Lack of Civil Lawsuit Precludes Duty to Defend, While Prior Knowledge Exclusion Bars Indemnity Coverage

The United States District Court for the District of New Mexico, applying New Mexico law, has held that an insurer owed no duty to defend a title and escrow agent against a demand by a title insurer because no civil proceeding had been brought against the insured.  The court also held that the insured owed no duty to indemnify due to a prior knowledge exclusion in the policy.  Aztec Abstract & Title Ins., Inc. v. Maxum Specialty Group, et al., 2018 WL 734285 (D.N.M. Feb. 6, 2018).

The insured served as an agent for a title insurance company.  In December 2010, a bank, which had been issued a title insurance policy by the insured agent on behalf of the title insurance company, discovered that another entity was asserting that its mortgage was senior to the bank.  In February 2011, the title insurance company advised the insured agent about the claim from the bank.  The insured agent responded in March 2011, explaining that the bank’s claim had occurred due to a mistake in the legal descriptions of the properties involved in two separate transactions.  A court ultimately determined in December 2012 that the bank’s mortgage was secondary on the disputed property, and the title insurance company indemnified the bank for the lost collateral.  However, pursuant to the terms of their agency agreement, the title insurance company subsequently demanded that the insured agent indemnify it for the losses and expenses it incurred due to the insured agent’s gross negligence in filing conflicting legal descriptions.

The insured agent then sought coverage under its professional errors and omissions policy that incepted on July 1, 2012.  The insured agent sought coverage for both defense and indemnification, even though the title insurance company never filed suit against the insured agent.  The insurer denied coverage based on the policy’s prior knowledge exclusion, which stated that the policy did not apply to “any ‘claim’ arising out of or resulting from any ‘wrongful act’” which the insured agent “had knowledge of or information related to, prior to the first inception date of the continuous claims-made coverage with” the insurer “and which may result in a ‘claim.’”  The insured agent then filed suit against the insurer alleging breach of contract and bad faith.  The insurer moved for summary judgment on all of the causes of action.

The court first held that the insurer owed no duty to defend because the title insurance company had not initiated a civil suit against the insured agent.  Under the policy, the insurer’s duty to defend applied only to a “suit,” which was in turn defined to mean “a civil proceeding.”  The court determined that the term “suit” unambiguously meant only a civil lawsuit filed in a court of law.  As such, a mere demand for money was insufficient to trigger the duty to defend.  Because the title insurance company had not sued the insured agent, the insurer had no duty to provide the insured agent with a defense.

Next, the court determined that the prior knowledge exclusion barred coverage because, prior to the policy’s inception in July 2012, the insured agent had “knowledge of information related to” the overlapping legal descriptions that “may result in a claim” by the title insurance company.  As an initial matter, the court refused to interpret the prior knowledge exclusion to exclude coverage only for ripened claims that had already been made or were certain to be made at the time of policy inception.  It thus held that the exclusion applied to errors that might result in a claim.

Turning to the facts at hand, the court found that it was undisputed that the insured agent knew as early as December 2010 of the bank’s claim to the title insurance company.  Indeed, the court noted that in March 2011 the insured agent knew of the negligent mistake that caused the claim and that it was possible for that mistake to result in the bank’s loss of collateral.  The court thus determined that a reasonable jury could find from the undisputed evidence that, prior to July 2012, the insured agent had knowledge of a negligent act or error that could result in a claim or demand for money.  In so holding, the court rejected the insured agent’s argument that the prior knowledge exclusion only applied to claims for “gross” negligence, as provided in the agency agreement between the title insurance company and the insured agent.  The court explained that the policy’s definition of claim did not state that the claim must be valid and, even if it did, the undisputed evidence revealed that the insured agent had concerns that the title insurance company would sue it – presumably under a theory of gross negligence – prior to the inception of the policy.