In a thinly-reasoned opinion, the U.S. Court of Appeals for the Third Circuit opined that under Pennsylvania law, a title insurer, unlike other liability insurers, is only required to defend alleged claims that are actually covered. The court’s opinion on Pennsylvania law is certainly curious, as under the Commonwealth’s long-standing “in for one, in for all” rule, a liability insurer is required to defend all causes of action in a complaint, even when only one cause of action is potentially covered.
The case stems from a dispute over a residential property caught up in foreclosure proceedings. The owner, Adrian Lupu, refinanced his home mortgage with Loan City, LLC. The loan and mortgage were subsequently transferred multiple times before ending up with current lien holder, Ocwen Loan Servicing, LLC.
Under the terms of the original loan, Stewart Title Guaranty Company issued the title policy. After defaulting on the mortgage payments, Lupu challenged the chain of title on his mortgage, specifically, suing to void the debt instruments based on the use of the Mortgage Electronic Registration System (MERS) to transfer ownership of his mortgage.
Lupu changed his complaint several times, and after filing the Third Amended Complaint, Lupu alleged through interrogatories that Loan City created, notarized and recorded forged mortgage documents and that the original mortgage was never recorded. In his Fourth Amended Complaint, Lupu referred to an allegation of forgery. The District Court ultimately dismissed his action, and no appeal was filed by Lupu.
However, after Lupu made the allegations of forgery, Ocwen sought policy coverage from Stewart Title. Stewart denied the policy claim, stating that the complaint itself did not raise any covered claims.
Ocwen then followed up with a third-party complaint against Stewart seeking coverage. Stewart eventually agreed to defend the forgery claim, but none of the other claims asserted by Lupu. Regardless, Ocwen continued its suit, seeking and requesting coverage on all claims.
After hearing cross-motions for summary judgment, the District Court applied the “four corners” rule, holding that Stewart had no duty to defend claims in the Third Amended Complaint, but had a duty to defend the forgery allegations made in the Fourth Amended Complaint, as they were covered by the title policy.
The Court also applied the “in for one, in for all” rule used by Pennsylvania courts in insurance cases, meaning Stewart had an obligation to defend against all claims in the Fourth Amended Complaint, because the title policy covered at least one claim. Stewart appealed the decision to the Third Circuit.
On appeal, the Third Circuit affirmed in part and reversed in part, holding that while the “four corners” rule still applied, the “in for one, in for all” rule did not apply for title insurance policies.
The Court attempted to clarify its decision on the “four corners” rule, saying that, based on common law precedent, as well as efficiency and policy, the question of what is covered under a policy claim is best described as comparing the four corners of the insurance contract to the four corners of the complaint.
The Court also noted and affirmed that the Pennsylvania court system has no exception to the four corners rule where the insurer believes or should believe that the allegations in the complaint conflict with the facts. Based on this rule, the Third Circuit held that Stewart’s duty to defend did not arise until after the forgery allegations were presented in the Fourth Amended Complaint.
Most significantly, the Appeals Court also held that title insurance companies are not required to defend claims not covered under their policies, and that the “in for one, in for all” rule does not apply to title insurance cases.
The Third Circuit’s decision is obviously contrary to Pennsylvania’s “in for one, in for all” rule. The Court reasoned, however, that title insurance is narrower and more backward looking than general liability insurance, and hence, the rule should not apply.
Since the Pennsylvania Supreme Court has not yet created a title-policy exception for the “in for one, in for all” rule, the Third Circuit remanded the case back to the District Court so that it may use state law, court decisions, and public policy to determine which claims are within the scope of the title policy.
With all due respect to their eminences on the Third Circuit, the opinion is nonsense, and reflects the empty title industry rhetoric that title insurance is not actually insurance. Pardon my simplistic thinking, but you’re agreeing to: (a) defend and indemnify, (b) an insured, (c) in consideration for a monetary premium. It’s insurance. Similarly, the “in for one, in for all” rule and its variants across the country are calculated to protect insureds’ reasonable expectations that a liability policy purchased will defend them against lawsuits, not claims and not causes of action – lawsuits.
The nature of the specific trigger of coverage (backward or forward, narrow or broad) expounded upon by the Court fails to alter the insured’s reasonable expectations of what it is purchasing. Rather, the Third Circuit’s reasoning reflects the title industry’s unreasonable expectation that it can collect premiums without living up to the terms of its agreement. In this regard, they are no different from any other insurance company, and should be treated accordingly.