A mortgagee title insurance policy does not provide a lender complete protection against all claims or losses. A mortgagee title insurance policy obligates the title insurer to provide a defense for the insured in litigation in which any third party asserts a claim adverse to the title or interest insured and insures against loss or damages, within policy limits, that result from title defects which are not accepted or excluded from coverage. The title insurance company is not obligated to purchase the insured mortgage with a title claim if a defect in the title or an adverse claim against the title is made.
The title insurance company may defend against the adverse claim; or, if the title is defective, elect to remove the defect within a reasonable amount of time; pay the amount of damages; or purchase the mortgage from the insured for the amount due on the debt. Paying damages does not mean paying the title insurance policy limits. When there is a failure of title, a title insurance company is liable only to the value of the land as that is the amount of the actual loss. Therefore, if the lender’s mortgage is greater than the value of the land, the lender will not recover the additional amount.
The title insurance company’s liability is limited to the actual loss. In Goode vs. Federal Title and Insurance Corp., 162 So. 2d 269 (Fla 2d DCA 1964) the court stated that it was not enough for an insured mortgagee to allege that title to the mortgage property was not in the mortgagor at the date of the policy. Shortly after the discovery of the defect, the insured procured a conveyance of the property to the mortgagor. Since the insured could not prove damages resulting from the lack of title, it had no cause of action on the mortgage title insurance policy.
Another example of “actual loss” is illustrated in Blackhawk Prod. Credit vs. Chicago Title Insurance Co., 400 N.W. 2d 287 (Wis. App. 1986). A lender had a mortgagee title insurance policy in the amount of $85,000.00. The property was additional security for a total indebtedness of $297,000.00. A prior lien was found. The “net proceeds” from the sale of the property by the lender, while less than the balance of the amount owed, exceeded the face amount of the policy. Thus there was no loss under the policy even though the lender paid off the prior lien.
To recover under the mortgagee title insurance policy, the insured must show an actual loss in terms of impairment of mortgage security from the existence of the defect or encumbrance alleged to be the basis of the right to recover. It is not sufficient merely to show that the defect is within the risks insured against under the mortgagee title insurance policy terms.
Once it has been determined that the mortgage security has been impaired by the defect; however, the next step is to decide the valuation date for the loss or damages. The measurement of loss under the mortgagee title insurance policy in broad terms is qualified by (a) the amount of the indebtedness of the insured mortgage and (b) the value of the land securing the indebtedness. Most courts follow the fair market value of the real property securing the mortgage and not the original principal amount of the mortgage as the controlling factor in determining whether the mortgagee has sustained a loss.
The mortgagee title insurance policy is a contract to defend and indemnify. It does not obligate the insured to become a surety for the mortgage debt nor is it a guarantor of its payment.
While the mortgagee title insurance policy does not guaranty a lender one hundred percent protection against all claims or losses, the insurance coverage does provide a defense for the insured mortgagee in which any third party asserts a claim adverse to the title or interest insured, and it insures against loss or damages, within policy limits, that result from title defects that are not accepted or excluded from coverage.
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