First American Title Insurance v. Johnson Bank
239 Ariz. 348
| Ariz. | 2016Background
- First American issued ALTA lender title policies in 2005–2006 to Johnson Bank on two parcels securing loans totaling $2,050,000; the policies did not list recorded CC&Rs that allegedly barred commercial development.
- Borrowers allegedly could not develop the parcels due to the undisclosed CC&Rs, defaulted on the loans, and the properties were sold at trustee’s sale in 2010, with Johnson Bank credit-bidding $102,000.
- Johnson Bank claimed the undisclosed CC&Rs caused the default and sought indemnity under its lender policies for diminution in value; First American disputed the appropriate valuation date for damages.
- Lower courts split: superior court ruled valuation as of foreclosure date; the court of appeals held valuation should be as of the loan/policy issuance date because the breach occurred when the loan was made.
- The Arizona Supreme Court found the ALTA policy ambiguous as to valuation date, held that when an undisclosed title defect prevents the known, intended use and causes default, damages may be measured as of the policy issuance date, but remanded because causation (that the defect caused the borrowers’ default/foreclosure) was not established on the record.
Issues
| Issue | Johnson Bank (plaintiff) | First American (defendant) | Held |
|---|---|---|---|
| Which date to use to measure diminution in value under ALTA lender policy when policy is silent? | Use loan/policy issuance date because the insurer breached when loan was made and should bear market-decline risk. | Use foreclosure date because loss is not realized until foreclosure and market decline, not title defect, may explain value drop. | Policy ambiguous; construed against insurer — valuation may be measured at policy issuance if the undisclosed defect prevented intended use and caused default and foreclosure; otherwise use foreclosure date. |
| Does policy language §7(a)(iii) unambiguously fix valuation date? | N/A (argues for policy-date reading) | N/A (argues for foreclosure-date reading) | Court: language ambiguous in these circumstances; cannot resolve from text alone. |
| Should social policy/statutory framework decide ambiguity in favor of insurer? | N/A (argues insurer should bear risk where its search failed) | N/A (argues statutory scheme distinguishes commitments/abstracts and imposes no duty to discover) | Court: social-policy and transaction analysis supports using policy date here; construed against insurer because ambiguity remains. |
| Was causation (defect caused default/foreclosure) established on summary judgment? | Points to prior owner judgment against insurer and trial testimony supporting causation. | Argues record lacks proof that CC&Rs caused default/foreclosure. | Court: no adequate evidence of causation in record; remand for Johnson Bank to prove defect caused default/foreclosure; if not proven, valuation date is foreclosure. |
Key Cases Cited
- First Am. Title Ins. Co. v. Action Acquisitions, LLC, 218 Ariz. 394 (Ariz. 2008) (insurance-contract interpretation principles; construe ambiguous provisions against insurer)
- Swanson v. Safeco Title Ins. Co., 186 Ariz. 637 (Ariz. Ct. App. 1996) (under owner’s title policy, valuation measured at date defect discovered)
- First Am. Bank v. First Am. Transp. Title Ins. Co., 759 F.3d 427 (5th Cir. 2014) (cases holding lender loss measured at foreclosure date, often where undisclosed senior lien affected priority)
- Citicorp Savings of Illinois v. Stewart Title Guaranty Co., 840 F.2d 526 (7th Cir. 1988) (reasoning that breach occurred at loan closing; court treated loan date as valuation date in some total-failure scenarios)
- In re W. Feliciana Acquisition, L.L.C., 744 F.3d 352 (5th Cir. 2014) (title defect must cause the insured’s loss; mere existence of defect not per se breach)
- Marble Bank v. Commonwealth Land Title Ins. Co., 914 F. Supp. 1252 (E.D.N.C. 1996) (held lender did not suffer loss until foreclosure where undisclosed senior lien affected foreclosure proceeds)