A lender obtained standard form title insurance policies in connection with a $2,400,000 loan for the purchase of parcels of land. Due to title defects, borrowers stopped making payments on their loans and, ultimately, the lender acquired title to the parcels through a full-credit bid in a trustee’s sale. The lender then submitted a claim to its title insurer for the full amount of the policies, and, when the title insurer did not resolve the claim, filed suit. In relevant part, the district court held that lender’s full-credit bid was an actual payment of principal on the debt, which reduced the insurer’s liability under standard form title insurance policies. On appeal, the United States Court of Appeals for the Ninth Circuit certified to the Arizona Supreme Court questions regarding the extent to which lender’s full-credit bid extinguished insurer’s liability because the issue is governed by Arizona law and was an issue of first impression.
In response to the certified questions, the Arizona Supreme Court concluded that a lender’s full-credit bid does not constitute “payment” or “payment made” under the title insurance policies, meaning that a full-credit bid does not terminate or reduce coverage under the title insurance policy. Instead, any reduction in the amount owed under the title policy would be limited to the fair market value of the land acquired by the bid at the trustee’s sale. Neither “payment” nor “payment made” is defined under the title policies, and—from the lender’s perspective—a full-credit bid would not satisfy the term “payment” because the lender would not be made whole for its loan by acquiring the property. The Court reasoned that this interpretation of the title policy is supported by Arizona public policy protecting insureds by interpreting policy language in favor of coverage and consistent with the title policies’ provisions stating that the amount of liability on property acquired in trustee’s sale is reduced by the amount of all payments made, indicating that the two terms were not identical. Finally, the Court was unpersuaded by the insurer’s argument that the title policy incorporated the definition of full-credit bid in Arizona’s foreclosure statutes—A.R.S. §§ 33-801 et seq.—because the insurer was not directly, indirectly, or contingently liable for the debt incurred.
Judge Barton, sitting by designation, delivered the opinion of the unanimous Court. Justice Timmer was recused.
Posted by: William D. Furnish