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

Heading: The “Created or Suffered” Exclusion

Text: The only relevant exclusion, the parties agree, excludes from coverage claims “created, suffered, assumed or agreed to or by the Insured claimant.” Coverage exclusions are construed strictly against the insurer, and the insurer bears the burden of showing that an exclusion applies. See Hoosier Ins. Co. v. Audiology Found. of America, 745 N.E.2d 300, 309 (Ind. App. 2001). The “created or suffered” exclusion is a standard one in title insurance contracts, and it is apparently “[o]ne of the most litigated” clauses in the field. Palomar, Title Insurance Law § 6:10. From Ticor’s brief, we can discern three separate arguments in support of its assertion that the “created or suffered” exclusion applies. First, Ticor contends that Home Federal “created, suffered, assumed, or agreed to the Wilhelm Lien” because “Home Federal made the No. 11-3446 15 conscious decision not to distribute the remaining loan funds and chose not to pay Wilhelm.” Ticor Br. 21. Although Ticor has identified no factual evidence that Home Federal’s decision to withhold the final loan disbursement to its borrower (Altra) was the cause of Wilhelm’s claim (i.e., the reason it was not paid), we will assume that underlying fact for the sake of addressing Ticor’s legal argument, which we reject. At least one judicial decision supports Ticor’s assumption that but-for causation is sufficient to satisfy the “created or suffered” exclusion. See First American Title Ins. Co. v. Action Acquisitions, LLC, 187 P.3d 1107, 1113 (Ariz. 2008) (“we conclude that the exclusion . . . applies whenever the insured intended the act causing the defect, not only when the insured intended the defect or when the insured engaged in misconduct”). But the overwhelming weight of authority is to the contrary. As a number of federal courts have recognized, the “created or suffered” language is intended to protect the insurer from liability for matters caused by the insured’s own intentional misconduct, breach of duty, or otherwise inequitable dealings: The cases discussing the applicability of the ‘created or suffered’ exclusion generally have stated that the insurer can escape liability only if it is established that the defect, lien or encumbrance resulted from some intentional misconduct or inequitable dealings by the insured or the insured either expressly or impliedly assumed or agreed to the defects or encumbrances in the course of purchasing the property 16 No. 11-3446 involved. The courts have not permitted the insurer to avoid liability if the insured was innocent of any conduct causing the loss or was simply negligent in bringing about the loss. Brown v. St. Paul Title Ins. Co., 634 F.2d 1103, 1107-08 n.8 (8th Cir. 1980) (Missouri law); accord, Chicago Title Ins. Co. v. Resolution Trust Corp., 53 F.3d 899, 907 (8th Cir. 1995) (Minnesota law); American Title Ins. Co. v. East West Fin., 16 F.3d 449, 455 (1st Cir. 1994) (Rhode Island law); American Sav. & Loan Ass’n v. Lawyers Title Ins. Corp., 793 F.2d 780, 784-865(6th Cir. 1986) (Tennessee law); Fifth Third Mortg. Co. v. Chicago Title Ins. Co., 758 F. Supp. 2d 476, 484-85 (S.D. Ohio 2010) (Ohio law); Mid-South Title Ins. Corp. v. Resolution Trust Corp., 840 F. Supp. 522, 529-30 (W.D. Tenn. 1993) (Tennessee law). Neither this court nor any Indiana state court has defined the “created or suffered” exclusion, but the clear majority view among courts of other jurisdictions is that the exclusion applies only to intentional misconduct, breach of duty, or otherwise inequitable dealings by the insured. We predict that Indiana courts would adopt that view as well. Ticor has not argued that Wilhelm’s lien resulted from “deliberate, dishonest,” or “illegal” dealings by Home Federal. See Chicago Title Ins. Co., 53 F.3d at 907, quoting Joel E. Smith, Annotation, Title Insurance: Exclusion of Liability for Defects, Liens, or Encumbrances Created, Suffered, Assumed, or Agreed to by the Insured, 87 A.L.R.3d 515, 520 (1978). No evidence would support a finding that this decision was intentional misconduct. Ticor argues instead that Home Federal breached a duty to Ticor to distribute the entirety of the loan proceeds, No. 11-3446 17 citing two cases from the Eighth and Tenth Circuits, Brown v. St. Paul Title Ins. Corp., 634 F.2d 1103 (8th Cir. 1980), and Bankers Trust Co. v. Transamerica Title Ins. Co., 594 F.2d 231 (10th Cir. 1979). Both Brown and Bankers Trust reflect the understanding of the “created or suffered” exclusion we adopted above — that it is limited to situations in which the claim arises due to the intentional misconduct, breach of duty, or inequitable dealings by the insured. In each case, a bank financed a construction project with a loan secured by a first lien mortgage on the property. Each bank purchased title insurance, and each policy included both a mechanic’s lien endorsement and a “created or suffered” exclusion similar to the ones in this case. And in each case, the developer defaulted.5 After foreclosure proceedings were commenced, unpaid contractors filed mechanic’s liens against the properties. In Bankers Trust, the contractors prevailed, and the bank sought indemnification from its insurer, which refused on account of the “created or suffered” exclusion. For the same reason, the insurer in Brown denied defense to its insured, which ultimately settled with the contractors. Each bank sued on the title insurance policy, and each insurer prevailed on 5 In Bankers Trust, the default came before the final disbursement. 594 F.2d at 234. In Brown, the default came after the bank had disbursed the whole of its loan commitment, but the developer continued to work on the project after the default. 634 F.3d at 1105-06. Cost overruns, combined with a delay between the disbursement and the endorsement, resulted in the post-default work going uncompensated. Id. at 1107-08. 18 No. 11-3446 appeal. In Bankers Trust, the Tenth Circuit held: “Where, as here, work was performed and payment was not made up to the amount of the lender’s loan commit- ment, the resulting mechanics’ liens must be considered to have been created or suffered by the insured.” 594 F.2d at 234 (emphasis omitted). In Brown, the Eighth Circuit likewise held that the mechanic’s liens were “created or suffered by” the bank due to its “failure to furnish . . . the funds necessary to cover the improvements made.” 634 F.2d at 1110. Ticor contends that these cases are indistinguishable, and the district court granted summary judgment on the strength of their authority. That approach overlooks a factual difference that the Bankers Trust court called “critical,” and that the Brown court also relied upon: these cases involved breaches of a duty because the insured banks had each agreed to make adequate funds available to pay the developers and their contractors. The parties in Bankers Trust and Brown had negotiated “disbursement agreements” whereby the title insurers assumed responsibility for both (a) securing lien waivers from potential claimants and, more important, (b) actually disbursing the loan funds to the various contractors as construction progressed. Both circuit courts concluded that the disbursement agreements “clearly contemplated that adequate funds were to be made available to [the insurer] in order to satisfy claims.” Bankers Trust, 594 F.2d at 233; see Brown, 634 F.2d at 1110 (“the parties contemplated that [the bank] would provide adequate funds to pay for work completed prior to the No. 11-3446 19 default”). By requiring the insurers themselves to disburse funds, and to do so only after receiving lien waivers from contractors, the disbursement agreements presupposed an obligation on the part of the banks to make sufficient funds available. The disbursement agreements were “critical.” Bankers Trust, 594 F.2d at 232. In this case, there was no disbursement agreement, and it was Home Federal rather than Ticor that both secured lien waivers and disbursed the funds when due under the loan agreement. Unlike in Bankers Trust and Brown, nothing in the insurance policy or the course of dealings indicates that Home Federal was bound to disburse the entirety of its loan commitment to Altra even if Altra was in default. In both Bankers Trust and Brown, the bank, the title insurer, and the developer and its contractors were involved in one complex business relationship: the bank put up the loan, and the title insurer performed title searches, secured lien waivers, and released funds to the developer and contractors for construction already performed. Here, there were instead two bilateral contractual relationships — one between Home Federal and Altra, and another between Home Federal and Ticor. The title insurance policy provided: “At the time of each disbursement of the proceeds of the loan, title must be searched . . . for possible liens” filed up to “the date of such disbursement.” The policy did not require Ticor to perform a title search prior to any disbursement, as the disbursement agreements did in Bankers Trust and Brown. And it did not entrust the title insurer with the responsibility to disburse the funds. That 20 No. 11-3446 responsibility remained with Home Federal. In the absence of any indication from the insurance policy that Home Federal would continue funding the develop- ment after a default by its borrower (Altra), Home Federal owed no duty to Ticor to disburse the entire amount of the loan commitment to Altra to pay its contractors. Because of the Indiana statute giving strong priority to the construction lender’s mortgage, it should have taken little trouble or expense for Ticor to honor the promise of its mechanic’s lien endorsement by de- fending against the Wilhelm counterclaim. Our reasoning here tracks that of the court in Mid-South Title, which distinguished Bankers Trust and Brown on precisely this basis. Where the developer defaulted on the construction loan and there was no disbursement agreement, the lender had no obligation to continue lending good money after bad: The fact that committed funds under the loan agreement remained undisbursed has no bearing on the potential or actual lien losses under the title policy unless or until an actual or implied duty arises between the parties to the title policy to provide the funds. In Bankers Trust and Brown, this duty was impliedly created by the disbursement agreement. However, absent a contractual relationship ancillary to the insurance contract at issue, there was no implied duty between these parties that all committed loan funds must have been expended. Here no such agreement existed. No. 11-3446 21 840 F. Supp. at 528. This case is distinguishable from Brown and Bankers Trust on exactly the same grounds.6 Ticor’s final argument is that the “created or suffered” exclusion applies because Home Federal is seeking to obtain an inequitable windfall by first refusing to pay Wilhelm and then seeking to recover on the title insurance policy. We disagree. Home Federal had no duty to pay Wilhelm directly. Both companies had contracts with Altra but not with each other, and Altra had defaulted on both. Home Federal paid an extra premium for the mechanic’s lien endorsement, which specifically insured against “attempted enforcement of any [mechanic’s] lien . . . arising from construction contracted for and/or commenced . . . prior to, at, or subsequent to the effective date of said policy, and any extension of said date.” This provision covered not just the risk of an unknown prior lien (against which all title insurance policies insure), but the risk that a mechanic’s lien seeking seniority would be filed after the effective date of the policy, even if the effort to seek seniority was a sure loser. Wilhelm’s lien was of just this variety, filed for work performed after the latest update. If Wilhelm had established priority of its lien over the mortgage, it would have impaired Home Federal’s 6 Ticor seeks to distinguish Mid-South Title on the theory that Indiana law provides greater protection to a construction lender than Tennessee law. This argument echoes the mistaken argument, discussed above, that Ticor owed no duty to defend or indemnify here because the Wilhelm counterclaim was doomed on the merits. 22 No. 11-3446 security interest in the mortgage and reduced the amount of its recovery from the proceeds of the foreclosure sale by $6 million. However dim Wilhelm’s prospects of success, that was precisely what Home Federal had insured against in the mechanic’s lien endorsement. Ticor denied Home Federal’s request for a defense, saying, effectively, “Handle this yourself — it’s a slam dunk.” Home Federal defended its position but eventually chose to settle with Wilhelm rather than risk paying for litigation and possibly losing priority of its security interest. Bearing those costs is a risk against which Home Federal had already insured through its policy with Ticor by paying for the mechanic’s lien endorsement. As we see the case, Home Federal was seeking only the peace of mind it had paid for, not a windfall. The district court should have granted Home Federal’s motion for summary judgment and denied Ticor’s. Having erroneously abandoned its insured against the Wilhelm counterclaim, Ticor is of course precluded from arguing that it was under no duty to indemnify Home Federal for liability it incurred as a consequence of that litigation. See Frankenmuth Mut. Ins. Co. v. Williams, 690 N.E.2d 675, 678-79 (Ind. 1997). We must remand the case for further proceedings on the issue of damages, which Home Federal’s motion for summary judgment did not address. An insurer that refuses to defend its insured does so “at its peril,” and where it breaches its duty to defend, “an insurer is ordinarily bound by the result of litigation to which its insured is a party, so long as the insurer had notice and the opportunity to control the proceedings.” State Farm Fire & Cas. Co. v. T.B. ex rel. Bruce, 762 N.E.2d 1227, 1231 (Ind. 2002), quoting Liberty No. 11-3446 23 Mut. Ins. Co. v. Metzler, 586 N.E.2d 897, 900 (Ind. App. 1992). Where the insured elects to settle the third-party’s claim, the settlement is binding on the insurer so long as the claim was within the policy’s coverage and the settlement was reasonable and made in good faith. See Midwestern Indem. Co. v. Laikin, 119 F. Supp. 2d 831, 842 (S.D. Ind. 2000) (interpreting Indiana law as supporting rule that a “consent judgment . . . bind[s] the insurer on issues of its insured’s liability and the extent of the injured parties’ damages, so long as (1) the coverage is eventually shown, and so long as the consent judgment (2) is not the product of bad faith or collusion and (3) falls somewhere within a broad range of reasonable resolutions of the underlying dispute”); Cincinnati Ins. Co. v. Young, 852 N.E.2d 8, 14 (Ind. App. 2006) (endorsing Laikin’s approach); see also 7C Appleman, Insurance Law & Practice § 4714, at 531 (“A settlement made by the insured of a pending action must be reasonable; and the court will examine the merits of the claim to determine that question.”).