Opinion ID: 807961
Heading Depth: 2
Heading Rank: 1

Heading: Wilhelm Sought Priority or Parity

Text: The policy’s “Defense and Prosecution” clause required Ticor to “provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against by this policy.” Under the mechanic’s lien endorsement, one matter insured against was any litigation in which a third party claimed its mechanic’s lien had priority over or parity with Home Federal’s mortgage on the property: the Company Insures against loss or damage incurred by the insured by reason of the enforcement or at- tempted enforcement of any statutory lien for labor or material arising from construction contracted for and/or commenced on the land prior to, at, or subsequent to the effective date of said policy, and any extension of said date, as having priority over, or sharing on a parity with, the lien of the insured mortgage for that portion of the proceeds of the loan secured thereby . . . . (Emphases added.) Two things are important about this clause. First, it confirmed that Ticor must defend and indemnify Home Federal against enforcement or attempted enforcement of a claim asserting priority over or parity with the mortgage. Second, the covered claims were not limited to those that arose prior to the effective date of the policy, as extended by updated endorsements. Rather, the mechanic’s lien endorsement covered any claim “arising from construction contracted for and/or commenced on the land prior to, at, or subse10 No. 11-3446 quent to the effective date.” While the policy “insure[d] only to the extent of the amount actually disbursed,” that clause limited the “amount” of recovery, not the temporal scope of covered claims.4 4 Many title insurance policies insure only against mechanic’s liens arising before the endorsement date and for which labor or materials have already been furnished. See Joyce Palomar, Title Insurance Law § 9:9 (stating that American Land and Title Association (ALTA) Construction Loan Policy Endorsement A “does not insure the priority of the mortgage lien over mechanics’ liens resulting from work performed or materials supplied subsequent to the endorsement date”). So why would Ticor insure Home Federal against liens arising after the effective date of the latest update? The answer probably lies in Indiana construction law, which gives commercial construction mortgages priority over all later recorded mechanic’s liens. See Ind. Code § 32-28-3-5(d); see also Palomar, supra, § 9:9 & n.6 (“in states where statutes give the construction mortgage lien priority over all mechanics’ liens, regardless of whether the insured lender made all disbursements obligatory under the mortgage documents,” the standard endorsement covers any “loss or damage sustained by reason of lack of priority of the lien . . . over any statutory lien for services, labor or material heretofore or hereafter furnished”). This means that Ticor could safely insure Home Federal against any loss incurred due to the enforcement of a later-recorded mechanic’s lien because the risk of successful enforcement was close to zero. The risk of attempted enforcement of such a lien was not zero, however, for even a frivolous claim counts as an “attempt.” As we shall see, Ticor’s refusal to defend its insured against one such apparently futile (continued...) No. 11-3446 11 Wilhelm’s original counterclaim stated that Wilhelm was “entitled to enforce its mechanic’s lien claim . . . against the entire land . . . without impairment by mortgage foreclosure.” Dkt. 44-3 at 17, ¶ 10. That counterclaim was unambiguously within the scope of Ticor’s duty to defend, and Ticor quickly understood as much. A letter from Ticor’s claim counsel to an attorney for Home Federal said, based on the original counterclaim: “Wilhelm is seeking a judgment determining that its Lien is prior to and superior to the interest of the Agstar [i.e., Home Federal] Mortgage against the subject property.” Dkt. 44-3 at 32. Yet Ticor now contends on appeal that the Wilhelm counterclaim was not an “attempted enforcement” of a statutory lien asserting “priority over, or sharing on a parity with, the lien of the insured mortgage.” It offers two reasons, but both suffer from the same underlying mistake. (The district court did not base its decision on these arguments by Ticor.) First, Ticor asserts that “Wilhelm did not allege priority over the Mortgage” because it simply “mirrored the statute” that “provides a right of removal to a lien claimant within 90 days if the land is encumbered by a mortgage.” Ticor Br. 15, citing Ind. Code § 32-28-3-2. According to Ticor, this was the “wrong” statute, so “no defense was required.” Id. The undisputed facts show that this argu- (...continued) attempt was a breach of its duties under the mechanic’s lien endorsement. 12 No. 11-3446 ment is frivolous. The duty to defend depends on what the claimant alleges, not the ultimate merit or lack of merit of the claim. E.g., Terre Haute First Nat’l Bank v. Pac. Employers Ins. Co., 634 N.E.2d 1336, 1339 (Ind. App. 1993). The original counterclaim plainly asserted priority over the Home Federal mortgage. That is how Ticor understood it at the time. Even if there had been any ambiguity then, Wilhelm’s amended counterclaim was even more explicit, offering several theories for barring Home Federal from enforcing its mortgage with priority over Wilhelm’s mechanic’s lien. Dkt. 44-4 at 14-16. Second, Ticor argues, because the applicable Indiana statute gives priority to a commercial construction mortgage over all later-recorded mechanic’s liens, see Ind. Code § 32-28-3-5(d), “the Wilhelm Lien could not attain priority over or stand in parity with the Mortgage.” Ticor Br. 16. Ticor compliments Home Federal’s efforts in the state court foreclosure case, saying it “properly argued that the Wilhelm Lien was inferior to the Mortgage” in its motion for summary judgment against Wilhelm, correctly identifying the statutory authority and supporting case law. Id. In other words, Ticor argues that it had no duty to defend Home Federal from Wil- helm’s counterclaim because Wilhelm didn’t have a prayer of prevailing. Home Federal could take care of itself. That argument also runs flatly contrary to the most basic principle of an insurer’s duty to defend. Under the policy, Ticor had a duty to defend against any claim No. 11-3446 13 “attempt[ing]” to enforce a lien as having priority over or parity with the mortgage. Wilhelm’s counterclaim plainly did so, even if it might have been a sure loser. “It is the nature of the claim, not its merit, which establishes the insurer’s duty to defend.” Terre Haute First Nat’l Bank, 634 N.E.2d at 1339, quoting Trisler v. Indiana Ins. Co., 575 N.E.2d 1021, 1023 (Ind. App. 1991). An “insurance company has a contractual duty to defend unfounded, false and fraudulent suits based upon risks it has insured.” Davidson v. Cincinnati Ins. Co., 572 N.E.2d 502, 505 (Ind. App. 1991), citing Cincinnati Ins. Co. v. Mallon, 409 N.E.2d 1100, 1105 (Ind. App. 1980). Wilhelm’s counterclaim presented a risk that Home Federal’s policy specifically insured against — a statutory lien seeking priority over or parity with the mortgage. Wilhelm’s claim might have been weak, even hopeless, but that lack of merit could not absolve Ticor of its duty to defend against the attempted enforcement of a mechanic’s lien with priority over the mortgage. Ticor tries to avoid these principles by quoting Mallon, where the Indiana Court of Appeals wrote: “when the underlying factual basis of the complaint, even if proved true, would not result in liability under the insurance policy, the insurance company can properly refuse to defend.” 409 N.E.2d at 1105, citing 7C J. A. Appleman, Insurance Law and Practice § 4683, at 50 (W. F. Berdal ed., 1979). Mallon is perfectly consistent with the principles we rely on above. As noted, the Mallon court stated the general point that the duty to defend applies to “unfounded, false or fraudulent suits based upon risks it has insured.” Id. The Mallon court based 14 No. 11-3446 its decision, however, not on the merits of the underlying claim but on policy exclusions that would have applied even if the underlying claim had been valid. Id. The court did not suggest that an insurer is entitled to ignore the relief the claimant actually seeks against its insured and to refuse to defend on the theory that the claimant cannot possibly prevail as a matter of law. Wilhelm’s counterclaim sought to enforce a lien as having priority over or parity with Home Federal’s insured interest in the plant’s mortgage. Unless a coverage exclusion applied, Ticor breached its duty to defend under the policy.