Ticor Title Insurance Company of California, a California Corporation v. American Resources, Ltd., a Hawaii Corporation, Individually and Through the Trustee for the Estate of American Resources, Ltd., and Harold Chu

Citations: 859 F.2d 772; 1988 U.S. App. LEXIS 14251Docket: 87-2425

Court: Court of Appeals for the Ninth Circuit; October 18, 1988; Federal Appellate Court

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The United States Court of Appeals for the Ninth Circuit addressed the appeal by American Resources, Ltd. against the summary judgment granted in favor of Ticor Title Insurance Company, which declared that Ticor had no obligation to defend or indemnify American Resources in various lawsuits. American Resources had participated in a joint venture involving land insured by Ticor, following the placement of a $3 million mortgage on its property in favor of Pacific Loan. A subsequent release of this mortgage, which was unrecorded, led to lawsuits initiated by Thrift Guaranty Corporation, which had taken over Pacific Loan, alleging fraudulent conduct by American Resources.

In February 1985, American Resources sought Ticor's defense against these lawsuits, claiming the existence of an encumbrance on the joint venture property. Although Ticor initially defended under a reservation of rights, it later sought a declaration of no duty to defend or indemnify. The district court ruled in favor of Ticor, prompting the appeal.

The court confirmed it had jurisdiction based on the diversity of citizenship, with Ticor being a California corporation and American Resources based in Hawaii. The court noted that while diversity jurisdiction is typically sufficient for federal declaratory relief, it may choose to decline jurisdiction if similar state law issues are concurrently before state courts.

American Resources did not challenge the exercise of diversity jurisdiction by the court, leaving the applicability of a discretionary rule regarding jurisdiction unresolved until a relevant case is presented. The title insurance policies in question, issued in Hawaii to a joint venture, are governed by Hawaiian law, which stipulates that an insurer's duty to defend is based on the policy's language. The policy requires Ticor Title to defend the joint venture against claims related to encumbrances existing prior to the policy's issuance. Thrift's complaints include claims of pre-existing encumbrances, indicating that the policy likely covers the situation.

Ticor Title argues that American Resources is not an insured party under the policy because it is not a named insured, claiming that the joint venture itself holds the policy. However, relevant case law, particularly from California, suggests that insurance on a joint venture extends to its individual members, indicating that Hawaiian law would likely align with this interpretation, thus entitling American Resources to coverage.

Additionally, Ticor Title contends that an affirmative defense related to a 1986 settlement agreement negates American Resources' insurable interest. This argument is rejected, as an insurer's obligation to defend is not contingent upon the insured's potential affirmative defenses. Instead, the determination hinges on whether the underlying claims fall within the coverage of the title policy, focusing on the possibility of coverage, not the certainty of liability.

An insurer's obligation to defend a claim hinges on whether the allegations in the complaint fall within the coverage of the insurance policy, as established in relevant case law. Ticor Title's position would improperly shift the burden of defense to the insured, who should not be compelled to defend against claims that raise legitimate defenses under title insurance law. In this context, when a lawsuit includes claims covered by the policy, the insurer must provide a defense, regardless of whether the defense involves denying allegations or asserting valid legal barriers.

Regarding American Resources, the insurer's argument that policy exclusions apply due to a knowingly created defect in title is rejected. The court must view facts favorably towards American Resources, assuming the validity of the mortgage release it claims. Furthermore, the insurer's duty to defend should not hinge on predictions about the resolution of the underlying dispute. Courts should avoid adjudicating the merits of the dispute when determining the insurer's duty. Instead, genuine factual disputes must be resolved based on the version of events that supports insurance coverage. Since American Resources’ facts suggest a valid release and no applicable encumbrance at the time of insurance purchase, the conduct does not trigger the policy's exclusions.

The court concludes that Ticor Title must defend American Resources against various lawsuits despite Ticor's argument regarding policy exclusions related to a previously existing encumbrance. Under Hawaii law, insurance contracts are interpreted in favor of the insured, especially regarding ambiguities and exclusions. Exclusions must specifically identify the activities not covered, and they do not apply to defects that were resolved before the policy was purchased. Since the mortgage was properly released before the insurance was obtained, it is considered a historical issue rather than an active encumbrance. Consequently, the court reverses the district court's declaratory judgment, affirming that Ticor Title has a duty to defend American Resources. Additionally, even though American Resources is no longer part of the joint venture, it remains entitled to defense due to potential financial losses tied to title defects. The broader duty to defend extends to actions deemed frivolous or meritless, reinforcing the insurer's obligation in this context. The case is reversed and remanded for further proceedings.

The determination of whether the mortgage was properly released hinges on disputed material facts, with no conclusions drawn regarding those disputes, only the most favorable assumptions for American Resources. For a court to rule that the duty to defend is inapplicable, it must find that the only possible interpretation of the conduct is outside the policy's coverage. This principle underscores the complexity of modern pleadings, where ambiguity often arises from unresolved factual situations until the underlying tort case concludes. The provision for defense is essential and should be activated when a suit is initiated, rather than requiring the insured to prove the insurer's obligation to pay beforehand. The district court's finding that Ticor had no duty to defend meant it did not consider Ticor's duty to indemnify for judgments in the underlying actions. Since no pending actions have established American Resources' liability to Thrift, the existence of an actual controversy regarding Ticor Title's indemnification obligation is questionable. Courts typically dismiss declaratory judgment actions in such circumstances, particularly when federal relief depends on the outcomes of state court proceedings.