Parol Evidence & Title Policy Defenses
Title Agent found the first mortgage of record and the commitment disclosed the senior lien. The proposed junior mortgagee confirmed it would not be paying off the existing mortgage, yet its’ lender’s policy failed to except the senior mortgage. The senior lender later foreclosed, and the junior mortgagee filed a claim under the policy.
The Insurer sought reformation of the policy to supply the missing exceptions. Relying on parol evidence, the Court determined the Insurer did not "fully, clearly, and decisively show that [the Insured] communicated to [the Insurer] that it consented to an exception for the [senior mortgage].” Finding no mutual mistake, the Court refused to reform the policy.
On the other hand, different parol evidence indicated the Insured was aware of the senior lien when it agreed to take the borrower’s mortgage. This knowledge was sufficient to show the Insured "assumed" and "agreed to" a junior position for its mortgages. Policy Exclusion 3(a) was held to bar the claim. “More importantly,” said the Court, “extending coverage to the loss … would result in a windfall to [Insured] that neither party ever expected or agreed to…. Equity will simply not have it” [emphasis supplied]. First American Title Insurance Company v. Lane Powell PC, #13-2012, slip op., (1st Circuit, August 22, 2014).
The Court pointed out that the failure of Equity to intervene ”would effectively morph the title insurance the parties agreed to into a credit insurance policy of sorts that [Insured] did not pay for, and that neither party intended.” This seems tantamount to reformation, yet retains the Law and Equity distinction. In this particular instance, the Insured’s “assumption and agreement” was based on its agreement with the debtor, prior to the title agent’s involvement. Would Equity be less forgiving if the underlying deal was silent on the priority issue?