United Fire & Casualty Co. v. Fidelity Title Insurance

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 00-2595
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United Fire & Casualty Company, *
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Plaintiff - Appellee, *
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v. *
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Fidelity Title Insurance Company, *
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Defendant, *
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Lawyers Title Insurance Corporation, *
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Defendant - Appellant. *
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Appeals from the United States
No. 00-2596 District Court for the
___________ District of Minnesota
United Fire & Casualty Company, *
*
Plaintiff - Appellee, *
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v. *
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Fidelity Title Insurance Company, *
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Defendant - Appellant, *
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Lawyers Title Insurance Corporation, *
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Defendant. *
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Submitted: March 14, 2001
Filed: July 16, 2001
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Before BYE, LAY, and JOHN R. GIBSON, Circuit Judges.
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BYE, Circuit Judge.
This appeal raises a question of Minnesota law: whether a Notice of Adverse
Claim, filed pursuant to Minn. Stat. § 508.70 against a registered Torrens property,
should be considered a "defect in title" under the plain and ordinary meaning of that
term. The district court1 held that a title insurance agent's knowledge of the Notice of
Adverse Claim triggered an exclusion in his errors and omissions (E&O) policy which
precluded coverage for a claim brought against the agent by a title insurer. We affirm.
BACKGROUND
A 45-acre hobby farm in Hennepin County, Minnesota, is the genesis of this
insurance coverage dispute. The hobby farm is registered Torrens property.2 Myrna
1
The Honorable David S. Doty, Senior United States District Judge for the
District of Minnesota.
2
Torrens refers to a real estate titling system under which ownership is initially
established by registering for a certificate of title through court proceedings. Any post-
registration disputes are also resolved in court. The Torrens system contrasts with the
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Lysne began renting the hobby farm in 1993. She ran an Arabian horse-boarding
operation on the property, and soon needed money to keep her business afloat. She
obtained a $40,000 loan from Rockford State Bank (Rockford), securing the loan with
money she claimed she would receive as the beneficiary of a family trust fund.
Rockford made the original loan due and payable by February 11, 1995, but later gave
Lysne several extensions and even loaned her additional money.
In December 1995, Lysne used part of her Rockford funds to purchase the hobby
farm under a contract for deed. Lysne never recorded the deed, however, so the world
at large had no notice of her interest in the property. Later, Lysne became delinquent
in her Rockford loan commitments, which had increased substantially from the original
$40,000. In late February 1996, Rockford insisted that Lysne give the bank a
$249,395.01 mortgage on the property, and she did so.
A couple months later, Lysne decided to pay the contract for deed in its entirety.
She applied for a another loan through a mortgage broker. In her loan application, she
disclosed her Rockford loan commitments, but only as a liability being "paid by trust
account" and not as an encumbrance upon the property. The mortgage broker sent
Lysne's application to Southern Pacific Mortgage Company (Southern). Southern
approved the loan and arranged to have Richard Jacobsen, operating as Fidelity Title
Insurance Company (Fidelity), and acting as an agent for Lawyers Title Insurance
Corporation (Lawyers Title), provide closing and title insurance services.
abstract system, which allows for voluntary registration of interests in real estate
without requiring an initial court proceeding, and where all the conveyances, interests,
liens, and encumbrances that affect title are summarized on an abstract. Compare
Minn. Stat. ch. 508 (governing the registration of Torrens property) with Minn. Stat.
ch. 508A (governing abstract property).
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When Jacobsen performed his initial title search, neither Lysne's contract for
deed, nor the Rockford mortgage, appeared in the chain of title. Shortly thereafter,
Rockford learned that Lysne had not recorded her contract for deed. Rockford filed
a Notice of Adverse Claim pursuant to Minn. Stat. § 508.703 to give notice of its
mortgagee's interest in the property. Despite the fact that the underlying contract for
deed had not been recorded, Hennepin County accepted and filed Rockford's Notice
on May 14, 1996.
Jacobsen learned of the Notice of Adverse Claim on June 10, 1996, prior to the
closing on the Southern loan. Jacobsen contacted Lysne and her real estate agents,
who contested the validity of the Notice. Lysne denied giving Rockford a mortgage on
the property. Jacobsen also contacted an attorney for advice. The attorney agreed to
initiate a "proceeding subsequent to initial registration," see Minn. Gen. R. Prac. 213,
to remove the Notice. Jacobsen arranged to have $5000 of the Southern loan proceeds
3
The statute provides, in relevant part, that
[a]ny person claiming any right, title, or interest in registered land adverse
to the registered owner arising subsequent to the date of the original
registration, may, if no other provision is made in this chapter for
registering the same, file with the registrar a verified statement in writing
setting forth fully the alleged right or interest, and how or from whom it
was acquired, and a reference to the volume and page of the certificate of
title of the registered owner, together with a description of the land, the
adverse claimant's residence, and designating a place at which all notices
may be served upon the adverse claimant. Such statement shall be entitled
to registration as an adverse claim, and the court, upon the petition of any
party in interest, shall grant a speedy hearing upon the validity of such
adverse claim and enter such decision and decree therein as justice and
equity may require.
Minn. Stat. § 508.70, subd. 1.
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set aside in escrow to pay the attorney's fees necessary to conduct the "proceeding
subsequent."
Based upon his conversations with Lysne, the realtors, and the attorney, and
upon his own understanding of the Torrens statute, Jacobsen did not believe that the
Notice of Adverse Claim would give Rockford's mortgage priority over Southern's
mortgage. Jacobsen left a message with Lawyers Title about Rockford's adverse claim,
and asked if he should proceed with closing. When no one from Lawyers Title
contacted him, Jacobsen closed the loan and issued a final title insurance policy, on
behalf of Lawyers Title, without excepting the Rockford mortgage.
Much to Jacobsen's surprise, in the proceedings that followed, a title examiner
declared Rockford's mortgage valid and superior to Southern's mortgage.4 Thus,
4
We question the title examiner's decision, since it appears that Hennepin County
shouldn't have filed the Notice of Adverse Claim. See Op. Atty. Gen. 374f, January
24, 1957 (holding that Hennepin County should not receive or file an adverse claim of
a person holding a mortgage under an unrecorded contract for deed unless and until
ordered by a court to do so); Op. Atty. Gen. 374f, October 23, 1963 (holding that
Anoka County may not record a mortgage deed as an adverse claim under Minn. Stat.
§ 508.70 until the underlying contract for deed upon which the mortgage is based has
been recorded).
The title examiner didn't consider these attorney general opinions, see Billigmeier
v. Hennepin County, 428 N.W.2d 79, 81-82 (Minn. 1988) (holding that attorney
general opinions, while not binding, are entitled to careful consideration, especially
when long-standing), or a Minnesota Court of Appeals decision consistent with the
attorney general opinions. See Fingerhut Corp. v. Suburban Nat'l Bank, 460 N.W.2d
63, 66 (Minn. Ct. App. 1990) (holding that Notice of Adverse Claim provision can't be
utilized if "[an]other provision is made in this chapter for registering [an adverse
claim]," and that Minn. Stat. § 508.48, which allows a lis pendens to be filed against
a registered property, is such a provision).
The parties didn't appeal the title examiner's decision, however, and the validity
of that decision matters not for our purposes.
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Lawyers Title suddenly found itself obligated to pay a substantial sum (about $365,000)
in order to give Southern priority on its mortgage. Lawyers Title immediately sought
indemnity from Jacobsen/Fidelity. They, in turn, looked to United Fire and Casualty
Company (United), their E&O carrier, to provide coverage. United denied coverage,
and filed this declaratory judgment action. United moved for summary judgment,
relying upon an exclusion in the E&O policy that applied "to claims arising from
defects in title of which the Named Insured had knowledge at the date of issuance of
such title insurance."
In a well-reasoned opinion, the district court discussed the plain and ordinary
meaning of the term "defect" (since the policy did not define the term), as well as the
meaning given to that term by Minnesota courts. The district court concluded that the
Notice of Adverse Claim constituted a "defect" because the adverse claim could only
be removed by litigation, even if it was invalid. Because Jacobsen knew about the
Notice of Adverse Claim when he issued the title insurance, the district court held that
the exclusion applied, and granted United's motion for summary judgment. Both
Fidelity and Lawyers Title filed timely appeals.
DISCUSSION
We review the district court's grant of summary judgment de novo, applying the
same standard as the district court. See Krentz v. Robertson Fire Protection Dist., 228
F.3d 897, 902 (8th Cir. 2000). Interpretation of the contractual provisions of an
insurance policy presents a question of law we review de novo. See Noran
Neurological Clinic, P.A. v. Travelers Indem. Co., 229 F.3d 707, 709 (8th Cir. 2000).
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Under Minnesota law, undefined terms in an insurance policy are given their
plain, ordinary or popular meaning. See Smith v. St. Paul Fire & Marine Ins. Co., 353
N.W.2d 130, 132 (Minn. 1984). United argues that a "defect in title" includes a Notice
of Adverse Claim, because the Notice can only be removed by litigation. See Minn.
Stat. § 508.70. United ventures that the plain, ordinary and popular meaning of the
term "defect" has a broad sweep that encompasses all imperfections of title, whether
claimed or actual. Thus, an adverse claim that can only be removed by litigation, even
though lacking in merit, still constitutes a "defect."
Lawyers Title and Fidelity counter that such a broad definition of the term would
defeat the reasonable expectations of the insured, and render the E&O coverage
completely illusory. The appellants argue that while Jacobsen knew the Notice was a
"cloud" on title, or potential defect, he did not know or believe that it constituted an
actual defect. The appellants contend that the purpose of the E&O policy was to
provide coverage when an agent makes a mistake in judgment about a potential defect
that is later deemed to be an actual defect.
We agree with United. The plain and ordinary meaning of "defect" is broad,
referring to any "fault or shortcoming or failing; imperfection. . . . Defect is the general
word for any kind of shortcoming, imperfection, or deficiency, whether hidden or
visible." Random House Webster's College Dictionary 347 (2d ed. 1999). While
courts use many terms to describe flawed titles, and the various types of flaws in title,
(i.e., "cloud on title," "encumbrance," "defective title," "unmarketable title") the term
"defect" itself is typically used in a broader sense that encompasses all the other terms.
See, e.g., State Bank of Good Thunder v. Bryson, 262 N.W. 561, 561-62 (Minn. 1935)
(referring to "defect" in general terms when discussing a title that "might or might not
be good"); Maeser v. Cook, Vogele & Nelson, P.A., 446 N.W.2d 697, 698 (Minn. Ct.
App. 1989) ("A title that may force the purchaser into litigation to remove defects is not
a marketable title."); Tara Hills Condo. Ass'n v. Gaughan, 399 N.W.2d 638, 643
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(Minn. Ct. App. 1987) (referring to "defects" as those both real and apparent that affect
marketability); Simon Home Builders, Inc. v. Pailoor, 357 N.W.2d 383, 385 (Minn. Ct.
App. 1984) (equating "defect" and "cloud" — "The 'defect' in title relating to the
attorney's lien did not cause [appellant's] breach. Even if the attorney's lien did
constitute a cloud on title, it was not material.") (emphasis added); see also Stewart
Title Guar. Co. v. Greenlands Realty, 58 F. Supp. 2d 370, 382 (D.N.J. 1999) (holding
that "defects" can be so minimal or trivial that they do not even rise to the level of a
"defect" that renders title unmarketable); Annot., Defects Affecting Marketability of
Title, 18 A.L.R. 4th 1311, 1313 (defining "defect" in terms broader than those aspects
of a title that render it unmarketable — "It may perhaps be stated that as a general rule
discernible from the cases discussed herein, defects which merely diminish the value
of the property, as opposed to defects which adversely affect a clear title to the
property, will not render title unmarketable within the meaning and coverage of a policy
insuring against unmarketable title.")
Therefore, we conclude that the plain and ordinary meaning of "defect" includes
a claim against title that, regardless of validity, might force a person into litigation.
E.g., Maeser, 446 N.W.2d at 698. Jacobsen knew that the Notice of Adverse Claim
could only be removed by litigation, since he set aside $5000 in escrow to pay for
attorney's fees necessary to conduct the litigation. In addition, he knew about the
Notice at the time he issued the title insurance policy. Therefore, the exclusion for
"claims arising from defects in title of which the Named Insured had knowledge at the
date of issuance of such title insurance" applies.
We disagree with appellants' contention that interpreting the policy in this
manner renders the E&O coverage illusory. The doctrine of illusory coverage applies
only when "part of the premium is specifically allocated to a particular type or period
of coverage and that coverage turns out to be functionally nonexistent." Jostens, Inc.
v. Northfield Ins. Co., 527 N.W.2d 116, 119 (Minn. Ct. App. 1995). That is not the
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case here. The E&O policy clearly provided coverage under many circumstances. If,
for example, Jacobsen had neglected to discover Rockford's Notice of Adverse Claim
prior to the closing date, his negligent lack of knowledge would not have triggered the
exclusion. But the policy was not meant to provide coverage for known defects in title,
and Fidelity never paid a premium for such coverage. See Kabanuk Diversified Inv.,
Inc. v. Credit Gen. Ins. Co., 553 N.W.2d 65, 73 (Minn. Ct. App. 1996) (refusing to
apply the doctrine of illusory coverage absent evidence that a premium was specifically
allocated to the disputed coverage).
We also disagree that a broad definition of the term "defect" defeats the
reasonable expectations of the insured. Since the term "defect" was undefined in the
policy, Jacobsen could not reasonably expect that the term would be given a narrower,
technical meaning that differed from its plain and ordinary meaning. See Auto-Owners
Ins. Co. v. Hanson, 588 N.W.2d 777, 779-80 (Minn. Ct. App. 1999) (explaining that
Minnesota rejects a "terms of art" approach to interpreting undefined terms in an
insurance policy). When understood in its plain and ordinary meaning, "the language
in this policy was not ambiguous and appellant[s] made no showing of a hidden
exclusion or other special circumstances, [and therefore] the [district] court correctly
refused to apply the doctrine of reasonable expectations." Levin v. Aetna Cas. & Sur.
Co., 465 N.W.2d 99, 102 (Minn. Ct. App. 1991).
We affirm the judgment of the district court.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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