Arizona Court of Appeals Division One holds that the date of valuation for calculating losses under a title insurance policy protecting lenders is the date the loans were issued.

First American issued title insurance policies for two parcels of commercial land for which Johnson Bank was the lender.  After the purchase, the owners of the land discovered undisclosed covenants, conditions, and restrictions (“CC&Rs”) which prevented commercial development of the land.  After the owners defaulted, Johnson Bank obtained title to the parcels and made claims under the title insurance policies. 

A dispute arose between First American and Johnson Bank as to the date that should be used to calculate diminution of value, with First American arguing that it should be the date of foreclosure and Johnson Bank arguing it should be the date the loans were issued.  The parties cross-sued for declaratory relief, and the superior court granted summary judgment for First American, selecting the foreclosure date as the relevant date for valuation.  Johnson Bank timely appealed.

The Court of Appeals reversed.  Arizona generally follows the majority rule, which calls for valuing the property as of the date a title defect is discovered.  But a lender is in a different position than an owner.  The valuation date for a loss under a lender’s title insurance policy is an issue of first impression in Arizona.  The insurance contract itself was ambiguous as to the valuation date, so the Court resolved the question by looking to “social policy and the transaction as a whole,” construing remaining ambiguity against the insurer.

Citing persuasive authority that the valuation date for a lender’s loss should be the date of the loan because the purpose of the loan is frustrated from the outset by a title defect, the Court further noted that in this case the title defect was the direct cause of the default that caused Johnson Bank’s damages.  The contract also required calculation of damages based on the value of the property “as insured,” indicating the policy issuance date is the proper valuation date.  The Court also noted that, unlike owners, lenders do not benefit from appreciations in property value. If the loss was valued from the foreclosure date on a lender, the title insurance company could benefit from falling real estate values without facing any risk from rising values.  The Court remanded the case to superior court with instructions to enter judgment for Johnson Bank.

Judge Winthrop wrote the opinion for the court; Judges Cattani and Swann joined.