764 F.3d 114
1st Cir.2014Background
- Lane Powell, a Washington law firm, took mortgages from client Charles Crovo on two Massachusetts properties as security for unpaid legal fees and sought lender's title insurance from First American.
- Coogan Law Office, acting as First American’s agent, performed title searches and issued a West Tisbury policy and a Newton policy; neither policy expressly excepted existing senior mortgages (ING on West Tisbury; Chase and Green on Newton).
- Lane Powell knew both properties were encumbered by prior mortgages, accepted subordinate positions for its mortgages, and informed Coogan it would not pay off the senior liens; First American charged higher premiums accordingly.
- Senior mortgageholders foreclosed; Lane Powell recovered nothing and claimed coverage under the title policies; First American denied coverage and sought declaratory relief and reformation in state court, later removed to federal court.
- First American argued reformation based on mutual mistake (policies should have excepted senior liens) and alternatively that Exclusion 3(a) (matters "assumed or agreed to by the insured") barred recovery; the district court granted summary judgment for First American, affirmed on appeal.
Issues
| Issue | Plaintiff's Argument (First American) | Defendant's Argument (Lane Powell) | Held |
|---|---|---|---|
| Whether the policies should be reformed for mutual mistake to exclude senior liens | Policies mistakenly failed to except senior liens; parties intended to exclude them | Lane Powell says the written policies govern and show coverage; no mutual mistake proven by First American | Reformation denied: no clear evidence Lane Powell manifested assent to except senior liens |
| Whether Exclusion 3(a) bars coverage for loss from senior liens | Exclusion 3(a) applies because Lane Powell knew of and accepted junior positions, so losses from senior liens are excluded | Lane Powell contends Exclusion 3(a) requires misconduct or is barred by the integration/parol-evidence rule | Held for First American: Exclusion 3(a) applies because Lane Powell "assumed" or agreed to existing encumbrances; parol evidence permissible to show applicability of exclusion |
Key Cases Cited
- Caron v. Horace Mann Ins. Co., 466 Mass. 218 (Mass. 2013) (standards for reformation and mutual mistake in insurance contracts)
- OneBeacon Am. Ins. Co. v. Travelers Indem. Co. of Ill., 465 F.3d 38 (1st Cir. 2006) (reformation burden at summary judgment)
- Sancta Maria Hosp. v. City of Cambridge, 369 Mass. 586 (Mass. 1976) (reformation requires proof of parties' agreement and intent to be bound)
- Nat'l Credit Union Admin. v. Ticor Title Ins. Co., 873 F. Supp. 718 (D. Mass. 1995) (Exclusion 3(a) bars coverage where insured knowingly assumed junior position)
- Am. Title Ins. Co. v. E. W. Fin., 16 F.3d 449 (1st Cir. 1994) (insured assumes a defect when aware of specific encumbrance)
- Chicago Title Ins. Co. v. Resolution Trust Corp., 53 F.3d 899 (8th Cir. 1995) (discusses Exclusion 3(a) application and related equitable concerns)