Home Fed. Sav. Bank v. Ticor Title Ins. Co.

• Decision Date: 25 September 2012
• Docket Number: No. 11–3446.,11–3446.
• Citation: 695 F.3d 725
• Parties: HOME FEDERAL SAVINGS BANK, Plaintiff–Appellant, v. TICOR TITLE INSURANCE COMPANY, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

695 F.3d 725

HOME FEDERAL SAVINGS BANK, Plaintiff–Appellant,

v.TICOR TITLE INSURANCE COMPANY, Defendant–Appellee.

No. 11–3446.

United States Court of Appeals,Seventh Circuit.

Argued April 9, 2012.

Decided Sept. 6, 2012.

Rehearing Denied Sept. 25, 2012.

R.C. Richmond, III (argued), Attorney, Taft Stettinius & Hollister LLP, Indianapolis, IN, for Plaintiff–Appellant.

Tammy L. Ortman (argued), Attorney, Mercer Belanger, Indianapolis, IN, for Defendant–Appellee.

Before FLAUM and HAMILTON, Circuit Judges, and FEINERMAN, District Judge.^*

HAMILTON, Circuit Judge.

This case concerns a title insurance policy covering a construction project. The plaintiff is the insured party, Home Federal Savings Bank, which agreed to lend up to $95.5 million to finance the construction of a new ethanol production plant. When the developer of the plant ran into serious trouble finishing the project, the bank did not disburse the final $8 million of the loan amount. The developer defaulted on the debt to the bank and fired its general contractor, which then filed a mechanic's lien on the property to recover $6 million allegedly owed it. When the bank sought to foreclose on its mortgage, the general contractor counterclaimed, asserting that its lien had priority over, or at least parity with, the bank's mortgage. The plaintiff bank tendered its defense to the defendant title insurer under a policy that required the insurer to defend the bank against a “claim ... alleging a defect, lien or encumbrance or other matter insured against by this policy.” The policy contained an exclusion from coverage for claims “created, suffered, assumed, or agreed to” by the insured. On cross-motions for summary judgment, the district court ruled in favor of the title insurer. We reverse and remand. The undisputed facts show that the title insurer breached its duty to defend the bank on the contractor's claim that its mechanic's lien had priority over or parity with the mortgage.

I. Factual and Procedural Background

The material facts are not in dispute. The case arises from a construction project that fell apart in 2008. The developer was Altra, Indiana, LLC, which in 2006 obtained a construction loan commitment for up to $95.5 million from plaintiff Home Federal Savings Bank to finance the construction of an ethanol plant in Cloverdale, Indiana. The loan was to be disbursed in installments. To secure its loan, Home Federal had a mortgage on the property. To protect its security from conflicting claims of ownership or prior mortgages or liens, Home Federal purchased title insurance from defendant Ticor Title Insurance Company. Under the policy, Ticor performed a title search after each disbursement Home Federal made, insuring against any loss the bank might incur due to “Lack of priority of the lien of the insured mortgage over any statutory lien for services, labor or material.”

Home Federal also paid an extra premium for a mechanic's lien endorsement to insure against “enforcement or attempted enforcement” of a mechanic's lien claim “having priority over or sharing on a parity with” the mortgage. ¹ The policy obligatedTicor to defend Home Federal “in litigation in which any third party asserts a claim ... alleging a defect, lien or encumbrance or other matter insured against by this policy,” and insured Home Federal to the extent of the amount already disbursed to Altra, up to the $95.5 million total of the loan.

When Home Federal distributed additional funds as construction proceeded, it would secure lien waivers from each contractor paid with the funds and ask Ticor to update the policy, which Ticor did after performing a new title search and receiving the contractors' lien waivers from Home Federal.² This case centers on two policy updates made in September 2008. On September 24, 2008, Ticor issued Update 15 pursuant to Home Federal's request. Update 15 revealed no defects, liens, or encumbrances on the estate that are relevant to the case. At that point, more than $87 million of the loan proceeds had been disbursed and accounted for by lien waivers. A serious dispute then arose between Altra and the project's general contractor, F.A. Wilhelm Construction Co. (“Wilhelm”). Altra fired Wilhelm on September 26. That same day, Wilhelm filed a mechanic's lien on the property claiming it was owed $6 million for work on the project.

Suspecting that such a lien had been filed, Home Federal requested on October 27 that Ticor perform a title search. Ticor's October 30 update disclosed Wilhelm's lien and made it an express exception from coverage. Cue the litigation.

First, in January 2009, Home Federal filed suit against Altra in state court to recover the $96 million then due under the loan and to foreclose Home Federal's mortgage on the plant property. Home Federal named Wilhelm as a defendant because of its mechanic's lien. The following month, Wilhelm answered and filed a counterclaim against Home Federal and a cross-claim against Altra seeking to foreclose on its $6 million mechanic's lien. Wilhelm asserted that it was entitled to enforce its lien against the entire property, claiming priority over Home Federal's mortgage. Ticor itself acknowledged that Wilhelm was seeking a judgment determining that its lien was prior to and superior to the interest of the Agstar/Home Federal mortgage.

On April 3, 2009, Home Federal tendered the defense of Wilhelm's mechanic's lien to Ticor, seeking defense in the suit and indemnity for any loss should Wilhelm prevail. After conducting an investigation, Ticor denied Home Federal's request for defense and indemnification. Left to fend for itself in state court, Home Federal moved for summary judgment against Wilhelm, asserting the priority of its mortgage over the mechanic's lien. Home Federal eventually reached a settlement by paying Wilhelm $1.8 million on its counterclaim, with no contribution from Ticor.

Home Federal then filed this suit in federal court alleging that Ticor acted in bad faith and breached its duties to defend against Wilhelm's counterclaim and to indemnify Home Federal for the settlement and attorney fees. On cross-motions for summary judgment, the district court granted summary judgment for Ticor. Home Fed. Sav. Bank v. Ticor Title Ins. Co., No. 1:10–cv–0999–JMS–TAB, 2011 WL 4479080 (S.D.Ind. Sept. 27, 2011). The court relied on a policy exclusion for any “Defects, liens, encumbrances, adverse claims or other matters ... created, suffered, assumed or agreed to or by the Insured claimant.” The court found that the exclusion applied because Home Federal withheld disbursement of the funds that could have satisfied Wilhelm's claim. The district court also noted that since all $87 million in disbursements Home Federal made had been fully accounted for with waivers of mechanic's liens, “Home Federal seeks to obtain a windfall—avoiding more than $6 million [in] construction bills without having risked any of its own funds.” 2011 WL 4479080, at *6. Home Federal has appealed.

II. Discussion

We review de novo the district court's decision on cross-motions for summary judgment. E.g., Exelon Generation Co. v. Local 15, Int'l Bhd. of Elec. Workers, 676 F.3d 566, 570 (7th Cir.2012). Subject-matter jurisdiction is based on diversity of citizenship, see 28 U.S.C. § 1332, and the parties agree that Indiana law applies to interpretation of the insurance policy. In Indiana, the meaning of an insurance policy is a matter of law, and in general the same rules of construction apply to insurance policies as to other contracts. See Commercial Union Ins. v. Moore, 663 N.E.2d 179, 180 (Ind.App.1996). Any ambiguity in the policy will be construed strictly against the insurer, particularly where the scope of a coverage exclusion is at issue. See State Auto. Mut. Ins. Co. v. Flexdar, Inc., 964 N.E.2d 845, 848 (Ind.2012). An insurer's duty to defend an insured is broader than its duty to indemnify, so if an insurer has no duty to defend its insured in a suit, it necessarily does not have a duty to indemnify the insured for any liability incurred thereby. See Trisler v. Indiana Ins. Co., 575 N.E.2d 1021, 1023 (Ind.App.1991).³

The decisive issue here is the duty to defend. Where an insurer elects not to defend its insured, “Such a course is taken at the insurer's peril because the insurer will be bound at least to the matters necessarily determined in the lawsuit.” State Farm Fire & Cas. Co. v. T.B. ex rel. Bruce, 762 N.E.2d 1227, 1231 (Ind.2002) (internal quotation marks and emphasis omitted); Frankenmuth Mut. Ins. Co. v. Williams, 690 N.E.2d 675, 678–79 (Ind.1997). We address first Ticor's argument that the Wilhelm counterclaim did not trigger the duty to defend because it did not actually seek priority over or parity with the Home Federal mortgage. We turn then to the basis for the district court's decision, the policy exclusion for liens created, suffered, assumed or agreed to or by the insured.

A. Wilhelm Sought Priority or Parity

The policy's “Defense and Prosecution” clause required Ticor to “provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against by this policy.” Under the mechanic's lien endorsement, one matter insured against was any litigation in which a third party claimed its mechanic's lien had priority over or parity with Home Federal's mortgage on the property:

the Company Insures against loss or damage incurred by the insured by reason of the enforcement or attempted enforcement of any statutory lien for labor or material arising from construction contracted for and/or commenced on the land prior to, at, or subsequent to the effective date of said policy, and any extension of said date, as having priority over, or sharing on a parity with, the lien of the insured mortgage for that portion of the proceeds...