In what appears to be a case of first impression construing a Mortgage Banker/Brokers Errors & Omission Insurance Policy, the United States District Court for the District of Arizona has held that an insured did not possess any insurable "owner interest" or "mortgagee interest" in property for which it had brokered a mortgage. 11333, Inc. v. Certain Underwriters Lloyd's, London, et al., 2007 WL 2556755 (D. Ariz. June 13, 2017). The Court reasoned that coverage was not available under the two esoteric types of mortgage errors and omissions insuring agreements at issue which provided coverage for certain losses resulting from an insured's negligent failure to obtain adequate "fire and extended coverage insurance" or "flood insurance" for a property in which it had an "owner interest" or "mortgagee interest," because the insured was never the lender, never owned the property, and never serviced a loan that had been sold into the secondary market.
The claim arose when on September 13, 2008, Hurricane Ike made landfall on the Bolivar Peninsula in Texas resulting in alleged wind, water and flood damages to a real estate subdivision development that had proceeded only to the construction of streets, underground utilities, and site preparation. At the time Hurricane Ike struck, the lender for the project, an investment vehicle created by the plaintiff, had foreclosed and taken ownership of the property due to the borrower's default on the loan. Coverage was sought by the insured entity which had originated the loan, serviced the loan, and serviced the property post-foreclosure.
The amended complaint in the coverage action alleged breach of contract and breach of the duty of good faith and fair dealing against Underwriters for denying coverage. The insuring agreements at issue consisted of an "Insurance Requirements Errors and Omissions" coverage part and a "Mortgagee Interest" coverage part. The "Mortgagee Interest" coverage part provides coverage for "Loss" to the Insured’s "mortgagee interest" or "owner interest" in real property provided that such loss is a direct result of an error or negligent omission on the part of the insured in failing to obtain or maintain certain specified types of insurance, including flood or fire and extended coverage insurance. Similarly, the "Insurance Requirements Errors and Omissions" coverage part provides coverage for the insured's failure to obtain or maintain such insurance, but only for a 90 day time frame. Both coverage parts at issues were first-party coverages, not third-party coverages.
Judge Neil V. Wake, Senior United States District Judge, held that the Plaintiff never held the requisite "mortgagee interest" or "owner interest" in the property because the subject loan was originally made by a third party lender and held by that lender until it foreclosed upon the loan and took ownership of the property. In so ruling, the Court rejected the notion that the undefined terms "owner interest" and "mortgagee interest" were ambiguous.
The "Mortgagee Interest" coverage part also afforded coverage for "Loss to an Investor’s interest in real property on whose behalf the Insured is servicing a mortgage." "Investor" was defined to include entities or individuals "purchasing Real Estate Loans sold or originated by the Insured." The Court held that no one held an "investor's interest" in the subject property because no one ever purchased the loan on the subject property at issue. In so holding, the Court rejected the argument that the plaintiff "sold" a loan to the lender when it received a fee for originating the loan.
As a result, Judge Wake found that Underwriters were not in breach of their insurance contract by denying coverage.
The Court also held that Underwriters did not breach the covenant of good faith and fair dealing. Notably, the Court struck the Plaintiff's proffered expert testimony on the issue of bad faith claims handling. Judge Wake acknowledged that the individual was qualified as an expert, but struck his opinions on bad faith because they suffered from fatal flaws in factual basis, methodology, and reliability. The Court rejected the expert's opinion that claims handling actions and decisions, none of which could individually support a bad faith claim, could constitute a breach of the implied covenant in the aggregate. The Court also specifically criticized the portion of the opinion contending that Underwriters' decision to hire outside monitoring counsel to protect their interests could provide any foundation for a bad faith claim.
The Court also granted a related motion for summary judgment brought by Underwriters' co-defendant, insurance broker HUB International. The Court held that the Plaintiff's request that HUB obtain the subject Mortgage Banker / Brokers Errors & Omissions Insurance Policy did not give rise to an obligation on the HUB's part to also "to ferret out and meet" the insured's other insurance needs. The Court also held that such claims were barred by the relevant two year Arizona statute of limitations.