The U.S. Court of Appeals for the Eleventh Circuit recently held that a title insurance policy exclusion for defects "assumed or agreed to" by the insured precluded coverage, where the evidence showed that the insured had actual knowledge that there was no right of access to and from the property securing the loan.
A copy of the opinion is available at: http://www.ca11.uscourts.gov/opinions/ops/201210495.pdf.
A number of real estate investors formed a company ("Company") to purchase a parcel of raw land in Lincoln County, Georgia for purposes of developing a residential subdivision. Company financed the land acquisition with a purchase money loan from a local state bank ("Bank") with the intention of funding the development through another source. Bank obtained personal guaranties from two of Company's principals as well as additional collateral from other investors in Company. Bank also took out a title insurance policy with defendant title company ("Title Insurer").
The title policy insured "owners of real property or others having an interest in such real property . . . against loss by encumbrance, defective titles, invalidity, adverse claim to title, or unmarketability of title by reason of encumbrance or defects not excepted in the insurance contract." Ga. Code Ann. § 33-7-8. While the policy generally covered loss or damage incurred due to a "lack of right of access to and from the land," there was a provision excluding coverage for defects "assumed or agreed to" by the insured.
Shortly after Company's acquisition of the land, Company's development plans stalled. One of the obstacles Company faced was that the property was landlocked, lacking access to any public road. Being aware of this condition prior to its purchase of the property, Company had originally planned to obtain an easement across adjacent property, but later abandoned that idea for reasons of cost.
Company later filed a claim with Title Insurer under the provision insuring against loss due to lack of access to and from the land. Title Insurer denied the claim on grounds that Bank, and not Company, was the insured party.
Facing mounting interest costs on the land purchase loan and problems in securing funding for development, Company later unsuccessfully attempted to modify the loan, among other things. Company also encouraged Bank to file a claim with Title Insurer based on the "lack of access" provision in the policy. In response, Bank declined to make a claim, stating among other things that Bank knew at the time of loan origination that there was no designated access to the property.
Company later defaulted on the land purchase loan and, after Bank indicated that it would pursue the personal guarantees, Company's investors formed a new business ("Loan Owner") that purchased Company's promissory note from Bank, thereby stepping into Bank's shoes.
Next, Loan Owner filed an insurance claim against Title Insurer based on the lack of access provision. Accordingly, Title Insurer, as part of its investigation of the claim, had a Bank executive with personal knowledge of the loan transaction execute an affidavit stating that at the time it extended the loan and took out the title insurance policy, Bank was fully aware of the property's lack of dedicated access. The Bank executive died shortly before the lawsuit was filed.
Title Insurer subsequently denied the claim, citing a provision in the policy excluding coverage for matters "assumed or agreed to" by the insured. Loan Owner filed suit in state court, seeking damages for breach of contract and penalties for acting in bad faith. Title Insurer removed the case to federal court. The parties filed cross-motions for summary judgment on the issue of Title Insurer's liability under the policy. The lower court granted summary judgment to Title Insurer, ultimately concluding that the policy exclusion negated coverage for losses arising from "defects, liens, encumbrances, adverse claims or other matters . . . assumed or agreed to by the insured claimant." Loan Owner appealed.
The Eleventh Circuit affirmed based on the consistent evidence that when it made the loan, Bank had "assumed" the landlocked condition of the property within the meaning of the exclusion to the title insurance policy.
As you may recall, Rule 807 of the Federal Rules of Evidence, the so-called catch-all rule, permits admission of a hearsay statement "(1) if it is particularly trustworthy; (2) it bears on a material fact; (3) it is the most probative evidence addressing that fact; (4) its admission is consistent with the rules of evidence and advances the interests of justice; and (5) its proffer follows adequate notice to the adverse party." See Fed. R. Evid. 807(a), (b).
Rejecting Loan Owner's various assertions, including the argument that the lower court's interpretation of the insurance policy was inconsistent with Georgia law because, according to Loan Owner, the insurance policy guaranteed coverage "without exception" for losses resulting from lack of access, the Eleventh Circuit pointed out that losses and damages arising from "defects, liens, encumbrances, adverse claims or other matters . . . assumed or agreed to by the insured claimant" were expressly excluded from coverage. In so doing and stressing that only "assumed" losses were excluded, the Court agreed with the lower court's assumption-of-the-risk analogy whereby a plaintiff has a priori consented to take his chance of injury from a known risk, pointing out that the phrase "other matters" in the policy exclusion would be meaningless if it did not refer to anything besides the four items that preceded it. See Vaughn v. Pleasent, 471 S.E.2d 866, 868 (Ga. 1996).
Emphasizing that, contrary to Loan Owner's assertion, Bank was not required to unearth evidence of a title defect before making the loan, and that Bank had actual knowledge about the lack of access to the property and thus fully appreciated how lack of access affected the value of the property prior to making the loan, the Court also noted that there was no obligation on the part of Title Insurer to investigate prior to issuing its policy whether or not the property was landlocked.
Turning to Loan Owner's argument that the admission of the affidavit of Bank's president at trial was improper because the affidavit constituted inadmissible hearsay, the Court agreed with the lower court's analysis under Rule 807. Notably, with respect to Loan Owner's assertion that it lacked the requisite notice of Title Insurer's intent to rely on the affidavit well before any "trial or hearing", the Court pointed out that the affiant's death occurred prior to the filing of the lawsuit and that the affidavit was provided to Loan Owner well before any briefing on the dispositive motions took place.
The Eleventh Circuit thus concluded that summary judgment was proper based on the considerable and consistent evidence presented, including the affidavit of the now-deceased Bank president and testimony as to Bank's knowledge of and lack of concern with access to the property, as it was only extending a purchase money loan for the land, not a loan for its development. Consequently, the Court reasoned, Bank's only concern was simply obtaining adequate collateral for the purchase loan.
Accordingly, having determined that "no reasonable factfinder could doubt" that Bank knew about the property's lack of access and appreciated its significance, the Eleventh Circuit concluded that, because Bank had "assumed" the landlocked condition of the property, Title Insurer was entitled to summary judgment.
Ralph T. Wutscher
McGinnis Wutscher LLP
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Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.
Our updates are available on the internet, in searchable format, at:
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