In the case of Park v. First American Title Company, the lender, Kang Sik Park, obtained a 2006 policy from First American insuring the lender’s deed of trust. First American’s policy insured the lender against, among other things, the “invalidity or unenforceability of the lien of the Insured Mortgage upon the title”
In 2010, third parties filed an action against Park and Park’s borrowers, Peter and Virginia Lamb, seeking to quiet title to the real property secured by Park’s deed of trust. In October 2015, a Utah state court ruled in the third parties’ favor, holding that documents under which the Lambs claimed an interest in the property were not authorized by all of the owners, or conveyed an interest in the property that the grantors did not possess. Park’s deed of trust was invalidated as a result.
Park subsequently made claim to First American under the terms of the lender’s policy, which First American quickly rejected. Park filed suit in Utah state court alleging First American breached the lender’s policy in bad faith.
First American responded by moving the case to Federal District Court and filing a motion to dismiss, claiming that Park’s claims were time barred under a Utah statute requiring an action against an insurer on a first-party policy be filed within three years of “inception of the loss.” First American asserted that Park’s “loss” incepted when he was served with the third parties’ quiet title action in 2010. Easily persuaded, the District Court agreed, finding that Park’s claims were time-barred under First American’s “inception of the loss” argument. Park appealed the District Court’s decision to the Tenth Circuit.
The Tenth Circuit reviewed a number of decisions interpreting the Utah’s “inception of the loss” statute in prior actions in a variety of contexts and under a variety of policies. Noting that the District Court “perceived some tension” between these prior cases, the Tenth Circuit concluded that this so-called “tension” dissipates if one focuses on the specific loss alleged in each case.” For example, in an action on an equipment insurance policy, a Utah state court held that the “loss incepted” on the date the insured equipment went missing, as opposed to the date that the insurer denied policy benefits. Similarly, in an action on an insurer’s failure to defend, a Federal District Court in Utah held that the “loss incepted” when the insured first incurred defense costs, not when the insurer denied a duty to defend.
Focusing on the actual “loss” alleged by Park, the invalidation of his interest in the property caused by a title defect, the Tenth Circuit held that Park’s “loss incepted” in 2015, the date the Utah state court ruled in the third parties’ quiet title action (which, not coincidentally, was the actual risk First American insured Park against). In a further irony, this reading of the Utah statute, the Tenth Circuit noted, corresponds with the actual terms of First American’s policy, purporting to insulate the insurer from liability “until there has been a final determination by a court of competent jurisdiction.”
Beyond the common-sense application of traditional insurance coverage law, the Tenth Circuit’s decision is noteworthy in two respects. First, the fact that “insurance coverage law” even applied to the case amounts to a remarkable concession on First American’s part that it has the same obligations to its insureds as any other insurance carrier. First American’s (and other title carrier’s) rhetoric that title insurance is somehow “different” or “not really insurance” is apparently wearing thin on courts.
Second, the Tenth Circuit (in a footnote) declined to address a likely First American defense that, regardless of the construction of the Utah statute at issue, Park had failed to provide prompt written notice, required by the policy, of the third parties’ quiet title action. In asserting this defense, First American would have been required to prove it was actually prejudiced by Park’s failure to provide notice. Whether or not First American did (or even could) prove such prejudice is simply not discussed in the opinion. The take-away from the Tenth Circuit’s declining to explore the issue, however, is that lenders in Park’s position should not sit on their rights, trusting in friendly appeals courts to actually apply the law and reinstate their claims. Rather, prudent lenders should provide written notice to a title carrier immediately upon becoming aware of a potential defect or claim.