At a sheriff’s sale in early 2005, purchasers Action Acquisitions LLC and Free for Now LLC successfully bid $3,500 for a home in Gilbert. The property was worth between $300,000 and $400,000 and was subject to a $162,000 deed of trust. The purchasers thus stood to profit more than $130,000 if they resold the home at market value. The purchasers bought a $400,000 owner’s title insurance policy from Capital Title Agency issued by First American Title Insurance Company. The policy they purchased excluded coverage for losses resulting from the insured’s “failure to pay value” for the title or from risks “created” by the insured. The prior homeowner successfully moved to set aside the sheriff’s sale on the ground that the $3,500 price was grossly inadequate. The purchasers did not appeal the superior court’s judgment and instead made a claim against the title insurance policy. First American sought a declaratory judgment that it was not liable, and the purchasers counterclaimed. First American and Capital Title moved for summary judgment, which the superior court granted, finding coverage was properly denied under the “created” risk exclusion. The court of appeals affirmed, but relied on the “failure to pay value” exclusion.
On de novo review, the Supreme Court affirmed the superior court’s ruling. First, the Court addressed the “failure to pay value” exception, holding that the exclusion “is most reasonably understood as applying when an insured is not a bona fide purchaser protected by the recording statues.” Thus, the Court agreed that the policy’s exclusion resulting from the insured’s “failure to pay value” for the title means a loss resulting because the insured has not paid “valuable consideration” and is therefore not protected under the recording statutes. However, the Court agreed with the purchasers that their $3,500 payment constituted valuable consideration because it represented a “present equivalent” for the title. Present equivalent has an “expansive meaning” and does not require that the purchaser pay fair market value or even some value that could be characterized as adequate. Rather, valuable consideration or present equivalent exists “if the purchaser surrenders a right or detrimentally changes a legal position ‘so that if the claim of title fails the purchaser is left in a worse position that he was before.’” Here, although the $3,500 was a bargain price, the purchasers surrendered the right to money of more than a nominal amount.
The Court went on to address the exclusion for risks “created, allowed, or agreed to by” the insured. The Court held that the exclusion applies “whenever the insured intended the act causing the defect, not only when the insured intended the defect or when the insured engaged in misconduct” (emphasis added). Here, by bidding $3,500, the purchasers created the risk that resulted in the loss (i.e. the setting aside of the sale) because their bid was an intentional, affirmative act. Finally, the Court rejected the purchasers’ reasonable expectations argument. The Court found that the doctrine did not apply in the circumstances because the purchasers’ expectations failed each of the four tests articulated in Gordinier v.Aetna Cas. &Sur. Co., 154Ariz. 266, 272-73, 742 P.2d 277, 283-84 (1987).
Justice Bales authored the opinion for a unanimous Court.