First American Title Insurance Co v. Johnson Bank ( 2016 )


Menu:
  •                               IN THE
    SUPREME COURT OF THE STATE OF ARIZONA
    FIRST AMERICAN TITLE INSURANCE COMPANY,
    A CALIFORNIA CORPORATION,
    Plaintiff/Appellee,
    v.
    JOHNSON BANK, A WISCONSIN BANK REGISTERED IN ARIZONA,
    Defendant/Appellant.
    No. CV-15-0244-PR
    Filed June 13, 2016
    AMENDED BY ORDER FILED AUGUST 19, 2016
    Appeal from the Superior Court in Maricopa County
    The Honorable Robert H. Oberbillig, Judge
    No. CV2013-003634
    REVERSED AND REMANDED
    Opinion of the Court of Appeals, Division One
    
    237 Ariz. 490
    , 
    353 P.3d 370
    (App. 2015)
    VACATED
    COUNSEL:
    Mark A. Nadeau, Courtney G. Saleski, (argued), DLA Piper LLP (US),
    Phoenix, Attorneys for First American Title Insurance Company
    William G. Ridenour, Timothy Berg (argued), Janice Procter-Murphy,
    Fennemore Craig, P.C., Phoenix, Attorneys for Johnson Bank
    Dennis I. Wilenchik, Tyler Q. Swensen, Wilenchik & Bartness, P.C.,
    Phoenix, Attorneys for Amici Curiae Equity Income Partners LP and
    Galileo Capital Partners, Ltd.
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    Ari Ramras, Ramras Legal, PLC, Phoenix, Attorney for Amicus Curiae
    Land Title Association of Arizona
    VICE CHIEF JUSTICE PELANDER authored the opinion of the Court, in
    which JUSTICES BRUTINEL and BOLICK, and JUDGE ECKERSTROM *
    joined, and CHIEF JUSTICE BALES dissented.
    VICE CHIEF JUSTICE PELANDER, opinion of the Court:
    ¶1             This case presents the question of how to calculate damages
    under a lender’s title insurance policy that failed to disclose encumbrances
    substantially affecting the value of the property and thwarting its intended
    use. Because the policy itself does not specify a valuation date, we are asked
    to determine the appropriate date from which to measure the insured
    lender’s loss. We hold that when an undisclosed title defect prevents the
    known, intended use of the property and causes the borrower to default on
    the loan, the lender’s diminution-in-value loss should be calculated as of
    the date the title policy was issued rather than as of the date of foreclosure.
    Because the record does not establish that the title defect caused the
    borrowers’ default and the ensuing foreclosure, we remand for further
    proceedings on that issue.
    I.
    ¶2              In 2005 and 2006, First American Title Insurance Company
    issued two title insurance policies to Johnson Bank for two properties that
    secured the bank’s loans in the total amount of $2,050,000. The policies
    failed to list certain covenants, conditions, and restrictions (“CC&R’s”) that
    allegedly prohibited commercial development on either parcel. The
    property owners defaulted on their loan obligations to Johnson Bank,
    allegedly because they had intended to develop the properties and were
    prevented from doing so by the CC&R’s. Based on the undisclosed
    *
    Justice Ann A. Scott Timmer has recused herself from this case.
    Pursuant to article 6, section 3 of the Arizona Constitution, the Honorable
    Peter Eckerstrom, Chief Judge of the Arizona Court of Appeals, Division
    Two, was designated to sit in this matter.
    2
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    CC&R’s, the owners successfully sued First American to recover damages
    under their owners’ title insurance policies.
    ¶3            In 2010, the properties were sold at a trustee’s sale. Johnson
    Bank purchased the two parcels with a credit bid of $102,000. In 2011,
    Johnson Bank notified First American of claims under its lender’s title
    insurance policies, asserting that the CC&R’s prevented both properties
    from being developed for commercial purposes, and that the CC&R’s were
    not listed exceptions to coverage under the policies.
    ¶4            The parties agreed to arbitrate the damage claims but could
    not agree on the date for calculating the alleged diminution in value of the
    subject parcels. Johnson Bank argued that the date of the loans should be
    used to calculate damages. First American argued that damages should be
    based on the value of the properties at the time of foreclosure, after the real
    estate market had precipitously declined.
    ¶5            Both parties sought declaratory relief in superior court. On
    the parties’ cross-motions for summary judgment, the court granted
    judgment in favor of First American, ruling that the parcels should be
    valued as of the foreclosure date.
    ¶6             The court of appeals reversed, holding that “in the absence of
    a specified date of comparative valuation identified in the policies, . . . the
    date to measure any diminution in property value is the date of the loan.”
    First Am. Title Ins. Co. v. Johnson Bank, 
    237 Ariz. 490
    , 494 ¶ 18, 
    353 P.3d 370
    ,
    374 (App. 2015). The court reasoned that because First American failed to
    discover and timely disclose the CC&R’s, the policy was breached when the
    loans were made. 
    Id. at ¶
    17. Accordingly, the court remanded the case for
    entry of judgment in favor of Johnson Bank on the valuation-date issue. 
    Id. at ¶
    18.
    ¶7           We granted review because the case presents an issue of first
    impression in Arizona and of statewide importance. We have jurisdiction
    under article 6, section 5(3) of the Arizona Constitution and A.R.S.
    § 12-120.24.
    II.
    3
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    ¶8            We review a summary judgment de novo, viewing the facts
    in the light most favorable to the party against whom judgment was
    entered. See Ariz. R. Civ. P. 56(a); BMO Harris Bank, N.A. v. Wildwood Creek
    Ranch, LLC, 
    236 Ariz. 363
    , 365 ¶ 7, 
    340 P.3d 1071
    , 1073 (2015). “We review
    de novo the interpretation of insurance contracts,” First Am. Title Ins. Co. v.
    Action Acquisitions, LLC, 
    218 Ariz. 394
    , 397 ¶ 8, 
    187 P.3d 1107
    , 1110 (2008),
    and construe provisions in such contracts according to their plain and
    ordinary meaning. Sparks v. Republic Nat. Life Ins. Co., 
    132 Ariz. 529
    , 534,
    
    647 P.2d 1127
    , 1132 (1982). We also interpret contracts so as to fulfill the
    parties’ intent. Taylor v. State Farm Mut. Auto. Ins. Co., 
    175 Ariz. 148
    , 152,
    
    854 P.2d 1134
    , 1138 (1993).
    A.
    ¶9            The title insurance policies at issue here are standard form
    American Land Title Association (“ALTA”) loan policies. The amounts
    insured corresponded to the total amount of Johnson Bank’s loans
    ($2,050,000). Subject to various exclusions, exceptions, and conditions, the
    policies insure “against loss or damage . . . sustained or incurred by the
    Insured by reason of . . . [a]ny defect in or lien or encumbrance on the title.”
    The policies do not define the term “loss or damage,” but require the
    insured claimant to timely notify the insurer and provide proof of any
    claimed loss or damage, including the basis of the claim and the “basis of
    calculating the amount of the loss or damage.”
    ¶10          The policies do not specify the date to be used in calculating
    loss or damage. In pertinent part, the policies provide:
    7. DETERMINATION AND EXTENT OF LIABILITY
    This policy is a contract of indemnity against actual monetary
    loss or damage sustained or incurred by the insured claimant
    who has suffered loss or damage by reason of matters insured
    against by this policy and only to the extent herein described.
    (a)   The liability of the Company under this policy shall not
    exceed the least of:
    ...
    4
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    (iii) the difference between the value of the insured estate
    or interest as insured and the value of the insured estate or
    interest subject to the defect, lien or encumbrance insured
    against this policy.
    ¶11           Both parties argue that this policy language is unambiguous
    and supports their respective view. Johnson Bank asserts that the phrase
    “as insured” in § 7(a)(iii) refers to “when the property is to be valued” and
    means that, for damage-calculation purposes, “the property should be
    valued as of the date that the insurance policy issued.”
    ¶12            First American counters that the phrase “as insured,” used
    throughout the policy, refers only to how the property interest is insured,
    i.e., the policy’s conditions and exceptions. The policy is not ambiguous,
    First American argues, merely because it does not specify a date for
    calculating the loss. See First Tenn. Bank, Nat. Ass’n v. Lawyers Title Ins. Corp.,
    
    282 F.R.D. 423
    , 427 (N.D. Ill. 2012) (stating that the absence of explicit text
    establishing a valuation date “does not necessarily mean that the provision
    is ambiguous”). According to First American, the policy implicitly
    establishes the date of foreclosure as the applicable valuation date because
    the policy indemnifies a loss from an undisclosed title defect only after the
    lender forecloses on the property, and thus the insured lender incurs no loss
    until then.
    ¶13            The court of appeals found the policy language in § 7(a)(iii)
    ambiguous because it does not identify “the date the loss is to be
    calculated.” First Am. 
    Title, 237 Ariz. at 493
    12, 353 P.3d at 373
    . Under the
    facts of this particular case, we agree. Because the relevant provision is
    reasonably susceptible to differing interpretations, and because no other
    evidence establishes any particular meaning mutually intended by the
    contracting parties, the policy’s language alone does not resolve the
    valuation-date issue before us today. See State Farm Mut. Auto. Ins. Co. v.
    Wilson, 
    162 Ariz. 251
    , 258, 
    782 P.2d 727
    , 734 (1989) (stating that ambiguity
    exists when a policy “presents conflicting reasonable interpretations”); cf.
    
    Taylor, 175 Ariz. at 153
    –54, 854 P.2d at 1139–40 (discussing ambiguity
    determinations, parol evidence rule, and court’s “primary objective—to
    enforce the contract as intended by the parties”).
    5
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    ¶14             First American nonetheless argues that because the lender
    must foreclose on the property to incur and claim a loss, the date of
    foreclosure is the only reasonable valuation date. See, e.g., Marble Bank v.
    Commonwealth Land Title Ins. Co., 
    914 F. Supp. 1252
    , 1254 (E.D.N.C. 1996)
    (“In the court’s view, [the insured lender] did not suffer a loss until it
    foreclosed on the project. Since a lender suffers loss only if the note is not
    repaid, the discovery of an insured-against lien does not trigger recognition
    of that loss.”). First American’s argument, however, conflates two concepts.
    Although the insured lender’s exact loss might not be calculable until
    foreclosure occurs, that calculation can be made using the property’s value,
    with and without the defect, as of the policy date to determine the actual
    loss on the date of foreclosure.
    ¶15             In addition, the policy contains several contractual
    prerequisites that do not directly bear on damage valuation. For instance,
    the lender must submit a written claim and proof of loss to the title
    company after discovering a title defect, and the title insurance company
    must decide whether it will exercise its rights under the policy to remove
    or cure the title defect instead of paying money damages. Such policy
    prerequisites, however, do not dictate the valuation date. Cf. Swanson v.
    Safeco Title Ins. Co., 
    186 Ariz. 637
    , 641–42, 
    925 P.2d 1354
    , 1358–59 (App. 1995)
    (concluding that the damage-valuation date under an owner’s title
    insurance policy was the date the title defect was discovered).
    ¶16            We recognize that other courts have found the same or similar
    policy clause (ALTA Loan Policy § 7(a)(iii)) unambiguous in circumstances
    different from those presented here. See, e.g., First Am. Bank v. First Am.
    Transp. Title Ins. Co., 
    759 F.3d 427
    , 430–33 (5th Cir. 2014) (noting that the title
    defect was a maritime improvement lien); Associated Bank, N.A. v. Stewart
    Title Guar. Co., 
    881 F. Supp. 2d 1058
    , 1062–63 (D. Minn. 2012) (noting that
    the title defect was an undisclosed senior lien); First Tenn. 
    Bank, 282 F.R.D. at 427
    (same); Marble 
    Bank, 914 F. Supp. at 1254
    (same). Unlike this case,
    those cases involved undisclosed senior liens in which courts found that the
    policy unambiguously requires using the date of foreclosure as the
    valuation date.
    ¶17          When the title defect is an undisclosed lien, the foreclosure
    date might well be the appropriate valuation date because the lender’s
    damage results from not having priority in the foreclosure proceeds. See
    First Tenn. 
    Bank, 282 F.R.D. at 427
    ; see generally Christopher B. Frantze,
    6
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    Equity Income Partners LP v. Chicago Title Insurance Co. and Recovery Under A
    Lender’s Title Insurance Policy in A Falling Real Estate Market, 48 Real Prop.
    Tr. & Est. L.J. 391, 392 (2013) (surveying cases). But to the extent the
    foregoing cases suggest that, regardless of circumstances, lenders’ title
    insurance policies like that at issue here clearly establish the date of
    foreclosure as the only damage-valuation date because the existence and
    extent of any loss is unknown before then, we find them unpersuasive.
    ¶18           In any event, the title defect in this case is not an undisclosed
    lien, but is instead undisclosed CC&R’s that allegedly prevented the
    borrowers/owners from developing the property, which in turn allegedly
    caused them to default on their loans. The policy does not clearly identify
    the appropriate valuation date for calculating the lender’s loss in these
    circumstances, and thus the court of appeals did not err in finding the
    policy ambiguous on that issue. See Leo Eisenberg & Co., Inc. v. Payson, 
    162 Ariz. 529
    , 532, 
    785 P.2d 49
    , 52 (1989) (noting that a contract is ambiguous
    when it “can be reasonably construed in more than one manner”).
    B.
    ¶19           “If a clause appears ambiguous, we interpret it by looking to
    legislative goals, social policy, and the transaction as a whole. If an
    ambiguity remains after considering these factors, we construe it against
    the insurer.” Action 
    Acquisitions, 218 Ariz. at 397
    8, 187 P.3d at 1110
    (citation omitted).
    1.
    ¶20            Turning first to any pertinent legislative goals, like the court
    of appeals, we find “no statute or other binding legal precedent in Arizona
    that determines the starting date of comparative valuation of property for
    calculating covered losses under a lender’s title insurance policy.” First Am.
    
    Title, 237 Ariz. at 492
    10, 353 P.3d at 372
    . Under the relevant statute,
    “[t]itle insurance” means:
    insuring, guaranteeing or indemnifying owners of real
    property or others interested therein against loss or damage
    suffered by reason of liens, encumbrances upon, defects in or
    the unmarketability of the title to such property,
    guaranteeing, warranting or otherwise insuring the
    7
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    correctness of searches relating to the title to real property, or
    doing any business in substance equivalent to any of the
    foregoing.
    A.R.S. § 20-1562(8); see also § 20-1562(11) (“‘Title insurance policy’ means a
    written statement or contract by means of which title insurance liability is
    accepted.”). A title “commitment” is defined as:
    [A] report that is furnished in connection with an application
    for title insurance and that offers to issue a title insurance
    policy subject to the stated exceptions set forth in the report
    or incorporated by reference. The reports are not abstracts of
    title and the rights, duties and responsibilities relating to the
    preparation and issuance of an abstract of title do not apply
    to the issuance of a report. The report is not a representation
    as to the condition of title to real property but does constitute
    a statement of the terms and conditions on which the issuer is
    willing to issue its title insurance policy if the offer is
    accepted.
    A.R.S. § 20-1562(5).
    ¶21           Under this statutory scheme, a party cannot reasonably rely
    on a title commitment as a representation on the condition of title to the
    property. Cf. Centennial Dev. Grp., LLC v. Lawyer’s Title Ins. Corp., 
    233 Ariz. 147
    , 149–50 ¶¶ 8–9, 
    310 P.3d 23
    , 25–26 (App. 2013) (stating that § 20-1562
    “effectively bar[s] a common-law claim against an insurer whose title
    commitment fails to identify a cloud on title,” and that a title commitment
    issued in connection with the title company’s policy “was not a
    representation of the condition of the title to the property” and could not
    support a negligent misrepresentation claim). A party desiring to rely on a
    representation on the quality of title must obtain an abstract of title. See
    A.R.S. § 20-1562(1) (defining “abstract of title” as “a written representation
    that is provided pursuant to a written or oral contract that is intended to be
    relied on by the person who has contracted for the receipt of the
    representation”).
    ¶22           First American asserts that the court of appeals erred by
    establishing the date of the loans as the valuation date because only title
    commitments had been issued when Johnson Bank made the loans, and the
    8
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    bank could not have reasonably relied on title commitments as a
    representation of the title. But Johnson Bank’s claim is not based on any
    alleged misrepresentation, title commitment, or abstract of title; nor is the
    bank seeking or entitled to reliance damages. Rather, Johnson Bank has
    alleged only a breach of the title insurance policy, a contract claim for which
    proof of reliance is not required. See Graham v. Asbury, 
    112 Ariz. 184
    , 185,
    
    540 P.2d 656
    , 657 (1975) (identifying the elements of a breach-of-contract
    claim as: (1) the existence of a contract; (2) breach; and (3) resulting
    damages). In short, no identifiable legislative goals affect or resolve the
    issue before us.
    2.
    ¶23           We next consider any pertinent social policies and the parties’
    transaction as a whole. See Action 
    Acquisitions, 218 Ariz. at 397
    8, 187 P.3d at 1110
    . Because these topics implicate overlapping considerations, we
    consider them together.
    ¶24             In this case, social policies and fundamental aspects of the
    parties’ transaction support using the date of the policy as the valuation
    date. The insurer has complete control of the title defects against which it
    insures; it is in the best position to avoid such risks and prevent resulting
    loss by conducting thorough and accurate title searches. Here, First
    American’s deficient title search resulted in its failure to discover and
    disclose the adverse CC&R’s that had been recorded against the property
    in 1985. That encumbrance prevented the borrowers/owners’ intended use
    of the property and consequently deprived Johnson Bank of the benefit of
    not only its bargain with the borrowers to whom it loaned substantial sums,
    but also its bargain with First American.
    ¶25             Significantly, the insurance premium First American charged
    was based on the amount insured, which was the same amount as Johnson
    Bank’s loans and corresponding security interest in the properties. And,
    under its policies, First American agreed to pay up to that amount for any
    “loss or damage . . . sustained or incurred by [Johnson Bank] by reason
    of . . . [a]ny defect in or lien or encumbrance on the title.” Using the
    foreclosure date as the damage-valuation date would allow the insurer to
    profit from a depreciating market even when the title defect caused the
    borrower to default. See Barlow Burke, Law of Title Insurance § 7.04 (3d ed.
    Aspen Publishers 2004) (noting that if an insurer collects a premium based
    9
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    on the loan’s face amount and then, when title fails in a falling market,
    argues the decrease resulted from market conditions and thus “seeks to pay
    less than the amount of the insurance purchased and the loss of capital sunk
    in the purchase price,” “the insurer is in a ‘tails I win, heads you lose’
    position”).
    ¶26            In addition, by using the date of the policies as the valuation
    date in circumstances such as these, a title insurance company can
    accurately evaluate if it should exercise its rights under the policy to cure
    the title defect or pay money damages. Finally, using the foreclosure date
    when the title defect caused the borrower to default would unfairly allow
    the title company to avoid the insured’s actual, resulting consequential
    damages. 
    Id. (“The choice
    of a date for measuring damages should not
    provide the insurer with an opportunity to shield its eyes from the insured’s
    actual, economic, and consequential losses.”).
    ¶27            In evaluating relevant social policy and the transaction as a
    whole, we also must consider the assessment and allocation of risk under
    circumstances which, as here, include a downturn in the real estate market.
    First American argues that the court of appeals improperly allocated the
    risks of a declining market and a borrower’s default. Under the policies,
    First American did not expressly agree to indemnify or otherwise insure
    against the risk of a drop in the real estate market. But the policies also do
    not exclude coverage for loss resulting partly from such risk, nor do we
    hold that a title company, as a general commercial matter, bears that risk.
    ¶28            When an undisclosed, material title defect completely
    frustrates the borrowers/owners’ intended use of the property and directly
    causes their default and the subsequent foreclosure, an insured lender’s
    recoverable damages may include loss resulting from a declining real estate
    market. We acknowledge that, for purposes of § 7(a)(iii) of the policy,
    measuring the difference in value at the time of policy issuance for a loss
    that does not occur until foreclosure in a down market may effectively shift
    to the title insurer part of the loss attributable to the market downturn
    (which could occur irrespective of any title defect or error in the title
    search). Under these particular circumstances, however, that consequence
    offends neither the policy language nor the relevant, identified social
    policies. As a leading treatise has explained, reasons that support using the
    policy date to measure the lender’s loss in a falling market include: “the
    purpose of the policy from the standpoint of the insured is future
    10
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    indemnification;” and “the policy date is consistent with fully
    compensating the insured for his or her ‘actual losses’ under the policy.”
    
    Id. ¶29 Banks,
    of course, are in the business of assessing the risk that
    their loans will not be repaid, including the risk of market declines. But that
    risk assessment occurs when banks enter into a loan contract, not when a
    default and foreclosure occur sometime later. Likewise, although a lender
    bears some inherent risk of a possible market downturn, the value of the
    lender’s security interest — again, taken at the time a loan is made — is the
    lender’s hedge against that risk. Moreover, and importantly, owners are
    less likely to default on the loan, even in a declining market, if their property
    can be developed as contemplated. This too is a consideration for lenders
    at the time a loan is made. Thus, in determining damages caused by First
    American’s incomplete title search under the facts presented here, social
    policy does not preclude using the date the policies were issued as the
    valuation date.
    ¶30             Finally, the lack of a specific valuation date in title insurance
    policies allows a case-by-case approach to value the insured’s loss. Joyce
    Palomar, 1 Title Ins. Law § 10:16 (2015 ed.) (“Because ALTA policies have
    not specified the date the value of the property is to be assessed to measure
    an insured’s loss, courts need to determine the insured’s actual loss in the
    particular circumstances.”). If the foreclosure date were the universal
    valuation date to be used regardless of circumstances, then courts and the
    parties could not evaluate the insured’s actual loss in a particular case. And
    if title insurers desire to avoid all uncertainty by establishing the foreclosure
    date or specifying some other damage-valuation measure to uniformly
    apply in all situations, they can modify their policies accordingly. In sum,
    neither social policy nor the transaction as a whole militates against using
    the date of policy issuance as the date for measuring damages under
    § 7(a)(iii).
    ¶31             Contrary to First American’s assertion, this reasoning and
    conclusion do not convert its indemnification policy into a mortgage
    insurance policy or a guarantee of title. “Title insurance does not guarantee
    perfect title; instead, it pays damages, if any, caused by any defects to title
    that the title company should have discovered but did not.” 
    Swanson, 186 Ariz. at 641
    , 925 P.2d at 1358; see Falmouth Nat. Bank v. Ticor Title Ins. Co.,
    
    920 F.2d 1058
    , 1063 (1st Cir. 1990) (“[W]hat is insured is the loss resulting
    11
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    from a defect in the security.”). Consequently, the mere existence of a title
    defect is not a breach. See In re W. Feliciana Acquisition, L.L.C., 
    744 F.3d 352
    ,
    359 (5th Cir. 2014).
    ¶32            Indisputably, First American’s policy only agrees to
    indemnify against actual monetary loss or damage; it is not “guarantee of
    title.” See First Am. 
    Bank, 759 F.3d at 433
    (noting that title insurance does
    not “guarantee either that the mortgaged premises are worth the amount of
    the mortgage or that the mortgage debt will be paid”) (internal citation
    omitted); Guarantee of Title, Black’s Law Dictionary (10th ed. 2014) (“A
    warranty that the title to a piece of real property is vested in a particular
    person, given by a title company or abstract company, and based on a title
    searcher’s opinion of the status of the property’s title.”).
    ¶33              Using the date of the policy does not convert the
    indemnification policy into a guarantee of title. First, the insurer will be
    liable only if the loss results due to a discoverable defect or encumbrance
    on the title. 
    Swanson, 186 Ariz. at 641
    , 925 P.2d at 1358. Absent such a defect
    in title, there would be no insured loss. Second, under the policy, the lender
    must demonstrate an actual loss. See generally Eric M. Larsson, 46 Causes
    of Action 2d 605, §§ 3–4 (originally published in 2010) (discussing the
    differences between a claim under a title insurance policy and related
    causes of actions). Third, the title insurance policy applies only if a title
    defect caused the insured’s loss. Cf. Feliciana 
    Acquisition, 744 F.3d at 359
    (noting that the title defect must cause the loss). As Johnson Bank
    acknowledges, “the insurer would have no liability if the borrower
    defaulted because of personal circumstances wholly unrelated to a defect
    in title or if the real estate market fell resulting in a default by the borrower
    when there was no defect in title.” Using the date of policy issuance as the
    valuation date under the circumstances here does not change the nature or
    scope of the policy’s coverage.
    3.
    ¶34            In support of its holding, the court of appeals relied largely
    on Equity Income Partners v. Chicago Title Insurance Co., 
    2012 WL 3871505
    (D.
    Ariz. Sept. 6, 2012), an unpublished federal district court decision, which in
    turn embraced the reasoning of Citicorp Savings of Illinois v. Stewart Title
    Guaranty Co., 
    840 F.2d 526
    (7th Cir. 1988). See First Am. 
    Title, 237 Ariz. at 493
    –94 ¶¶ 
    13–14, 353 P.3d at 373
    –74. First American argues that the court
    12
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    of appeals erred in adopting that “minority view” and should have instead
    followed the “majority view” of cases such as First American 
    Bank, 759 F.3d at 432
    (noting that “a majority of courts from other jurisdictions have held
    that, in the absence of specific policy language, a title insurer’s liability to a
    mortgagee should be measured using the foreclosure date”).
    ¶35              The “majority view” identified by First American largely
    involved situations where the title defect was an undisclosed senior lien.
    See, e.g., First Am. 
    Bank, 759 F.3d at 433
    (mentioning that the title defect was
    a maritime improvement lien); Associated 
    Bank, 881 F. Supp. 2d at 1063
    (noting that the title defect was an undisclosed senior lien); First Tenn. 
    Bank, 282 F.R.D. at 427
    (same); Marble 
    Bank, 914 F. Supp. at 1254
    (same). As noted
    above, this case does not involve an undisclosed senior lien, and therefore
    those cases are not persuasive or particularly helpful.
    ¶36            The “minority view,” as characterized by First American,
    involved situations where, as here, a total failure of title occurred and courts
    used the loan date to measure damages. See, e.g., 
    Citicorp, 840 F.2d at 529
    –
    30 (discussing that the insured’s lien was unenforceable ab initio); In re
    Evans, 
    460 B.R. 848
    , 895–99 (Bankr. S.D. Miss. 2011) (discussing that the
    lender had no right in the property). The Citicorp court reasoned that the
    policy was breached when the lender made the 
    loan. 840 F.2d at 530
    . The
    district court in Equity Income Partners used that same rationale when the
    title defect rendered the property essentially worthless because it lacked
    ingress and egress. See 
    2012 WL 3871505
    at *4 (using the date of the loan
    for damage-valuation purposes, noting that “because the policy was
    breached at the time of the loan, the title insurer should bear any risk of
    market value decline in the property at that time”) (internal citation and
    punctuation omitted). Thus, those cases that First American characterizes
    as representing the “minority view” actually involve different reasoning
    anchored in a different species of breach — the very species which, Johnson
    Bank maintains, occurred here. In sum, the case law from other
    jurisdictions does not influence the relevant social policies for determining
    the appropriate valuation date in this case.
    4.
    ¶37         “In interpreting an insurance policy, we apply ‘a rule of
    common sense’ thus, ‘when a question of interpretation arises, we are not
    compelled in every case of apparent ambiguity to blindly follow the
    13
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    interpretation least favorable to the insurer.’” Employers Mut. Cas. Co. v.
    DGG & CAR, Inc., 
    218 Ariz. 262
    , 264 ¶ 9, 
    183 P.3d 513
    , 515 (2008) (quoting
    
    Wilson, 162 Ariz. at 257
    , 782 P.2d at 733). Rather, “[t]he ‘ambiguity’ rule
    applies only after the court is unable to determine how the language of the
    policy applies to the specific facts of the case.” DGG & 
    CAR, 218 Ariz. at 264
    9, 183 P.3d at 515
    (quoting Preferred Risk Mut. Ins. Co. v. Lewallen, 
    146 Ariz. 83
    , 85, 
    703 P.2d 1232
    , 1234 (App. 1985)). Our evaluation of legislative
    goals, social policies, and the transaction as a whole does not eliminate the
    policy’s ambiguity or resolve the question before us. Accordingly, we will
    construe the policy, and particularly § 7(a)(iii), against First American. See
    Action 
    Acquisitions, 218 Ariz. at 397
    8, 187 P.3d at 1110
    . So construed, the
    policy implicitly permits using the policy-issuance date as the date for
    calculating damages under § 7(a)(iii), if the title defect caused the
    borrowers/owners to default on Johnson Bank’s loans.
    C.
    ¶38           The dissent advocates using the foreclosure date to measure
    Johnson Bank’s loss. Infra ¶¶ 50, 58. We are unpersuaded because the
    dissent rests on incorrect premises, uncontested but inapplicable legal
    principles, and inapposite out-of-state cases. According to the dissent,
    using the policy-issuance date to measure the bank’s loss “does not comport
    with the expressed intent of the parties.” Infra ¶ 61. But how is the parties’
    intent on the sole relevant issue here knowable or discernible when, as the
    dissent acknowledges, the policy is “facially ambiguous” regarding the
    proper damage-valuation date to use in this case? Infra ¶ 50. And the
    record does not reflect, nor does the dissent cite, any extrinsic parol
    evidence “to explain what the parties truly may have intended” on that
    issue. 
    Taylor, 175 Ariz. at 154
    , 854 P.2d at 1140.
    ¶39             The dissent also mistakenly asserts that we “impute[] duties
    to the title insurer that are inconsistent with the policy itself and Arizona’s
    statutory framework.” Infra ¶ 52. In its ALTA form policy, however, First
    American broadly agreed to indemnify “against loss or damage . . .
    sustained or incurred by the Insured by reason of . . . [a]ny defect in or lien
    or encumbrance on the title.” And again, as the dissent concedes, the policy
    does not clearly identify a valuation date for calculating the insured’s loss.
    Our analysis and conclusion do not conflict with any of the policy’s
    provisions.
    14
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    ¶40             Contrary to the dissent’s assertion, neither Johnson Bank’s
    contract claim nor our analysis and determination of the appropriate loss-
    valuation date contravene Arizona’s statutory framework. Infra ¶¶ 52, 55.
    As noted above, supra ¶ 22, the contract claim at issue here is based solely
    on the title insurance policy, not on an “abstract of title,” misrepresentation,
    or any other tort theory.
    ¶41           Although it acknowledges that First American’s policy is
    ambiguous, the dissent does not convincingly analyze the relevant social
    policies and the parties’ transaction as a whole, as we must do given the
    policy’s ambiguity. Action 
    Acquisitions, 218 Ariz. at 397
    8, 187 P.3d at 1110
    .
    Instead, the dissent incorrectly asserts that we impose common law and
    statutory duties on First American that indisputably do not exist here.
    ¶42            In support of its position, the dissent relies on cases (not cited
    by First American) that involve misrepresentation or other tort claims that
    are neither asserted nor applicable here. See, e.g., Barstad v. Stewart Title
    Guar. Co., Inc., 
    39 P.3d 984
    , 985–87 (Wash. 2002) (noting that lenders who
    brought claims for negligent misrepresentation, violations of the Consumer
    Protection Act, and civil conspiracy only received a preliminary title
    commitment but did not purchase title insurance); Siegel v. Fid. Nat. Title
    Ins. Co., 
    54 Cal. Rptr. 2d 84
    , 85–88 (Cal. Ct. App. 1996) (rejecting owners’
    negligence and contract claims against an insurer that sold a title insurance
    policy to the lender because the insurer did not have a fiduciary or
    contractual relationship with the owners, who failed to purchase title
    insurance); Hulse v. First Am. Title Co. of Crook Cty., 
    33 P.3d 122
    , 126, 134, 138
    n.8 (Wyo. 2001) (rejecting insured’s negligence claim against insurer
    because issuance of title commitment and title insurance policy did not give
    rise to an implied tort duty to search for and disclose title defects, and
    rejecting insured’s contract claim when access to property still existed).
    And in the only Arizona case the dissent cites, the court rejected the owner’s
    claims for negligent misrepresentation based on the title commitment, but
    remanded for a determination on the owner’s breach of contract claim
    based on the insurance policy. Centennial Dev. 
    Grp., 233 Ariz. at 148
    ¶¶ 1–
    
    3, 310 P.3d at 24
    .
    ¶43           The dissent is puzzling for another reason as well. It asserts
    that our analysis incorrectly “presumes” that First American “had any duty
    to discover and disclose the title defects.” Infra ¶ 59. The dissent’s “no
    duty” argument (an argument First American does not make and with
    15
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    which we do not disagree) would make sense if Johnson Bank were alleging
    a tort or claiming that the insurer breached the policy by not discovering
    and disclosing the encumbrance. But because Johnson Bank makes no such
    claim, the “no duty” argument is illogical and inapplicable. In accordance
    with the policy’s language, the bank merely seeks “indemnity against
    actual monetary loss or damage” it allegedly sustained “by reason of” the
    title defect. That contract claim does not hinge on any extra-contractual
    duty owed or breached, and the “no duty” proposition has no bearing on
    how damages should be calculated under the indemnification policy’s
    ambiguous § 7(a)(iii). First American concedes that it “is responsible for the
    diminution in value of the collateral as a result of the title defect.” Thus, the
    dissent’s “no duty” argument is not only off point but also inconsistent with
    First American’s position.
    ¶44            In any event, we do not find or impose on First American any
    extra-contractual tort or other common law duties. But in resolving the
    ambiguity in First American’s policy by evaluating relevant social policies
    and the parties’ transaction as a whole, we quite properly consider that First
    American was in the best position to timely discover and disclose the title
    defect, and to thereby avoid the risk of loss in a depreciating real estate
    market, but failed to do so. See supra ¶ 24. Because evaluation of relevant
    social policies and the parties’ transaction as a whole does not resolve the
    policy’s ambiguity, and because we must then construe the policy against
    the insurer, First American should bear that risk. That conclusion is not
    based on inapplicable tort law or statutes, but rather on the analytical
    framework this Court has adopted. Action 
    Acquisitions, 218 Ariz. at 397
    8, 187 P.3d at 1110
    . The dissent is unpersuasive in arguing otherwise.
    D.
    ¶45          First American argues that the court of appeals erred by
    assuming, without any evidentiary support in the record, that the title
    defect caused the borrowers’ default and Johnson Bank’s subsequent
    foreclosure. First Am. 
    Title, 237 Ariz. at 493
    ¶ 14, 494 ¶ 
    17, 353 P.3d at 373
    ,
    374. We agree.
    ¶46          There is no evidence demonstrating that the undisclosed title
    defect caused the borrowers’ default. Although Johnson Bank points to the
    unpublished court of appeals’ decision that affirmed judgment in favor of
    the borrowers/owners in their action against First American, that case does
    16
    FIRST AMERICAN TITLE V. JOHNSON BANK
    Opinion of the Court
    not establish as a matter of fact or law that the title defect caused the
    borrowers’ default. See Troon H Pad, L.L.C. v. First Am. Title Ins. Co., No.
    1 CA-CV 11-0491, 
    2013 WL 440609
    , at *5 ¶ 24 (Ariz. App. Feb. 5, 2013)
    (mem. decision) (noting some trial testimony that the owner “had lost an
    investor because the title defect affected the ability of the parcels to be
    developed”). Nor can we take judicial notice of that necessary causal link.
    Cf. Ariz. R. Evid. 201. Accordingly, the court of appeals erred by directing
    entry of summary judgment in favor of Johnson Bank. First Am. 
    Title, 237 Ariz. at 494
    18, 353 P.3d at 374
    .
    ¶47            On remand, Johnson Bank will have to prove that the title
    defect caused the borrowers’ default and subsequent foreclosure to justify
    using the date of the policies as the valuation date. If Johnson Bank fails to
    satisfy this burden, then the proper valuation date is the foreclosure date.
    III.
    ¶48           For the foregoing reasons, we vacate the court of appeals’
    opinion, reverse the judgment in favor of First American, and remand the
    case to the superior court for further proceedings.
    ¶49          Johnson Bank requests attorney fees under A.R.S. § 12-341.01,
    which permits an attorney fee award in contract actions. In our discretion,
    we deny the request, without prejudice to Johnson Bank seeking in the
    superior court any fees incurred in this Court, should Johnson Bank
    eventually prevail on remand.
    17
    FIRST AMERICAN TITLE INS. CO. V. JOHNSON BANK
    CHIEF JUSTICE BALES, Dissenting
    Bales, C.J., dissenting.
    ¶50          I agree with the majority that the title insurance policy is
    facially ambiguous regarding the proper date (policy issuance versus
    foreclosure) on which to measure an insured lender’s loss when an
    undisclosed title defect, lien or encumbrance (a “title defect”) reduces the
    value of property securing a loan. Supra ¶ 18. I also agree that the
    diminution in value generally is measured as of the date of foreclosure.
    Supra ¶ 47. Because I believe the same date should be used in the
    circumstances of this case, I respectfully dissent.
    ¶51            The majority holds that the drop in value should be measured
    as of the policy’s issuance when an undisclosed title defect prevents the
    known, intended use of the property and causes the borrower to default.
    Supra ¶¶ 1, 28. Recognizing that this approach shifts to the title insurer
    “loss[es] attributable to [a] market downturn (which could occur
    irrespective of any title defect or error in the title search),” 
    id. ¶ 28,
    the
    majority concludes that this result “offends neither the policy language nor
    the relevant, identified social policies.” 
    Id. The majority’s
    holding rests on
    its repeated observations that First American “failed” to discover and
    disclose the restrictive covenants for the subject property or that it
    conducted a “deficient” or “incomplete” title search when First American
    offered to extend title coverage before Johnson Bank issued loans to its
    borrowers. Supra ¶¶ 1, 2, 24, 29.
    ¶52            Loss under the policy should not be measured by imputing
    duties to the title insurer that are inconsistent with the policy itself and
    Arizona’s statutory framework. Although the policy may be facially
    ambiguous with regard to the date of valuation for calculating loss, the
    nature of the parties’ transaction as well as the policies reflected in
    Arizona’s title insurance statutes resolve that ambiguity: absent a contrary
    indication by the parties, loss should be measured as of the date of
    foreclosure. Cf. First Am. Title Ins. Co. v. Action Acquisitions, LLC, 
    218 Ariz. 394
    , 397 ¶ 8, 
    187 P.3d 1107
    , 1110 (2008) (discussing how facial ambiguity of
    insurance policy may be resolved by “looking to legislative goals, social
    policy, and the transaction as a whole”).
    ¶53          Title insurance, as the parties acknowledge, is a contract of
    indemnity, not a guarantee of title. E.g., Centennial Dev. Grp. LLC v. Lawyer’s
    FIRST AMERICAN TITLE INS. CO. V. JOHNSON BANK
    CHIEF JUSTICE BALES, Dissenting
    Title Ins. Corp., 
    233 Ariz. 147
    , 149 ¶ 6, 
    310 P.3d 23
    , 25 (App. 2013); Associated
    Bank, N.A. v. Stewart Title Guar. Co., 
    881 F. Supp. 2d 1058
    , 1066 (D. Minn.
    2012). A title insurer cannot “fail” to disclose title defects to a lender
    seeking title insurance unless it owes a duty to the lender to discover and
    disclose such defects when it offers to provide coverage on a property. See
    Centennial Dev. 
    Grp., 233 Ariz. at 150
    ¶¶ 
    9–10, 310 P.3d at 26
    ; First Midwest
    Bank, N.A. v. Stewart Title Guar. Co., 
    843 N.E.2d 327
    , 335 (Ill. 2006); Barstad v.
    Stewart Title Guar. Co., Inc., 
    39 P.3d 984
    , 987–88 (Wash. 2002).
    ¶54           Courts have consistently recognized that a title insurer has no
    implied duty to search title records for defects when it contracts to provide
    title insurance. E.g., Hulse v. First Am. Title Co. of Crook Cnty, 
    33 P.3d 122
    ,
    134–35 (Wyo. 2001); 
    Barstad, 39 P.3d at 990
    –91; Greenberg v. Stewart Title
    Guar. Co., 
    492 N.W.2d 147
    , 151–52 (1992); Lawrence v. Chicago Title Ins. Co.,
    
    192 Cal. App. 3d 70
    , 76–77 (1987). Therefore, any duty to investigate the
    condition of title can result only from a voluntary assumption of that duty
    in addition to the mere contract to insure title. 
    Hulse, 33 P.3d at 134
    –36;
    
    Greenberg, 492 N.W.2d at 152
    . If a title insurer undertakes no contractual
    duty to discover or disclose title defects to a lender when it offers to provide
    title insurance, then a lender could not reasonably expect such an offer to
    serve as any kind of guide regarding “the value of the lender’s security
    interest,” supra ¶ 29, or as a hedge against the risk of market downturns.
    See First Midwest Bank, 
    N.A., 843 N.E.2d at 335
    .
    ¶55              Under Arizona law, a duty to discover or disclose title defects
    is imposed by an abstract of title, not by a title insurance policy. See A.R.S.
    § 20-1562(1) (requiring an abstract of title to disclose “all recorded
    conveyances, instruments or documents that impart constructive notice
    with respect to the chain of title to the real property”). When a title insurer
    offers to provide title insurance for a property, it issues a title commitment.
    See § 20-1562(5) (defining “title commitment” as an offer to issue a title
    insurance policy subject to any stated exceptions). Once escrow closes and
    the loan documents have been recorded, a title policy is issued based on the
    precise terms of the title commitment. See § 20-1562(11) (defining “title
    insurance policy” as the means by which title insurance liability is
    accepted); see also Palomar, 1 Title Ins. Law § 5:29. Unlike an abstract of
    title, a title commitment is explicitly exempted from any duty to discover
    or disclose title defects. § 20-1562(5) (“the rights, duties and responsibilities
    relating to the preparation and issuance of an abstract of title do not apply
    to the issuance of a [title commitment]. The [title commitment] is not a
    19
    FIRST AMERICAN TITLE INS. CO. V. JOHNSON BANK
    CHIEF JUSTICE BALES, Dissenting
    representation as to the condition of title to real property”). The parties, of
    course, are free to contract around these statutory definitions, but we are
    not so free to ignore our statutory scheme. See e.g., Tower Plaza Investments
    Ltd. v. DeWitt, 
    109 Ariz. 248
    , 253, 
    508 P.2d 324
    , 329 (1973) (the laws of a state
    are part of a contract and must be read into it).
    ¶56            Our sister courts in Washington and California – which share
    the same statutory definitions of “abstract of title,” “title commitment,” and
    “title insurance policy” as Arizona – have reached similar conclusions. The
    Supreme Court of Washington, after discussing the same statutory
    differences between an abstract of title, title commitment, and title policy
    that are present here, expressly held that a title insurer owes no duty to a
    lender to discover or disclose any information regarding the condition of
    title when it offers to provide title insurance. 
    Barstad, 39 P.3d at 988
    –89, 991.
    Barstad emphasized that the party seeking title insurance has no reasonable
    expectation to any information concerning the condition of title for the
    subject property, and that any research conducted by the insurer was
    exclusively for its own benefit, not for the benefit of the insured. 
    Id. at 990–
    91.
    ¶57             Similarly, California’s Court of Appeal has recognized that
    the statutory definitions of “abstract of title,” “title commitment,” and “title
    insurance policy” – which are virtually identical to Arizona’s – preclude
    courts from imposing a duty on a title insurer to discover and disclose title
    defects when it contracts for title insurance. E.g., Siegel v. Fid. Nat’l Title Ins.
    Co., 
    46 Cal. App. 4th 1181
    , 1189, 1193 (1996). The statute makes clear that a
    title policy is “not a summary of the public records, and the insurer is not
    supplying information” regarding the condition of title to the insured.
    
    Lawrence, 192 Cal. App. 3d at 75
    . Like Washington, any title search that an
    insurer chooses to conduct is strictly for the insurer’s own benefit and has
    no bearing on the insured. Fid. Nat’l 
    Title, 215 Cal. App. 3d at 1175
    .
    ¶58           Under Arizona’s statutory framework and the policy at issue
    here, First American did not undertake a duty to discover any title defects
    or disclose them to Johnson Bank before the lender made the loan. Accord
    
    Hulse, 33 P.3d at 134
    –36; 
    Barstad, 39 P.3d at 988
    –91. Instead, the insurer
    agreed that if an undisclosed title defect was later discovered and caused
    “actual monetary loss” to the lender, First American would pay the lesser
    of: the unpaid loan balance, the cost of curing the title defect, or the
    diminution in value resulting from the defect. The appropriate date for
    20
    FIRST AMERICAN TITLE INS. CO. V. JOHNSON BANK
    CHIEF JUSTICE BALES, Dissenting
    calculating loss in this context is when it in fact occurred – the date of
    foreclosure.
    ¶59             The majority’s conclusion that loss may be measured as of
    policy issuance is both self-contradictory and inconsistent with the nature
    of title insurance under Arizona law. The majority acknowledges that a
    lender’s title insurance policy is not a guarantee of title, supra ¶ 21, and
    denies imposing any “extra-contractual duties” on the insurer. Supra ¶ 47.
    Nonetheless, the majority asserts that measuring loss as of the date of
    issuance is appropriate because the insurer conducted a “deficient title
    search” and its failure to disclose the defect caused “actual consequential
    damages” to the lender. Supra ¶¶ 24, 26. This can only mean that the lender
    was damaged because the insurer breached some duty (contractual or
    otherwise) to properly investigate title and disclose it to the lender before
    the loan was funded. (The treatise cited by the majority in support of
    measuring loss by the policy date, supra ¶ 28, does not address Arizona’s
    statutory framework and fails to adequately distinguish between a lender’s
    policy and an owner’s policy, as the latter might warrant using date of
    issuance to measure loss, since the owner’s equity is immediately impaired
    by the undisclosed defect.) The majority argues that cases or statutes like
    A.R.S. § 20-1562(5) recognizing that a title policy is not a representation
    about the condition of title are inapposite because Johnson Bank is not
    asserting claims based on tort or the title commitment. Supra ¶¶ 47, 48. The
    relevant point is not the nature of the claims asserted by the lender, but
    instead whether the title insurer had any duty to discover and disclose the
    title defects, as the majority’s analysis presumes.
    ¶60           Based on a mistaken characterization of a title insurer’s
    responsibilities to a lender, the majority ultimately concludes that it will
    construe the “ambiguous” policy in favor of the insured, and thereby allow
    the lender to measure loss as of the date of policy issuance if the defect
    “caused the borrowers/owners to default on Johnson Bank’s loans.” Supra
    ¶ 37. To do otherwise, the majority states, would allow the insurer to
    “unfairly” avoid paying the lender’s damages. Supra ¶ 26.
    ¶61           I respectfully disagree. Because First American did not
    undertake by issuing title insurance to then discover any title defects or
    disclose them to the lender, it is not appropriate to adopt a measure of loss
    (date of policy issuance) that presumes such duties. If the lender wanted
    some representation regarding the condition of title it could have
    21
    FIRST AMERICAN TITLE INS. CO. V. JOHNSON BANK
    CHIEF JUSTICE BALES, Dissenting
    purchased an abstract of title; similarly, if it wanted to shift the risk of
    market loss (an underwriting risk generally born by lenders rather than title
    insurers), it might have contracted to do so. We should not, however,
    interpret the title policy as implicitly adopting a measure of loss that does
    not comport with the expressed intent of the parties, the nature of title
    insurance, or Arizona’s policy as expressed in our title insurance statutes.
    22