Introduction
In a recent case from the United States District Court for the District of Nevada, the Court examined whether the duty to defend is triggered when a lender fails to provide the title insurance company notice of a complaint seeking to extinguish its deed of trust for more than five years after the suit was brought and after the lender settled the matter. The duty was not triggered and the lender was not entitled to coverage as it settled the action without giving the underwriter notice of the action. See U.S Bank N.A. v. Fidelity National Tilte Inc. Co., 2024 WL 125416 (D. Nev. 2024).
Background
In 2005, Milagros and Elpido Raon (the "Raons") acquired real property in Las Vegas, Nevada, with financing provided by Liberty American Corp. The property is governed by the Declaration of Covenants, Conditions, and Restrictions of the Eldorado Neighborhood Second Homeowners Association ("HOA"). Section 3.1 of the CC&Rs establishes that the obligation to pay assessments runs with the land, constituting a perpetual lien on the property. Consequently, by acquiring the property, the Raons committed to paying annual HOA assessments.
To finance the purchase, the Raons obtained a loan for $233,750 from Liberty American Corporation ("Liberty") and executed a deed of trust (the "DOT"), granting a security interest in the property. Liberty later assigned the DOT to U.S. Bank National Association ("U.S. Bank"). Fidelity National Title Insurance Company ("FNTIC") issued a lender's title insurance policy (the "Policy"), to insure the priority of the DOT over competing liens, including those of the HOA.
Around 2011, the Raons ceased paying monthly HOA assessments. On December 2, 2013, the HOA foreclosed on the property and sold it to Samsara Investments LLC Series #3 ("Samsara") for $9,700.00 via a non-judicial foreclosure ("HOA Sale"). On August 14, 2015, U.S. Bank submitted a claim under the Policy to FNTIC, seeking coverage for losses arising from the HOA Sale. On October 9, 2014, FNTIC informed U.S. Bank of its decision to deny coverage. U.S. Bank subsequently requested reconsideration, but FNTIC issued a second denial on February 5, 2014. The Opinion does not set forth the grounds for the denial.
On December 8, 2015, Samsara filed a lawsuit against U.S. Bank, seeking a declaration that the DOT had been extinguished by the HOA Sale. U.S. Bank settled with Samsara without notifying FNTIC of the lawsuit, reconveying its interest under the Deed of Trust. On October 8, 2020, U.S. Bank initiated the present action against FNTIC, asserting five distinct causes of action. FNTIC now moves to dismiss the Complaint under Federal Rules of Civil Procedure 12(b)(6).
The Decision
FNTIC maintained that U.S. Bank's claims for declaratory judgment and breach of contract fail because U.S. Bank settled the Samsara lawsuit without notifying FNTIC, violating Condition 8(c) of the Policy. Condition 8(c) states that the insurer is not liable for any loss or damage if the insured settles a claim without prior written consent. U.S. Bank contended that FNTIC waived this condition by denying coverage, citing the United States Supreme Court's decision styled St. Louis Dressed Beef & Provision Co. v. Maryland Cas. Co., 201 U.S. 173, 181 (1906). The Dressed Beef Court found that when an underwriter is notified of an action and a defense is tendered and denied, the insured is under no obligation to provide the underwriter any further notice of the litigation or settlement thereof. The Court distinguished Dressed Beef in that U.S. Bank never requested FNTIC's defense for Samsara's lawsuit. Thus, U.S. Bank's failure to notify FNTIC of the suit never triggered the duty to defend and Condition 8(c). On this basis, the Court dismissed the first two causes of action (declaratory judgment and breach of contract).
FNTIC also argued that U.S. Bank's third, fourth, and fifth claims (good faith and fair dealing, deceptive trade practices and unfair claims practices) are time-barred by the respective statute of limitations, the longest of which was four years. U.S. Bank claimed the statute was tolled due to FNTIC's duty to defend as it provided notice of the HOA Sale. The Court identified two potential periods related to the duty to defend tolling doctrine: from the HOA's foreclosure on December 2, 2013, to FNTIC's denial on October 9, 2014, and from Samsara's complaint on December 8, 2015, to the settlement on April 26, 2019. The Court then held that U.S. Bank's failure to notify FNTIC of Samsara's lawsuit was insufficient to trigger the duty to defend. Consequently, the tolling ended on October 9, 2014 when FNTIC denied the initial claim. The Court, therefore, dismissed the claims alleging bad faith, breach of the covenant of good faith and fair dealing, and violations of NRS § 598.0915 and § 686A.310 as time-barred, since U.S. Bank waited until 2020 to file them.
FNTIC requested the dismissal of U.S. Bank's complaint without leave to amend, arguing that U.S. Bank cannot present any facts to support a cause of action. The Court agreed, concluding that any amendment would be futile due to U.S. Bank's failure to tender defense of the lawsuit to FNTIC, a critical element in the Court's analysis.
Takeaways
This case underscores the importance of the insured actively communicating with their insurer when seeking defense coverage. The Court emphasized that proper and timely notice of any impending lawsuit is crucial for triggering the insurer's duty to defend. Failure to provide adequate notice can absolve the insurer of its obligation to defend the insured.
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