You Get What You Pay For: Title Insurers Need Only Defend Claims Explicitly Covered in Policy

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On November 13, the Seventh Circuit Court of Appeals decided in a case of first impression that the “complete defense” rule does not apply to title insurers and overturned the Northern District of Illinois’s ruling in Philadelphia Indemnity Ins. Co. v. Chicago Title Ins. Co. that defendant Chicago Title could not limit the defense of its insured to claims that might arise under the subject title insurance policy.

In 2007, Western Capital Partners, LLC, a high-risk real estate lender, moved to foreclose on mortgaged commercial property valued at $2.7 million.  The property owners responded with a lawsuit against Western Capital claiming breach of contract, fraud, violation of state consumer protection statutes, and other tortious activity.  Western Capital sought defense from its title insurer, Chicago Title.  The title insurance policy, however, only covered claims involving defects in title or lien priority and claims related to the insured’s title.  Chicago Title, therefore, disclaimed the duty to defend a majority of the claims.  Western Capital then sought defense from its excess general liability insurer Philadelphia Indemnity, who then filed this lawsuit against Chicago Title, seeking declaration of coverage obligations and rights.

The Northern District of Illinois applied the “complete defense” rule that requires an insurer to defend all claims against an insured if one of those claims would trigger the policy.  The court, therefore, denied enforcement of a provision in Chicago Title’s policy disclaiming the duty to defend any claims that are not related to title.  Hearing such a dispute for the first time, the Seventh Circuit relied heavily on the analysis undertaken by the Supreme Judicial Court of Massachusetts in GMAC Mortg. LLC v. First Am. Title Ins. Co., 985 N.E.2d 823 (Mass. 2013), which held that the “complete defense” rule does not apply to title insurance under Massachusetts law.  The Seventh Circuit agreed it should not apply to title insurance under Illinois law as well.

Philadelphia Indemnity supported the District Court’s holding by citing a long history of case law that requires insurers to cover all claims in a complaint if one claim is covered by the insurance policy.  However, the three-judge panel noted that every case cited involved a general liability policy, and that the rule had never been applied outside general liability policies.  The court reasoned, general liability insurance policies are broad, covering a variety of claims that may arise in the future, often stating the insurer will defend “a claim” or “any claim.”  Title insurance is fundamentally different.  Title insurance is narrow, limited in scope, and is paid in a one-time lump-sum premium for claims against a title that may already exist.  Additionally, the court noted that the central rationale behind the “complete defense” rule, that parsing out multiple claims is not feasible, does not apply with title insurance because title claims are easily severable.  Seeing no reason to extend the rule beyond general liability policies, the Seventh Circuit held that the “complete defense” rule does not apply to title insurance, and the policy language limiting Chicago Title’s defense to claims pertaining to title is thus enforceable.