In a precedential opinion issued on September 10, 2018, the United States Court of Appeals for the Third Circuit reversed the District Court and held that, under Pennsylvania law, an insurer’s duty to defend turned on allegations within the four corners of the complaint, and a title insurer is only bound to defend claims in the complaint that it specifically covered. See Lupu v. Loan City, LLC, et. al., v. Stewart Title Guaranty Company, 2018 WL 4290048 (3d Cir. Sep. 10, 2018). This opinion is significant in the Third Circuit’s application of Pennsylvania law to hold that title insurance companies are only required to defend covered claims, a departure from the law involving other general liability insurance companies that held as to the duty to defend in Pennsylvania, “in for one, in for all.”
This case involves a residential property owned by Adrian Lupu (“Lupu”), who refinanced his home loan and mortgage with Loan City, LLC (“Loan City”). The loan and mortgage then were transferred multiple times before eventually being transferred to the current holder, Ocwen Loan Servicing, LLC (“Ocwen”). Stewart Title Guaranty Company (“Stewart”) provided title insurance on the loan. After defaulting, Lupu sued to void the instruments evidencing his debt. Lupu initially challenged, among other things, the use of the MERS System to transfer mortgages. Lupu repeatedly amended his claims and, after filing the Third Amended Complaint, Lupu made accusations in his answers to interrogatories that Loan City created, notarized and recorded forged mortgage documents, and that the original mortgage was never recorded. In the Fourth Amended Complaint, Lupu made an express reference to this allegation of forgery. The District Court ultimately dismissed his action, and no appeal was filed.
After Lupu made his forgery allegations in his interrogatory answers, Ocwen sought coverage from Stewart under the title policy. Stewart denied, stating that the complaint itself did not raise any covered claims. Ocwen then filed a third-party complaint against Stewart seeking coverage. After Lupu filed the Fourth Amended Complaint in which he expressly made forgery allegations, Stewart agreed to defend the forgery claim, but no others. Ocwen continued its action against Stewart seeking coverage on all claims.
After cross-motions for summary judgment, the District Court applied the “four corners” rule and held that Stewart had no duty to defend claims in the Third Amended Complaint, but had a duty to defend the forgery allegations in the Fourth Amended Complaint as covered by the title policy. The District Court further held that the “in for one, in for all” rule applied by Pennsylvania courts in insurance cases required Stewart to defend against all claims in the Fourth Amended Complaint because at least one claim was covered by the title policy. This appeal followed.
On appeal, the Third Circuit affirmed in part and reversed in part, holding that, while the “four corners” rule still applied, the “in for one, in for all" rule did not apply for title insurance policies. As to the “four corners” rule, the Third Circuit reasoned that, based on common law precedent as well as efficiency and policy, the question of whether a claim against an insured is potentially covered is best answered by comparing the four corners for the insurance contract to the four corners of the complaint. The Third Circuit also noted and affirmed that, unlike other states, the Pennsylvania court system has no exception to the four corners rule where the insurer knows or should know the allegations in the complaint conflict with the facts. Accordingly, the Third Circuit held Stewart’s duty to defend did not arise until after the forgery allegations were pled in the Fourth Amended Complaint.
More significantly, the Third Circuit also held that title insurance companies are not required to defend claims that their policies do not cover, and that the “in for one, in for all” rule does not apply to title insurance cases. This is a ground-breaking departure from the rule for general liability insurance since, the Third Circuit reasoned, title insurance is more narrow than general liability insurance and is backward-looking. While the Pennsylvania Supreme Court has not created a title-policy exception to the “in for one, in for all” rule yet, the Third Circuit predicts that it will be based on state law, court decisions, and policy. Thus, the matter was remanded to the District Court to determine which claims are within the scope of the title policy.