- Hovannisian v. First American Title Ins. Co. (5th Dist. Ct. App. 2017) ___ Cal. App. 5th ___, 2017 DJDAR 7809, Case No. F072789
- November 7, 2017
In August 2006, Wells Fargo's predecessor made a loan secured by a deed of trust ("the Wells Fargo DOT") against certain property in Fresno. The Wells Fargo DOT stated that it was a first deed of trust. First American issued a lender's title insurance policy to Wells Fargo. In January 2012, the Hovannisians purchased the property at a foreclosure sale by Wells Fargo. The notice of sale stated that the property was to be sold without warranty "as to title, use, possession or encumbrances..." The deed issued to the Hovannisians stated that the conveyance was without warranty. In April 2012, the Hovannisians learned that Duane and Margaret Long had a first lien on the property. The Longs demanded payment on the note secured by the property through a deed of trust ("the Long DOT").
In May 2012, the Hovannisians informed First American that they were demanding that Wells Fargo pay the Longs so any cloud on the title could be resolved. First American responded in July 2012, stating that there was nothing it could do as the Hovannisians were not insureds under the title policy and that any claim would have to be directed at Wells Fargo. First American also noted that, in any event, there were no deed warranties provided in connection with the foreclosure. In October 2012, Wells Fargo tendered the Hovannisians' claim against it to First American. First American denied the claim noting that it did not appear the Hovannisians had a valid claim and Wells Fargo had no continuing coverage under the policy as it no longer had any interest in the property. The Hovannisians filed suit against Wells Fargo alleging intentional and negligent misrepresentation. Wells Fargo tendered the action to First American, which denied coverage on the ground that there was no continuing coverage after the sale and the causes of action were for tortious conduct not covered under the policy.
Wells Fargo retendered the defense arguing that there was continuing coverage because the Wells Fargo DOT expressly warranted that it was a first lien on the property. In addition, Wells Fargo argued that, if there was any negligence, it was on the part of First American for not properly investigating the title. Finally, Wells Fargo argued that, while First American could reserve rights on the issue of whether Wells Fargo had intentionally committed fraud, it could not deny a defense on this ground and must defend the negligent misrepresentation claim. First American again denied coverage on the ground that coverage terminated because Wells Fargo sold the property without any warranties. Wells Fargo assigned its claims against First American to the Hovannisians who then filed suit against First American for breach of contract and bad faith. First American successfully moved for summary judgment. The Hovannisians appealed.
APPELLATE COURT'S RULING
The Court of Appeal first addressed the language of the First American policy. The policy provided under "Conditions and Stipulations" and "Continuation of Insurance" that coverage under the policy would continue "only so long as the Insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money Mortgage given by the purchaser from the Insured, or only so long as the Insured shall have liability by reason of covenants of warranty made by the Insured in any transfer or conveyance of the estate or interest." The appellate court found that this language showed that the parties' intent was to limit coverage from the effective date of the policy until the insured conveyed away its interest, unless the insured provided warranties to the purchaser. Absent such warranties, the risk of a defective title would become the new owner's problem. The court found that when Wells Fargo conveyed the property to the Hovannisians, the Long DOT was attached. However, Wells Fargo did not warrant that the property was free of liens and in fact sold the property expressly with no warranty. Had Wells Fargo acceded to the Hovannisians' demands, it would have been doing more than it promised and incurred expenses not covered by the policy.
The Hovannisians argued that, even if coverage terminated, there was still a covered loss during the policy by virtue of Wells Fargo's failure to disclose the Long DOT. However, the appellate court disagreed, noting that there is no obligation under a title policy where there is no loss. In the present case, Wells Fargo never made a claim for a loss suffered by virtue of an undisclosed senior lien. Since the Long DOT posed no threat to Wells Fargo's title as it no longer had an interest in the property after the foreclosure, the Hovannisians could not state a covered claim. The Hovannisians further argued that Wells Fargo failed to meet its burden on summary judgment to prove it owed no duty to defend as it failed to show that it did not receive any information triggering a duty to defend. The appellate court disagreed again, noting that First American demonstrated that the Hovannisians did not learn about the Long DOT until after purchase of the property without warranty. Thus, the only potential claim was for misrepresentations for which there was no liability or loss under the policy. Since there was no breach of contract, there was also no claim for bad faith. Therefore, the judgment of the trial court was affirmed.
EFFECTS OF THE COURT'S RULING
This case establishes that coverage under a title insurance policy will not continue once the insured has conveyed its interest in the property to another unless the property is conveyed with a warranty as to title. Furthermore, the mere fact that the deed of trust states that it is a "first deed of trust" is not enough to create a covered claim under a title policy if the deed also states that the property is being conveyed without warranty.