First American Title Insurance Company v. Spanish Inn, Inc.

Facts: An owner of commercial property obtains a construction loan secured by a trust deed and obtains a title insurance policy. As a condition of the policy, the owner indemnifies the insurer against loss by mechanic’s liens. The owner later misses the completion deadline under the loan agreement and the lender declares the loan to be in default. The contractor who performed the work records a mechanic’s lien on the property. The lender assigns its trust deed to another mortgage holder that subsequently purchases the property at the foreclosure sale. The contractor then attempts to foreclose on the mechanic’s lien. The new owner tenders the foreclosure claim to the title insurer, who defends them against the foreclosure action and demands the prior owner reimburse the title insurer for related costs.

Claim: The title insurer seeks reimbursement from the prior owner for money losses resulting from the mechanic’s lien foreclosure action, claiming the prior owner is liable since they agreed to indemnify the title insurer for all costs and fees incurred in connection with a mechanic’s lien.

Counterclaim: The prior owner denies they owe reimbursement to the title insurer, claiming the mechanic’s lien is not excepted from the insurance coverage since the lender caused the lien to be recorded by providing less than the contracted amount for the construction loan which caused the owner to default on the loan, and thus the lender is liable.

Holding: A California court of appeals holds the title insurer is not liable for the costs of defense against the mechanic’s lien and is entitled to reimbursement from the prior owner since mechanic’s liens were excepted from the insurance coverage and the prior owner indemnified the title insurer against losses resulting from mechanic’s liens. [First American Title Insurance Co. v. Spanish Inn, Inc. (2015) 239 CA4th 598]

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