Opinion ID: 11670
Heading Depth: 2
Heading Rank: 3

Heading: Interpretation of the Rider

Text: 16 The FDIC interprets the Rider as covering an insured's losses from a transaction related to the transfer of mortgages when any person is induced by fraud to sign any document related to the transfer. The FDIC asserts that the Rider is ambiguous and therefore the district court was required to accept the insured's reasonable interpretation. 17 The FDIC presents a chain of arguments that, if correct, would establish the ambiguity of the Rider and the reasonableness of its interpretation. First, the Rider covers assignments of mortgages. The FDIC contends that swap documents, the Sales Agreements and Sales Certificates, executed by USAT and Couch and pertaining to the transfer of mortgages, are assignments of mortgages under the Rider. Second, the FDIC argues that under the Rider, an assignment becomes defective, and hence covered, when the signature of any person on that assignment is obtained by fraud. Under the FDIC's interpretation, because USAT's signature on the swap documents was fraudulently induced by Couch's assurances that the underlying mortgages were secured by first liens, those documents are defective under the terms of the Rider. Under this reading of the Rider's language, the swap documents are within the Rider's scope of coverage and are defective; therefore, the Rider should cover USAT's losses resulting from Couch's fraudulent swaps. 18 The FDIC is correct in asserting that we must accept an insured's reasonable interpretation of an ambiguous insurance contract. However, we find the Rider to be unambiguous as applied to the present facts. While the FDIC's arguments are appealing in a sense, they are logically unsound. 19 By its plain language, the Rider requires five elements before its coverage applies: (1) the insured must have acted in good faith and in course of business, (2) the insured must have suffered a loss, (3) the loss must have been caused by the insured's reliance on a real property mortgage or certain specified instruments relating to mortgages, (4) the mortgage or instrument must be defective, and (5) the defect must be caused by a signature on that mortgage or instrument being obtained by fraud. See Jefferson Bank v. Progressive Casualty Ins. Co., Civ. A. No. 90-584, 1990 WL 180585, at  5 (E.D.Pa. Nov.19, 1990) (interpreting the Rider as requiring elements two through five), aff'd, 965 F.2d 1274 (3d Cir.1992). 20 Setting aside any consideration of the first four elements, the fifth element is clearly lacking in this case. Contrary to the FDIC's arguments, a covered instrument does not automatically become defective under the Rider merely by containing a signature that was obtained fraudulently. The mortgages USAT obtained in the swap transactions may have been defective, in the sense that they were worthless or had little value to USAT. However, this defect was not caused by USAT's signature being obtained through fraud. USAT's signature, whether fraudulently obtained or not, had no effect on the value of the assignments or the underlying mortgages from USAT's perspective. USAT, at its own option, could have enforced its rights against Couch under the agreements or rescinded the transactions. Therefore, the fact that USAT's signature was obtained fraudulently did not cause any defect. 21 Other courts interpreting similar provisions in blanket bonds have come to the same conclusion. In Reliance Ins. Co. v. Capital Bancshares, Inc., 685 F.Supp. 148 (N.D.Tex.1988), aff'd, 912 F.2d 756 (5th Cir.1990), the court was required to interpret Insuring Agreement (E) to the Bond. That provision provides coverage for losses caused by a bank's reliance on certain instruments, including mortgages and stock certificates, that prove to be defective for certain specified reasons, such as forged signatures thereon. In that case, the bank accepted stock certificates as collateral for a loan. The stock certificates proved to be worthless, as the debtor owned no stock in the corporation and the certificates themselves contained forged signatures of corporation officers. The court found that even though the certificates were worthless and contained forged signatures, the banks losses were not caused by the forged signatures. Id. at 151-52. For [e]ven if the signatures had been genuine, the bogus stock certificates would not have been and the banks would still have suffered losses identical to those they now face. Id.; see also Liberty Nat'l Bank v. Aetna Life & Cas. Co., 568 F.Supp. 860, 863 (D.N.J.1983)(finding that Insurance Agreement (E) did not cover losses stemming from a bank's reliance on certificates of deposit that contained forged signatures when the bank's losses were actually caused by the lack of underlying assets to support the certificates). 22 As the FDIC makes no argument that the mortgages' values were somehow impaired by the fact that USAT's signatures on the swap documents were obtained by fraud, we need not indulge in an esoteric analysis of causation. Suffice it to say that when an insurance policy only covers losses caused by specific events, no coverage exists if those losses are caused by an uncovered or excluded event. See Warrilow v. Norrell, 791 S.W.2d 515, 527-28 (Tex.App.--Corpus Christi 1989, writ denied)(discussing distinctions of causation requirements between property insurance contracts and liability insurance contracts). If there is any ambiguity in this Rider, it does not exist in relation to the question of whether the Rider provides coverage for defective mortgages when the defect is caused by something other than a signature being obtained by fraud. Unequivocally, the Rider does not provide coverage for such a loss. 23 Firemen's urges this court to go further in interpreting the Rider. It urges that we interpret the Rider to cover only instruments that are unenforceable and then only when the instrument is unenforceable due to a signature being obtained by fraud in the factum rather than fraud in the inducement. 1 While such an interpretation would render the same result as our decision today, we decline to answer these questions categorically, as such a holding is unnecessary to resolution of this appeal. Accordingly, we express no opinion as to the differing effects of fraud in the factum and fraud in the inducement on the Rider's coverage. Additionally, we express no opinion as to whether a covered instrument must be unenforceable before the Rider's coverage will apply. 24 We simply hold that an instrument is only defective under the Rider if that defect results from a signature being obtained through trick, artifice, fraud, or false pretenses. When the fact that the signature is fraudulently obtained has no impact on the instrument's value to the insured, as in the present case, the Rider does not provide coverage. 25 AFFIRMED.