In Lexington Insurance Co. v. Integrity Land Title Co., the Eighth Circuit Court of Appeals enforced two exclusions, rejecting arguments in favor of coverage as unreasonable and too narrow. Notably, the court rejected these arguments to the detriment of an intervenor claiming benefits under a policy issued to another party, even though the basis of enforcing these exclusions was the policyholder’s knowledge and failure, not the intervenor’s.

Lexington Insurance Co. issued an E&O policy to a title company that issued title commitments, disbursed construction funds, and – on behalf of a title insurer – sold title insurance policies. After the title company tendered an indemnification claim made upon it by the title insurer, the E&O insurer sued for a declaration that it owed the title company no coverage. The title insurer intervened. The district court awarded summary judgment to the E&O insurer, and the title insurer appealed. Applying both the Prior-Knowledge exclusion and the Lien-Waiver exclusion, the Eighth Circuit affirmed.

The Eighth Circuit ruled that the policy’s Prior-Knowledge exclusion barred coverage for the title insurer’s indemnification claim against the title company. This exclusion applies to any claim arising out of “circumstances likely to give rise to a Claim that an Insured had knowledge of prior to the effective date of this policy.” Before the E&O policy became effective, a subcontractor unpaid for its work on certain properties claimed a lien on their titles and thus sued the title company, claiming priority over the deeds of trust the title company held. The title company then told homeowners that the subcontractor’s claims on their title should be covered by their title insurance and forwarded to the title insurer phone calls from homeowners and the lien claims they received. The title insurer defended the homeowners and paid the lien claimants.

The title insurer argued that its indemnification claim was not “likely” prior to the policy’s effective date because by then the title insurer’s liability under the title insurance was not established. The court noted that the exclusion did not require a claim to be ripe in order to be “likely,” hence the Eighth Circuit rejected this argument as “unreasonable.”

Further, the Eighth Circuit ruled that the Lien-Waiver exclusion barred coverage too. This exclusion applies to any claim “arising out of any release of funds without receipt of . . . appropriate waivers or releases of liens from any . . . subcontractor.” The title insurer argued that its claim was caused by the contractor’s failure to pay its subcontractor, not by the title company’s failure to secure lien waivers. The Eighth Circuit rejected this argument as a “too narrow” understanding of the exclusion’s causation requirement: The title insurer’s damages were also caused by the title company’s failure to obtain lien waivers before disbursing funds. Therefore, the title insurer’s claim “ar[ose] out of” this failure.

The opinion in Lexington Insurance Co. v. Integrity Land Title Co., No. 12-1599 (8th Cir. July 31, 2013) may be found here.