The Massachusetts Supreme Judicial Court has held that a title insurer has no duty to defend a bank against a third-party suit challenging the validity of the underlying debt, absent a specific provision in the title insurance policy envisioning such a claim. Deutsche Bank National Association v. First American Title Insurance Company, 465 Mass. 741 (2013).
Deutsche Bank alleged that First American, the title insurer for the mortgage on the property at issue in the action against Deutsche Bank, was required to defend it in a suit brought by the borrower. The borrower's suit challenged the validity of the underlying note and sought rescission of the loan as the result of an allegedly predatory lending scheme. Deutsche Bank urged the Court to determine First American's duty to defend pursuant to the broad standard for determining the duty for general liability insurers. The SJC rejected Deutsche Bank's argument, relying on its recent decision in GMAC Mortgage, LLC v. First American Title Insurance Company, 464 Mass. 733 (2013). In GMAC Mortgage, the SJC held that the "in for one, in for all" rule requiring general liability insurers to defend an entire action where its policy potentially covers any claim asserted against its insured.
The Court noted the "unique purpose of title insurance," to insure the policyholder against title defects, not to guarantee the underlying note. "Here, the pertinent provision of the title insurance policy provides coverage against...[t]he invalidity or unenforceability of the lien of the insured mortgage upon the title." Deutsche Bank, 465 Mass. at 748. Because the borrower's allegations challenged the underlying note and debt, rather than an improper execution or recording of the mortgage lien, First American had no duty to defend Deutsche Bank against the borrower's claims.
The Court noted that success by the borrower would effectively dissolve the mortgage interest, as the debt secured by the mortgage would disappear. Deutsche Bank or its predecessors in interest, however, were in the best position to ensure that the underlying debt was valid. It would be unreasonable to expect a title insurer to insure a debt where the title insurer had limited knowledge and the lender had exclusive control.
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