Title Insurance, Part 2: how to value equity to determine a “covered loss”

You’re a lender who has agreed to finance a construction or land development project via a mezzanine, or “bridge” loan secured by a deed of trust on the property.  Your lien is junior to the senior lender, whose loan is also secured by a deed of trust on the property.  The project stalls and fails due to a lack of funding and the subcontractors assert mechanic’s liens.  You make a claim against your title insurance, asserting the subcontractor mechanic’s liens constitute a “covered loss” under your policy.  Do you have a claim?

Courts have held a junior lender must demonstrate that equity remains in the property in order to sustain a covered loss under its policy of title insurance:

Because a title insurance policy insures the repayment of the insured’s debt, an insured mortgagee cannot suffer a loss if repayment of that debt is already impossible due to a superior, excluded mortgage or lien that subsumes any equity that would otherwise be utilized to satisfy, in part or in whole, the insured’s mortgage.

Twin Cities Metro-Certified Dev. Co. v. Stewart Title Guar. Co., 868 N.W.2d 713 (Minn. Ct. App. 2015).  In Twin Cities, the court found that the junior mortgagee sustained no loss where it retained no equity in the property because the senior mortgagee’s interest was specifically excluded under the junior lender’s policy of title insurance.  Therefore, a junior lender typically must demonstrate that equity still remains in the property at the time of the senior lender’s foreclosure.  There are several ways to demonstrate this, such as property appraisals, depending on the language of your title insurance policy and the circumstances surrounding financing. 

Questions? Contact an attorney at Lemons, Grundy & Eisenberg to see if we can assist you with your claim.