By Thomas K. Hanekamp, Esq. and Kathryn A. Formeller, Esq. of Tressler LLP
An errors and omissions policy’s prior knowledge and lien waiver exclusions applied to preclude coverage for claims for indemnification against a land title company arising out of several lawsuits in connection with faulty title commitments. Lexington Ins. Co. v. Integrity Land Title Co., Inc., et al., No. 12-1599, 2013 U.S. App. LEXIS 15621 (8th Cir. July 31, 2013) (applying Missouri law).
From January 2007 through August 2008, Integrity Land Title Company (Integrity) issued defective title commitments and title insurance policies for properties in residential developments. When issuing the title commitments, Integrity also sold title insurance policies underwritten by Fidelity National Financial, Inc. (Fidelity), and failed to include exclusions from coverage for later-filed mechanics liens. While serving as disbursing agent, Integrity released funds to subcontractors without obtaining lien waivers.
An unpaid subcontractor filed a lawsuit in March 2008 against 81 defendants, including Integrity. During that same month, Integrity received and forwarded to Fidelity at least 15 lien claims from homeowners who purchased property in the residential development. Integrity’s president was quoted in the news opining that title insurance should cover most of the liens and described the situation involving the unpaid subcontractors as a "debacle."
The same president, nevertheless, testified in his deposition that he did not believe Integrity was likely to face liability regarding the development properties. In applying for the E&O policy in April 2008, the Integrity president denied that Integrity had knowledge of an "act, error or omission which might give rise to a claim(s) under the proposed policy." The application also warned that if such knowledge existed, any claim arising out of or related to such acts, errors or omissions would be excluded from coverage. Similarly, the policy’s Prior Knowledge Exclusion precluded coverage for any Claim arising out of any prior alleged act, error or omission "likely to give rise to a Claim."
Fidelity ultimately paid substantial amounts to defend and settle claims with property owners due to the title defects. In February 2009, Fidelity sought indemnification from Integrity.
Integrity’s E&O policy, issued by Lexington Insurance Company (Lexington), was in effect from April 15, 2008, through July 15, 2009. Integrity sought coverage for Fidelity’s demand for indemnification. Lexington denied coverage and argued, among other things, that Integrity was aware of the Claims and/or Related Claims prior to the policy’s inception date.
Lexington filed suit against Integrity seeking a declaratory judgment that it owed no coverage to Integrity for Fidelity’s indemnification demands. Fidelity successfully moved to intervene in the coverage action. The District Court granted summary judgment in favor of Lexington finding, among other things, that the policy’s prior knowledge exclusion and lien waiver exclusion precluded coverage. The Eighth Circuit affirmed the District Court’s ruling on those bases.
Fidelity argued to the Eighth Circuit that Integrity’s knowledge prior to the inception of the policy did not show that an indemnification claim by Fidelity was "likely," as Fidelity’s own liability on its title insurance policies had not been fully established. The court rejected Fidelity’s argument, opining that if it were to adopt Fidelity’s position, "the prior-knowledge exclusion would exclude only coverage for ripened claims that had already been made or were certain to be made as of the time of policy inception." The court noted Integrity’s president had stated publicly that title insurance (Fidelity’s) would cover most lien claims. He therefore knew claims would be made against Fidelity because of Integrity’s failure to obtain waivers. Accordingly, the court held that the prior knowledge exclusions barred coverage for Fidelity’s indemnification claim against Integrity.
Lastly, the court noted that the lien waiver exclusion barred coverage for "any claim arising out of any release of funds without receipt of . . . appropriate waivers or releases of liens from any contractor, subcontractor, or materials or service provider[.]" Fidelity argued that Lexington was estopped from asserting the lien waiver exclusion because Lexington did not assert this exclusion as a basis for denying coverage when Integrity tendered Fidelity’s indemnification demands to Lexington. The court disagreed with Fidelity’s estoppel argument, observing that, under Missouri law, estoppel applies only where an insurer raised inconsistent defenses thereby causing prejudice to the insured. The court found that the lien waiver exclusion was not inconsistent with the prior knowledge exclusion, and that Fidelity failed to demonstrate that it was in any way prejudiced. Fidelity also argued that the lien waiver exclusion did not apply because Fidelity’s indemnification claims were not caused by Integrity’s failure to secure lien failures. The court again disagreed with Fidelity’s argument and instead found that the indemnification claims were claims "arising out of any release of funds without receipt of … appropriate waivers or releases of liens."
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