecessarily

forceplace insurance. Upon receipt of the Kirkland litigation, Midland requested

that United States Fidelity and Guaranty Company (USF&G) provide a defense to

the litigation pursuant to the Mortgage Holders Errors and Omissions Policy

USF&G had issued to Midland. USF&G refused to defend Midland in the

Kirkland litigation.

Midland moved for summary judgment against USF&G claiming that

USF&G’s policy potentially provided coverage for Ms. Kirkland’s claim against

Midland. The district court granted Midland’s summary judgment motion and

ordered USF&G to defend Midland in the Kirkland litigation. The district court

also awarded Midland its attorney fees because Midland 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 obligated to pay Midland’s attorney

fees because Midland would no longer be the prevailing party if we resolve the

appeal in USF&G’s favor. “We review the district court’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 diversity, we apply Oklahoma

law as if this case had been brought in Oklahoma state 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 policy. Coverage C

provides:

We will pay those sums that you become legally obligated 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 accepted by the

mortgagor.

The damages payable under this Coverage Form must arise out of

your capacity as a mortgage holder, mortgage fiduciary or mortgage

servicing agency.

Aplt. App. at 42.

Typically, this policy provision applies when, through an error or accidental

omission, a mortgage holder’s employee fails to secure insurance and the

underlying property is damaged or destroyed by a peril that would have been

covered had the mortgage holder forceplaced coverage. Thus, the mortgage

holder’s policy typically protects the mortgage holder from the consequences of

its own mistakes by paying for losses that the underlying insurance policy would

have paid if in force. In this manner, the mortgage holder’s interest in the

underlying property is maintained. However, the issue 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 policy 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 give rise to the potential of

liability under 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 coverage in the event that,

through an error or omission, Midland fails to forceplace coverage on a building

and that building is subsequently damaged by a peril 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 failures 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 same USF&G policy

provision at issue here, our research reveals that a simple alteration in Coverage C

would unambiguously provide coverage only in instances 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, requisite insurance is not in force
-7-

at the time of the loss,” would unambiguously limit coverage to situations where

the mortgage holder has failed to forceplace insurance. 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 “requisite 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 under the USF&G policy. 

Customarily, mortgagors require insurance in an amount equal to the value of the

property insured. In the present case, Ms. Kirkland’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 Allstate 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 ambiguous. Accordingly,

we interpret any potential ambiguity against the drafter (USF&G) and hold that

USF&G’s policy potentially provides coverage for the 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 summary 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.