Home Federal Savings Bank v. Ticor Title Insurance ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-3446
H OME F EDERAL S AVINGS B ANK,
Plaintiff-Appellant,
v.
T ICOR T ITLE INSURANCE C OMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 1:10-cv-0999—Jane E. Magnus-Stinson, Judge.
A RGUED A PRIL 9, 2012—D ECIDED S EPTEMBER 6, 2012
Before F LAUM and H AMILTON , Circuit Judges, and
F EINERMAN, District Judge.Œ
H AMILTON, Circuit Judge. This case concerns a title
insurance policy covering a construction project. The
plaintiff is the insured party, Home Federal Savings
Bank, which agreed to lend up to $95.5 million to finance
Œ
The Honorable Gary Feinerman of the Northern District
of Illinois, sitting by designation.
2 No. 11-3446
the construction of a new ethanol production plant. When
the developer of the plant ran into serious trouble
finishing the project, the bank did not disburse the final
$8 million of the loan amount. The developer defaulted
on the debt to the bank and fired its general contractor,
which then filed a mechanic’s lien on the property to
recover $6 million allegedly owed it. When the bank
sought to foreclose on its mortgage, the general con-
tractor counterclaimed, asserting that its lien had
priority over, or at least parity with, the bank’s mort-
gage. The plaintiff bank tendered its defense to the de-
fendant title insurer under a policy that required the
insurer to defend the bank against a “claim . . . alleging
a defect, lien or encumbrance or other matter insured
against by this policy.” The policy contained an exclusion
from coverage for claims “created, suffered, assumed, or
agreed to” by the insured. On cross-motions for sum-
mary judgment, the district court ruled in favor of the
title insurer. We reverse and remand. The undisputed
facts show that the title insurer breached its
duty to defend the bank on the contractor’s claim that
its mechanic’s lien had priority over or parity with
the mortgage.
I. Factual and Procedural Background
The material facts are not in dispute. The case arises
from a construction project that fell apart in 2008. The
developer was Altra, Indiana, LLC, which in 2006
obtained a construction loan commitment for up to
$95.5 million from plaintiff Home Federal Savings
No. 11-3446 3
Bank to finance the construction of an ethanol plant in
Cloverdale, Indiana. The loan was to be disbursed in
installments. To secure its loan, Home Federal had a
mortgage on the property. To protect its security from
conflicting claims of ownership or prior mortgages or
liens, Home Federal purchased title insurance from
defendant Ticor Title Insurance Company. Under the
policy, Ticor performed a title search after each disburse-
ment Home Federal made, insuring against any loss
the bank might incur due to “Lack of priority of the lien
of the insured mortgage over any statutory lien for ser-
vices, labor or material.”
Home Federal also paid an extra premium for a me-
chanic’s lien endorsement to insure against “enforcement
or attempted enforcement” of a mechanic’s lien claim
“having priority over or sharing on a parity
with” the mortgage.1 The policy obligated Ticor to
1
The Mechanic’s Lien Endorsement provided:
Anything contained in said policy to the contrary notwith-
standing, the Company insures against loss or damage
incurred by the insured by reason of the enforcement or
attempted enforcement of any statutory lien for labor or
material arising from construction contracted for and/or
commenced on the land prior to, at, or subsequent to
the effective date of said policy, and any extension of said
date, as having priority over, or sharing on a parity with,
the lien of the insured mortgage for that portion of the
proceeds of the loan secured thereby advanced for the
purpose of paying the costs of the acquisition of the
(continued...)
4 No. 11-3446
defend Home Federal “in litigation in which any third
party asserts a claim . . . alleging a defect, lien or encum-
brance or other matter insured against by this policy,”
and insured Home Federal to the extent of the amount
already disbursed to Altra, up to the $95.5 million total
of the loan.
When Home Federal distributed additional funds
as construction proceeded, it would secure lien waivers
from each contractor paid with the funds and ask Ticor
to update the policy, which Ticor did after performing
a new title search and receiving the contractors’ lien
(...continued)
land and the development of and the construction of
improvements on the land, including by [sic] not limited
to the cost of labor or materials incurred therewith. At the
time of each disbursement of the proceeds of the loan, the
title must be searched by Royal Title Services, Inc., down
to such time, for possible liens or objections inter-
vening between the date hereof and the date of such
disbursement.
This endorsement is made a part of the policy or commit-
ment and is subject to all the terms and provisions
thereof and of any prior endorsements thereto. Except to
the extent expressly stated, it neither modifies any of the
terms and provisions of the policy or commitment and
prior endorsements, if any nor does it extend the effective
date of the policy or commitment and prior endorsements
or increase the face amount thereof.
No. 11-3446 5
waivers from Home Federal.2 This case centers on
two policy updates made in September 2008. On
September 24, 2008, Ticor issued Update 15 pursuant to
Home Federal’s request. Update 15 revealed no
defects, liens, or encumbrances on the estate that are
relevant to the case. At that point, more than $87 million
of the loan proceeds had been disbursed and accounted
for by lien waivers. A serious dispute then arose
between Altra and the project’s general contractor,
F.A. Wilhelm Construction Co. (“Wilhelm”). Altra fired
Wilhelm on September 26. That same day, Wilhelm filed
a mechanic’s lien on the property claiming it was owed
$6 million for work on the project.
Suspecting that such a lien had been filed, Home
Federal requested on October 27 that Ticor perform a
title search. Ticor’s October 30 update disclosed
Wilhelm’s lien and made it an express exception from
coverage. Cue the litigation.
First, in January 2009, Home Federal filed suit against
Altra in state court to recover the $96 million then
due under the loan and to foreclose Home Federal’s
mortgage on the plant property. Home Federal named
Wilhelm as a defendant because of its mechanic’s lien.
2
AgStar Financial Services, Inc. acted as Home Federal’s loan
servicer. Likewise, Royal Title Services, Inc. issued Home
Federal’s policy, which was underwritten by Ticor, and Royal
prepared each title search and update. For convenience, we
refer to Agstar and Home Federal collectively as “Home
Federal,” and to Royal and Ticor as “Ticor.”
6 No. 11-3446
The following month, Wilhelm answered and filed a
counterclaim against Home Federal and a cross-claim
against Altra seeking to foreclose on its $6 million me-
chanic’s lien. Wilhelm asserted that it was entitled to
enforce its lien against the entire property, claiming
priority over Home Federal’s mortgage. Ticor itself ac-
knowledged that Wilhelm was seeking a judgment de-
termining that its lien was prior to and superior to
the interest of the Agstar/Home Federal mortgage.
On April 3, 2009, Home Federal tendered the defense
of Wilhelm’s mechanic’s lien to Ticor, seeking defense
in the suit and indemnity for any loss should Wilhelm
prevail. After conducting an investigation, Ticor denied
Home Federal’s request for defense and indemnifica-
tion. Left to fend for itself in state court, Home
Federal moved for summary judgment against Wilhelm,
asserting the priority of its mortgage over the mechanic’s
lien. Home Federal eventually reached a settlement by
paying Wilhelm $1.8 million on its counterclaim, with
no contribution from Ticor.
Home Federal then filed this suit in federal court
alleging that Ticor acted in bad faith and breached its
duties to defend against Wilhelm’s counterclaim and
to indemnify Home Federal for the settlement and
attorney fees. On cross-motions for summary judgment,
the district court granted summary judgment for Ticor.
Home Fed. Sav. Bank v. Ticor Title Ins. Co., No. 1:10-cv-0999-
JMS-TAB, 2011 WL 4479080 (S.D. Ind. Sept. 27, 2011).
The court relied on a policy exclusion for any “Defects,
liens, encumbrances, adverse claims or other matters . . .
No. 11-3446 7
created, suffered, assumed or agreed to or by the Insured
claimant.” The court found that the exclusion applied
because Home Federal withheld disbursement of the funds
that could have satisfied Wilhelm’s claim. The district
court also noted that since all $87 million in disbursements
Home Federal made had been fully accounted for with
waivers of mechanic’s liens, “Home Federal seeks to
obtain a windfall — avoiding more than $6 million [in]
construction bills without having risked any of its own
funds.” 2011 WL 4479080, at *6. Home Federal has ap-
pealed.
II. Discussion
We review de novo the district court’s decision on cross-
motions for summary judgment. E.g., Exelon Generation
Co. v. Local 15, Int’l Bhd. of Elec. Workers, 676 F.3d 566,
570 (7th Cir. 2012). Subject-matter jurisdiction is based
on diversity of citizenship, see 28 U.S.C. § 1332, and
the parties agree that Indiana law applies to interpreta-
tion of the insurance policy. In Indiana, the meaning
of an insurance policy is a matter of law, and in general
the same rules of construction apply to insurance
policies as to other contracts. See Commercial Union Ins.
v. Moore, 663 N.E.2d 179, 180 (Ind. App. 1996). Any ambi-
guity in the policy will be construed strictly against the
insurer, particularly where the scope of a coverage exclu-
sion is at issue. See State Auto. Mut. Ins. Co. v. Flexdar, Inc.,
964 N.E.2d 845, 848 (Ind. 2012). An insurer’s duty to
defend an insured is broader than its duty to indemnify,
8 No. 11-3446
so if an insurer has no duty to defend its insured in a suit,
it necessarily does not have a duty to indemnify the
insured for any liability incurred thereby. See Trisler v.
Indiana Ins. Co., 575 N.E.2d 1021, 1023 (Ind. App. 1991).3
The decisive issue here is the duty to defend. Where
an insurer elects not to defend its insured, “Such a
course is taken at the insurer’s peril because the insurer
will be bound at least to the matters necessarily deter-
mined in the lawsuit.” State Farm Fire & Cas. Co. v. T.B.
ex rel. Bruce, 762 N.E.2d 1227, 1231 (Ind. 2002) (internal
quotation marks and emphasis omitted); Frankenmuth
Mut. Ins. Co. v. Williams, 690 N.E.2d 675, 678-79 (Ind.
1997). We address first Ticor’s argument that the
Wilhelm counterclaim did not trigger the duty to
defend because it did not actually seek priority over
or parity with the Home Federal mortgage. We turn
then to the basis for the district court’s decision, the
policy exclusion for liens created, suffered, assumed
or agreed to or by the insured.
3
The district court’s opinion seems to have reversed or at
least confused this logic, addressing first the “Duty to Indem-
nify,” finding none, and then stating in a one-sentence discus-
sion under the heading “Duty to Defend”: “Because, for
reasons expressed above, Ticor had no duty to indemnify
Home Federal with respect to the Wilhelm claim, it necessarily
had no duty to indemnify [sic] Home Federal either.” 2011 WL
4479080, at *6, citing Ace Rent-a-Car, Inc. v. Empire Fire & Marine
Ins. Co., 580 F. Supp. 2d 678, 690 (N.D. Ill. 2008) (applying
Indiana law and stating correctly that if insurer had no duty
to defend, it necessarily had no duty to indemnify).
No. 11-3446 9
A. Wilhelm Sought Priority or Parity
The policy’s “Defense and Prosecution” clause re-
quired Ticor to “provide for the defense of an insured
in litigation in which any third party asserts a claim
adverse to the title or interest as insured, but only as to
those stated causes of action alleging a defect, lien or
encumbrance or other matter insured against by this
policy.” Under the mechanic’s lien endorsement, one
matter insured against was any litigation in which a
third party claimed its mechanic’s lien had priority over
or parity with Home Federal’s mortgage on the property:
the Company Insures against loss or damage incurred
by the insured by reason of the enforcement or at-
tempted enforcement of any statutory lien for labor
or material arising from construction contracted for
and/or commenced on the land prior to, at, or subsequent
to the effective date of said policy, and any extension of
said date, as having priority over, or sharing on a
parity with, the lien of the insured mortgage for that
portion of the proceeds of the loan secured thereby . . . .
(Emphases added.) Two things are important about this
clause. First, it confirmed that Ticor must defend
and indemnify Home Federal against enforcement or
attempted enforcement of a claim asserting priority over
or parity with the mortgage. Second, the covered
claims were not limited to those that arose prior to the
effective date of the policy, as extended by updated
endorsements. Rather, the mechanic’s lien endorsement
covered any claim “arising from construction contracted
for and/or commenced on the land prior to, at, or subse-
10 No. 11-3446
quent to the effective date.” While the policy “insure[d]
only to the extent of the amount actually disbursed,”
that clause limited the “amount” of recovery, not the
temporal scope of covered claims.4
4
Many title insurance policies insure only against mechanic’s
liens arising before the endorsement date and for which labor or
materials have already been furnished. See Joyce Palomar,
Title Insurance Law § 9:9 (stating that American Land and Title
Association (ALTA) Construction Loan Policy Endorsement
A “does not insure the priority of the mortgage lien over
mechanics’ liens resulting from work performed or materials
supplied subsequent to the endorsement date”). So why would
Ticor insure Home Federal against liens arising after the
effective date of the latest update? The answer probably lies
in Indiana construction law, which gives commercial con-
struction mortgages priority over all later recorded mechanic’s
liens. See Ind. Code § 32-28-3-5(d); see also Palomar, supra,
§ 9:9 & n.6 (“in states where statutes give the construction
mortgage lien priority over all mechanics’ liens, regardless of
whether the insured lender made all disbursements obligatory
under the mortgage documents,” the standard endorsement
covers any “loss or damage sustained by reason of lack of
priority of the lien . . . over any statutory lien for services,
labor or material heretofore or hereafter furnished”). This
means that Ticor could safely insure Home Federal against
any loss incurred due to the enforcement of a later-recorded
mechanic’s lien because the risk of successful enforcement
was close to zero. The risk of attempted enforcement of such
a lien was not zero, however, for even a frivolous claim
counts as an “attempt.” As we shall see, Ticor’s refusal to
defend its insured against one such apparently futile
(continued...)
No. 11-3446 11
Wilhelm’s original counterclaim stated that Wilhelm
was “entitled to enforce its mechanic’s lien claim . . .
against the entire land . . . without impairment by mort-
gage foreclosure.” Dkt. 44-3 at 17, ¶ 10. That counter-
claim was unambiguously within the scope of Ticor’s
duty to defend, and Ticor quickly understood as much.
A letter from Ticor’s claim counsel to an attorney for
Home Federal said, based on the original counterclaim:
“Wilhelm is seeking a judgment determining that its
Lien is prior to and superior to the interest of the Agstar
[i.e., Home Federal] Mortgage against the subject prop-
erty.” Dkt. 44-3 at 32.
Yet Ticor now contends on appeal that the Wilhelm
counterclaim was not an “attempted enforcement” of a
statutory lien asserting “priority over, or sharing on a
parity with, the lien of the insured mortgage.” It offers
two reasons, but both suffer from the same underlying
mistake. (The district court did not base its decision
on these arguments by Ticor.) First, Ticor asserts that
“Wilhelm did not allege priority over the Mortgage”
because it simply “mirrored the statute” that “provides
a right of removal to a lien claimant within 90 days if
the land is encumbered by a mortgage.” Ticor Br. 15,
citing Ind. Code § 32-28-3-2. According to Ticor,
this was the “wrong” statute, so “no defense was re-
quired.” Id. The undisputed facts show that this argu-
(...continued)
attempt was a breach of its duties under the mechanic’s
lien endorsement.
12 No. 11-3446
ment is frivolous. The duty to defend depends on what
the claimant alleges, not the ultimate merit or lack of
merit of the claim. E.g., Terre Haute First Nat’l Bank v.
Pac. Employers Ins. Co., 634 N.E.2d 1336, 1339 (Ind.
App. 1993). The original counterclaim plainly asserted
priority over the Home Federal mortgage. That is how
Ticor understood it at the time. Even if there had been
any ambiguity then, Wilhelm’s amended counterclaim
was even more explicit, offering several theories for
barring Home Federal from enforcing its mortgage
with priority over Wilhelm’s mechanic’s lien. Dkt. 44-4
at 14-16.
Second, Ticor argues, because the applicable Indiana
statute gives priority to a commercial construction mort-
gage over all later-recorded mechanic’s liens, see Ind.
Code § 32-28-3-5(d), “the Wilhelm Lien could not attain
priority over or stand in parity with the Mortgage.” Ticor
Br. 16. Ticor compliments Home Federal’s efforts in
the state court foreclosure case, saying it “properly
argued that the Wilhelm Lien was inferior to the Mort-
gage” in its motion for summary judgment against Wil-
helm, correctly identifying the statutory authority and
supporting case law. Id. In other words, Ticor argues
that it had no duty to defend Home Federal from Wil-
helm’s counterclaim because Wilhelm didn’t have
a prayer of prevailing. Home Federal could take care
of itself.
That argument also runs flatly contrary to the most
basic principle of an insurer’s duty to defend. Under the
policy, Ticor had a duty to defend against any claim
No. 11-3446 13
“attempt[ing]” to enforce a lien as having priority over
or parity with the mortgage. Wilhelm’s counterclaim
plainly did so, even if it might have been a sure loser. “It
is the nature of the claim, not its merit, which establishes
the insurer’s duty to defend.” Terre Haute First Nat’l
Bank, 634 N.E.2d at 1339, quoting Trisler v. Indiana Ins. Co.,
575 N.E.2d 1021, 1023 (Ind. App. 1991). An “insurance
company has a contractual duty to defend unfounded,
false and fraudulent suits based upon risks it has in-
sured.” Davidson v. Cincinnati Ins. Co., 572 N.E.2d 502,
505 (Ind. App. 1991), citing Cincinnati Ins. Co. v.
Mallon, 409 N.E.2d 1100, 1105 (Ind. App. 1980). Wilhelm’s
counterclaim presented a risk that Home Federal’s
policy specifically insured against — a statutory lien
seeking priority over or parity with the mortgage. Wil-
helm’s claim might have been weak, even hopeless, but
that lack of merit could not absolve Ticor of its duty
to defend against the attempted enforcement of a me-
chanic’s lien with priority over the mortgage.
Ticor tries to avoid these principles by quoting
Mallon, where the Indiana Court of Appeals wrote: “when
the underlying factual basis of the complaint, even
if proved true, would not result in liability under the
insurance policy, the insurance company can properly
refuse to defend.” 409 N.E.2d at 1105, citing 7C J. A.
Appleman, Insurance Law and Practice § 4683, at 50 (W. F.
Berdal ed., 1979). Mallon is perfectly consistent with the
principles we rely on above. As noted, the Mallon
court stated the general point that the duty to defend
applies to “unfounded, false or fraudulent suits based
upon risks it has insured.” Id. The Mallon court based
14 No. 11-3446
its decision, however, not on the merits of the
underlying claim but on policy exclusions that would
have applied even if the underlying claim had been
valid. Id. The court did not suggest that an insurer is
entitled to ignore the relief the claimant actually seeks
against its insured and to refuse to defend on the
theory that the claimant cannot possibly prevail as a
matter of law. Wilhelm’s counterclaim sought to enforce
a lien as having priority over or parity with Home Fed-
eral’s insured interest in the plant’s mortgage. Unless a
coverage exclusion applied, Ticor breached its duty
to defend under the policy.
B. The “Created or Suffered” Exclusion
The only relevant exclusion, the parties agree, excludes
from coverage claims “created, suffered, assumed or
agreed to or by the Insured claimant.” Coverage exclu-
sions are construed strictly against the insurer, and the
insurer bears the burden of showing that an exclusion
applies. See Hoosier Ins. Co. v. Audiology Found. of America,
745 N.E.2d 300, 309 (Ind. App. 2001). The “created or
suffered” exclusion is a standard one in title insurance
contracts, and it is apparently “[o]ne of the most liti-
gated” clauses in the field. Palomar, Title Insurance Law
§ 6:10.
From Ticor’s brief, we can discern three separate argu-
ments in support of its assertion that the “created or
suffered” exclusion applies. First, Ticor contends that
Home Federal “created, suffered, assumed, or agreed to
the Wilhelm Lien” because “Home Federal made the
No. 11-3446 15
conscious decision not to distribute the remaining loan
funds and chose not to pay Wilhelm.” Ticor Br. 21. Al-
though Ticor has identified no factual evidence that Home
Federal’s decision to withhold the final loan disbursement
to its borrower (Altra) was the cause of Wilhelm’s claim
(i.e., the reason it was not paid), we will assume that
underlying fact for the sake of addressing Ticor’s legal
argument, which we reject.
At least one judicial decision supports Ticor’s assump-
tion that but-for causation is sufficient to satisfy the
“created or suffered” exclusion. See First American Title
Ins. Co. v. Action Acquisitions, LLC, 187 P.3d 1107, 1113
(Ariz. 2008) (“we conclude that the exclusion . . . applies
whenever the insured intended the act causing the
defect, not only when the insured intended the defect
or when the insured engaged in misconduct”). But the
overwhelming weight of authority is to the contrary. As
a number of federal courts have recognized, the “created
or suffered” language is intended to protect the insurer
from liability for matters caused by the insured’s
own intentional misconduct, breach of duty, or other-
wise inequitable dealings:
The cases discussing the applicability of the ‘created
or suffered’ exclusion generally have stated that the
insurer can escape liability only if it is established
that the defect, lien or encumbrance resulted from
some intentional misconduct or inequitable dealings
by the insured or the insured either expressly or
impliedly assumed or agreed to the defects or encum-
brances in the course of purchasing the property
16 No. 11-3446
involved. The courts have not permitted the insurer
to avoid liability if the insured was innocent of any
conduct causing the loss or was simply negligent
in bringing about the loss.
Brown v. St. Paul Title Ins. Co., 634 F.2d 1103, 1107-08 n.8
(8th Cir. 1980) (Missouri law); accord, Chicago Title Ins. Co.
v. Resolution Trust Corp., 53 F.3d 899, 907 (8th Cir. 1995)
(Minnesota law); American Title Ins. Co. v. East West Fin.,
16 F.3d 449, 455 (1st Cir. 1994) (Rhode Island law);
American Sav. & Loan Ass’n v. Lawyers Title Ins. Corp., 793
F.2d 780, 784-865(6th Cir. 1986) (Tennessee law); Fifth
Third Mortg. Co. v. Chicago Title Ins. Co., 758 F. Supp. 2d 476,
484-85 (S.D. Ohio 2010) (Ohio law); Mid-South Title
Ins. Corp. v. Resolution Trust Corp., 840 F. Supp. 522, 529-30
(W.D. Tenn. 1993) (Tennessee law). Neither this court
nor any Indiana state court has defined the “created or
suffered” exclusion, but the clear majority view among
courts of other jurisdictions is that the exclusion
applies only to intentional misconduct, breach of duty, or
otherwise inequitable dealings by the insured. We
predict that Indiana courts would adopt that view as well.
Ticor has not argued that Wilhelm’s lien resulted from
“deliberate, dishonest,” or “illegal” dealings by Home
Federal. See Chicago Title Ins. Co., 53 F.3d at 907, quoting
Joel E. Smith, Annotation, Title Insurance: Exclusion of
Liability for Defects, Liens, or Encumbrances Created, Suffered,
Assumed, or Agreed to by the Insured, 87 A.L.R. 3d 515,
520 (1978). No evidence would support a finding that
this decision was intentional misconduct.
Ticor argues instead that Home Federal breached a duty
to Ticor to distribute the entirety of the loan proceeds,
No. 11-3446 17
citing two cases from the Eighth and Tenth Circuits, Brown
v. St. Paul Title Ins. Corp., 634 F.2d 1103 (8th Cir. 1980), and
Bankers Trust Co. v. Transamerica Title Ins. Co., 594 F.2d
231 (10th Cir. 1979). Both Brown and Bankers Trust
reflect the understanding of the “created or suffered”
exclusion we adopted above — that it is limited to situa-
tions in which the claim arises due to the intentional
misconduct, breach of duty, or inequitable dealings by
the insured. In each case, a bank financed a construction
project with a loan secured by a first lien mortgage on
the property. Each bank purchased title insurance,
and each policy included both a mechanic’s lien endorse-
ment and a “created or suffered” exclusion similar to
the ones in this case. And in each case, the developer
defaulted.5 After foreclosure proceedings were com-
menced, unpaid contractors filed mechanic’s liens
against the properties. In Bankers Trust, the contractors
prevailed, and the bank sought indemnification from
its insurer, which refused on account of the “created or
suffered” exclusion. For the same reason, the insurer
in Brown denied defense to its insured, which ultimately
settled with the contractors. Each bank sued on the
title insurance policy, and each insurer prevailed on
5
In Bankers Trust, the default came before the final disburse-
ment. 594 F.2d at 234. In Brown, the default came after the bank
had disbursed the whole of its loan commitment, but the
developer continued to work on the project after the default.
634 F.3d at 1105-06. Cost overruns, combined with a delay
between the disbursement and the endorsement, resulted in the
post-default work going uncompensated. Id. at 1107-08.
18 No. 11-3446
appeal. In Bankers Trust, the Tenth Circuit held: “Where,
as here, work was performed and payment was not
made up to the amount of the lender’s loan commit-
ment, the resulting mechanics’ liens must be considered
to have been created or suffered by the insured.” 594
F.2d at 234 (emphasis omitted). In Brown, the Eighth
Circuit likewise held that the mechanic’s liens were
“created or suffered by” the bank due to its “failure
to furnish . . . the funds necessary to cover the improve-
ments made.” 634 F.2d at 1110.
Ticor contends that these cases are indistinguishable,
and the district court granted summary judgment on
the strength of their authority. That approach overlooks
a factual difference that the Bankers Trust court called
“critical,” and that the Brown court also relied upon:
these cases involved breaches of a duty because the
insured banks had each agreed to make adequate funds
available to pay the developers and their contractors. The
parties in Bankers Trust and Brown had negotiated “dis-
bursement agreements” whereby the title insurers as-
sumed responsibility for both (a) securing lien waivers
from potential claimants and, more important, (b) actually
disbursing the loan funds to the various contractors
as construction progressed. Both circuit courts con-
cluded that the disbursement agreements “clearly contem-
plated that adequate funds were to be made available
to [the insurer] in order to satisfy claims.” Bankers
Trust, 594 F.2d at 233; see Brown, 634 F.2d at 1110 (“the
parties contemplated that [the bank] would provide
adequate funds to pay for work completed prior to the
No. 11-3446 19
default”). By requiring the insurers themselves to
disburse funds, and to do so only after receiving lien
waivers from contractors, the disbursement agreements
presupposed an obligation on the part of the banks to
make sufficient funds available. The disbursement agree-
ments were “critical.” Bankers Trust, 594 F.2d at 232.
In this case, there was no disbursement agreement,
and it was Home Federal rather than Ticor that both
secured lien waivers and disbursed the funds when due
under the loan agreement. Unlike in Bankers Trust and
Brown, nothing in the insurance policy or the course of
dealings indicates that Home Federal was bound to
disburse the entirety of its loan commitment to Altra
even if Altra was in default. In both Bankers Trust and
Brown, the bank, the title insurer, and the developer and
its contractors were involved in one complex business
relationship: the bank put up the loan, and the title
insurer performed title searches, secured lien waivers,
and released funds to the developer and contractors
for construction already performed. Here, there were
instead two bilateral contractual relationships — one
between Home Federal and Altra, and another between
Home Federal and Ticor. The title insurance policy pro-
vided: “At the time of each disbursement of the proceeds
of the loan, title must be searched . . . for possible liens”
filed up to “the date of such disbursement.” The policy
did not require Ticor to perform a title search prior to any
disbursement, as the disbursement agreements did in
Bankers Trust and Brown. And it did not entrust the title
insurer with the responsibility to disburse the funds. That
20 No. 11-3446
responsibility remained with Home Federal. In the
absence of any indication from the insurance policy that
Home Federal would continue funding the develop-
ment after a default by its borrower (Altra), Home Federal
owed no duty to Ticor to disburse the entire amount of
the loan commitment to Altra to pay its contractors.
Because of the Indiana statute giving strong priority to
the construction lender’s mortgage, it should have
taken little trouble or expense for Ticor to honor the
promise of its mechanic’s lien endorsement by de-
fending against the Wilhelm counterclaim.
Our reasoning here tracks that of the court in Mid-South
Title, which distinguished Bankers Trust and Brown on
precisely this basis. Where the developer defaulted on
the construction loan and there was no disbursement
agreement, the lender had no obligation to continue
lending good money after bad:
The fact that committed funds under the loan agree-
ment remained undisbursed has no bearing on the
potential or actual lien losses under the title policy
unless or until an actual or implied duty arises
between the parties to the title policy to provide the
funds. In Bankers Trust and Brown, this duty was
impliedly created by the disbursement agreement.
However, absent a contractual relationship ancillary
to the insurance contract at issue, there was no
implied duty between these parties that all committed
loan funds must have been expended. Here no
such agreement existed.
No. 11-3446 21
840 F. Supp. at 528. This case is distinguishable from
Brown and Bankers Trust on exactly the same grounds.6
Ticor’s final argument is that the “created or suffered”
exclusion applies because Home Federal is seeking to
obtain an inequitable windfall by first refusing to
pay Wilhelm and then seeking to recover on the title
insurance policy. We disagree. Home Federal had no
duty to pay Wilhelm directly. Both companies had con-
tracts with Altra but not with each other, and Altra
had defaulted on both. Home Federal paid an extra
premium for the mechanic’s lien endorsement, which
specifically insured against “attempted enforcement of
any [mechanic’s] lien . . . arising from construction con-
tracted for and/or commenced . . . prior to, at, or subsequent
to the effective date of said policy, and any extension
of said date.” This provision covered not just the risk of
an unknown prior lien (against which all title
insurance policies insure), but the risk that a mechanic’s
lien seeking seniority would be filed after the effective
date of the policy, even if the effort to seek seniority
was a sure loser. Wilhelm’s lien was of just this variety,
filed for work performed after the latest update. If
Wilhelm had established priority of its lien over the
mortgage, it would have impaired Home Federal’s
6
Ticor seeks to distinguish Mid-South Title on the theory that
Indiana law provides greater protection to a construction lender
than Tennessee law. This argument echoes the mistaken
argument, discussed above, that Ticor owed no duty to defend
or indemnify here because the Wilhelm counterclaim was
doomed on the merits.
22 No. 11-3446
security interest in the mortgage and reduced the amount
of its recovery from the proceeds of the foreclosure sale
by $6 million. However dim Wilhelm’s prospects of
success, that was precisely what Home Federal had
insured against in the mechanic’s lien endorsement. Ticor
denied Home Federal’s request for a defense, saying,
effectively, “Handle this yourself — it’s a slam dunk.”
Home Federal defended its position but eventually
chose to settle with Wilhelm rather than risk paying
for litigation and possibly losing priority of its security
interest. Bearing those costs is a risk against which
Home Federal had already insured through its policy
with Ticor by paying for the mechanic’s lien endorse-
ment. As we see the case, Home Federal was seeking
only the peace of mind it had paid for, not a windfall.
The district court should have granted Home Federal’s
motion for summary judgment and denied Ticor’s.
Having erroneously abandoned its insured against
the Wilhelm counterclaim, Ticor is of course precluded
from arguing that it was under no duty to indemnify
Home Federal for liability it incurred as a consequence
of that litigation. See Frankenmuth Mut. Ins. Co. v. Williams,
690 N.E.2d 675, 678-79 (Ind. 1997). We must remand the
case for further proceedings on the issue of damages,
which Home Federal’s motion for summary judgment
did not address. An insurer that refuses to defend its
insured does so “at its peril,” and where it breaches its
duty to defend, “an insurer is ordinarily bound by the
result of litigation to which its insured is a party, so long
as the insurer had notice and the opportunity to control
the proceedings.” State Farm Fire & Cas. Co. v. T.B. ex rel.
Bruce, 762 N.E.2d 1227, 1231 (Ind. 2002), quoting Liberty
No. 11-3446 23
Mut. Ins. Co. v. Metzler, 586 N.E.2d 897, 900 (Ind. App.
1992). Where the insured elects to settle the third-party’s
claim, the settlement is binding on the insurer so long
as the claim was within the policy’s coverage and the
settlement was reasonable and made in good faith. See
Midwestern Indem. Co. v. Laikin, 119 F. Supp. 2d 831, 842
(S.D. Ind. 2000) (interpreting Indiana law as supporting
rule that a “consent judgment . . . bind[s] the insurer
on issues of its insured’s liability and the extent of the
injured parties’ damages, so long as (1) the coverage is
eventually shown, and so long as the consent judgment
(2) is not the product of bad faith or collusion and (3) falls
somewhere within a broad range of reasonable resolutions
of the underlying dispute”); Cincinnati Ins. Co. v. Young, 852
N.E.2d 8, 14 (Ind. App. 2006) (endorsing Laikin’s ap-
proach); see also 7C Appleman, Insurance Law & Practice
§ 4714, at 531 (“A settlement made by the insured of a
pending action must be reasonable; and the court will
examine the merits of the claim to determine that ques-
tion.”).
III. Conclusion
The judgment of the district court is R EVERSED and
R EMANDED with instructions (a) to enter summary judg-
ment for plaintiff Home Federal on the issue of liability on
its claim that defendant Ticor breached its duty to
defend under the policy and on defendant’s counterclaim
for a declaratory judgment, and (b) to conduct further
proceedings consistent with this opinion.
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