The SJC recently issued two decisions clarifying the narrow scope of title insurance in Massachusetts.
In GMAC Mortgage, LLC v. First American Title Insurance Company, 464 Mass. 733 (2013), the SJC considered whether, under Massachusetts law: (a) a title insurer must defend an entire action against an insured where its policy potentially covers any one claim, and (b) a title insurer initiating litigation to cure a title defect covered by the title policy has a duty to defend the insured against all reasonably foreseeable counterclaims. The SJC noted that title policies cover relatively discrete issues, and title insurance company attorneys specialize in real property law and can only feasibly defend title-related issues. In addition, the SJC reasoned that a suit to cure a title defect is an option available to a title insurer under its contract with the insured, and the title insurer should not be penalized by having to assume a broad duty to defend to exercise its rights under the contract. The SJC held that a title insurer has no duty to defend the insured on the unrelated claims in the lawsuit—the duty to defend exists only on covered claims. In other words, the “in for one, in for all” general liability insurance defense rule does not apply in the context of title insurance. Moreover, a title insurer does not have to defend its insured against all reasonably foreseeable counterclaims, except possibly compulsory counterclaims.
Shortly after its decision in GMAC Mortgage, LLC, in Deutsche Bank National Association v. First American Title Insurance Company, SJC-11265, July 11, 2013, the SJC considered the issue of whether a title insurer has the same broad duty to defend as a general liability insurer if allegations of a third-party complaint brought against a lender can be reasonably interpreted as stating a claim covered by the terms of the title policy. At issue was a borrower seeking to rescind her residential mortgage on the grounds that it was procured through a predatory lending scheme. Noting that title insurance is “unique” and “fundamentally different” from general liability insurance, the SJC concluded that a title insurer does not have the same broad duty to defend as a general liability insurer. Basing its reasoning in part on the GMAC Mortgage, LLC case, the SJC stated that, if a complaint is substantively concerned with the loan underlying a title insurance policy, such as whether the loan was properly procured, and not whether the mortgage was improperly executed, improperly recorded, or the like, its claims do not relate to a defect in title and are not specifically envisioned by the terms of the title insurance policy. The SJC concluded by saying that, therefore, the allegations of the residential borrower’s complaint fell outside the scope of the lender’s policy of title insurance.
These cases underscore the importance of both owners and lenders informing themselves of the limited scope of protection they receive when they purchase a title insurance policy in Massachusetts.