The U.S. Court of Appeals for the Third Circuit held that a title insurer under Pennsylvania state law only had a duty to defend its insured lender for the covered claims alleged in the four corners of a borrower’s complaint, not for all alleged claims under the “in for one, in for all” rule.
A copy of the opinion in Lupu v. Loan City, LLC is available at: Link to Opinion.
A Pennsylvania borrower refinanced his home loan and mortgage with a lender. The loan transferred several times finally ending up with the current holder. A title insurer provided title insurance.
Relevant to this appeal, the title policy covered “loss or damage” resulting from, among other things: “[a]]ny defect in or lien or encumbrances to the title” and “Forgery after Date of Policy of any assignment, release or reconveyance (partial or full) of the Insured Mortgage.”
For a covered claim, the policy paid the “costs, attorneys’ fees and expenses incurred in defense of the title or the lien of the Insured Mortgage, as insured, but only to the extent provided in the Conditions and Stipulations.” The policy only provided a defense for “those stated causes of action . . . insured against by this policy” and not “those causes of action which allege matters not insured against by this policy.”
After defaulting, the borrower sued the holder to void the loan. The borrower initially did not allege that the loan documents were forged in his third amended complaint or any prior complaints, instead attacking the MERS transfer system. The borrower claimed the lender forged the loan documents in his discovery answers, but he did not allege this until his fourth amended complaint, which also still included the MERS transfer claims. The court dismissed all the borrower’s claims with prejudice and the borrower did not appeal.
After the court dismissed the borrower’s complaint, the holder sued the insurer in the federal trial court seeking to recover its attorneys’ fees and costs incurred to defend the borrower’s complaint.
The parties each moved for summary judgment. The holder argued that the policy covered all the borrower’s claims, and the insurer argued that it only had a duty to defend the covered claims alleged in the fourth amended complaint. The trial court applied the “four corners” rule and held that the insurer had no duty to defend the claims in the third amended complaint. However, the trial court applied the “in for one, in for all” rule to the fourth amended complaint finding that, because the insurer had a duty to defend against one claim, it had a duty under Pennsylvania law to defend all claims alleged in the complaint.
Both parties timely appealed the trial court’s ruling.
The Third Circuit first noted that the rule in Pennsylvania is that an insurer’s duty to defend its insured is “determined solely by the allegations of the complaint in the action.” Wilson v. Md. Cas. Co., 105 A.2d 304, 307 (Pa. 1954). Thus, the “question of whether a claim against an insured is potentially covered is answered by comparing the four corners of the insurance contract to the four corners of the complaint.” American & Foreign Ins. Co. v. Jerry’s Sport Center, 2 A.3d 526, 541 Pa. 2010).
The Third Circuit observed that Pennsylvania’s approach is the minority rule contrary to 31 jurisdictions that have left the “four-corners” rule behind in cases where the insurer knows or should know that facts providing coverage conflict with the complaint’s allegations.
Nevertheless, in 2006 in Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006), Pennsylvania declined to adopt this exception to the “four corners” rule. In doing so the Pennsylvania Supreme Court reaffirmed that “the allegations of the complaint” alone determine an insurer’s duty to defend. Kvaerner, 908 A.2d at 896.
The Third Circuit examined whether Kvaerner precluded using facts outside the pleadings that a third party like the borrower here introduced into the litigation from triggering the duty to defend, but rejected this approach in favor of the “simple, bright-line rule” because “Kvaerner’s unequivocal holding leaves no room for such a distinction.”
The holder argued that the policy covers the entire litigation given that the borrower’s interrogatory responses contained facts that trigger coverage because in Heffernan & Co. v. Hartford Insurance Co. of America, 614 A.2d 295 (Pa. Super. Ct. 1992), the Superior Court held that the information disclosed in the interrogatories triggered the duty to defend even though the operative complaint had included this information. The Third Circuit acknowledged that although it must give “due regard” to this Superior Court opinion, it conflicts with the Pennsylvania Supreme Court’s ruling in Kvaerner. In this situation “Kvaerner controls, and we must follow it.” Thus, the Third Circuit held, “we may not look for a covered claim beyond the four corners of” the complaint.
Examining the third amended complaint, the Third Circuit agreed with the trial court that the policy did not cover the allegations challenging the MERS transfer system as the policy “generally covers claims that the original mortgage is invalid or forged.” As such, the insurer’s “duty to defend arose when [the borrower] filed the fourth amended complaint, including there the forgery allegations he had referred to earlier in response to interrogatories.”
The Third Circuit then evaluated whether the “in for one, in for all” rule required the insurer to provide the holder with a defense to all the claims alleged in the fourth amended complaint or whether the insurer only owed the holder a defense for the covered forgery claim. The Third Circuit first looked to the nature of title insurance finding that it is only designed to cover defects or clouds on title. Title insurance looks backward whereas liability insurance looks forward to a future occurrence. This allows a title insurer to search public records before issuing a policy, decreases the title insurer’s risk, and keeps premiums low.
Here, the policy “disclaims a duty . . . to defend non-covered claims.” The policy only covers and agrees to defend against “stated causes of action . . . insured against by this policy.” The policy’s plain meaning controls unless it is against public policy. The holder argued that the “in for one, in for all” rule prevents insurers from covering only part of a claim and avoids the waste and difficulty of a bifurcated defense. However, no opinion in Pennsylvania has applied this rule “when a title insurance policy is at issue.” Here, the policy “expressly contemplates” only a “partial defense of a lawsuit.”
Additionally, the Third Circuit noted, other jurisdictions have rejected applying the “in for one, in for all” rule to title insurance. Title insurance fundamentally differs “from general liability insurance because (1) the risk covered is limited, specific, and retrospective, (2) the premium is a relatively modest one-time charge, and (3) the duration of coverage is indefinite.” The Third Circuit therefore predicted “that the Pennsylvania Supreme Court would also create a title-policy exception to the ‘in for one, in for all’ rule.”
As the trial court applied the “in for one, in for all” rule to the fourth amended complaint, it did not determine which claims in the fourth amended complaint come within the scope of the policy. Although the policy may only cover one alleged claim, the Third Circuit instructed the trial court to make this determination.
Accordingly, the Third Circuit affirmed in part and reversed in part, the trial court’s judgment and remanded for further proceedings consistent with its opinion.