First United Bank v. First American Title Insurance
242 Neb. 640, 1993 Neb. LEXIS 61, 496 N.W.2d 474 (1993)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
An insurer that defends an action against its insured without a reservation of rights, and with actual or presumed knowledge of facts that would permit it to deny coverage, is estopped from subsequently asserting a defense of non-coverage if the insured shows prejudice.
Facts:
- On December 11, 1986, First American Title Insurance Company (American Title) issued a $33,000 title insurance policy to First United Bank of Bellevue (First United) to insure a deed of trust on a property known as Parcel A.
- The policy insured against loss from undiscovered liens but contained an exclusion for defects or claims 'resulting in no loss or damage to the insured claimant.'
- The policy noted two superior liens on Parcel A, but failed to disclose a third superior lien held by Southwest Bank and Trust of Omaha (Southwest).
- On February 16, 1988, Southwest filed a foreclosure action, claiming its lien on Parcel A was superior to First United's.
- On February 26, 1988, First United tendered the defense of the foreclosure action to American Title.
- On March 2, 1988, American Title accepted the defense and hired counsel for First United without issuing a reservation of rights.
- During the foreclosure proceedings, another lienholder, Bank of Bellevue, offered to sell its interest in Parcel A and two other properties to First United in a package deal that First United believed could have provided it with equity of approximately $35,000.
- First United informed the counsel hired by American Title of this offer, but American Title did not pursue negotiations or alter its defense strategy.
Procedural Posture:
- Southwest Bank filed a foreclosure action in the district court for Dallas County, Iowa, against parties with an interest in Parcel A, including First United.
- The Iowa district court entered a decree of foreclosure, which foreclosed all of First United's rights in the property.
- First United sued American Title for breach of the insurance policy in the district court for Sarpy County, Nebraska.
- The Sarpy County district court granted summary judgment in favor of American Title.
- First United, as appellant, appealed the summary judgment to the Nebraska Court of Appeals.
- The Nebraska Court of Appeals affirmed the district court's judgment in favor of American Title, the appellee.
- First United petitioned the Nebraska Supreme Court for further review, which was granted.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Is a title insurance company estopped from denying liability under its policy by asserting a 'no actual loss' defense when it defends the policyholder's interest in a foreclosure action for over a year without a reservation of rights?
Opinions:
Majority - Fahrnbruch, J.
Yes. A title insurance company is estopped from denying liability under its policy when it undertakes the defense of its insured with knowledge of a potential coverage defense but fails to issue a reservation of rights, thereby causing prejudice to the insured. While the policy's 'no loss' exclusion would normally apply because the property's value was insufficient to cover even the known senior liens, the doctrine of estoppel prevents the insurer from asserting this defense. The court adopted an exception to the general rule that estoppel cannot create coverage, applying a three-part test: (1) the insurer had knowledge of facts indicating non-coverage; (2) the insurer assumed the defense without a reservation of rights; and (3) the insured suffered prejudice. Here, American Title had both actual and constructive knowledge of the potential 'no loss' defense when it accepted the defense. It is undisputed that American Title failed to issue a reservation of rights. Finally, prejudice was established both by American Title's assumption of complete control over the defense for more than a year and by the fact that First United was deprived of the opportunity to protect its own interests by pursuing the settlement offer from Bank of Bellevue.
Analysis:
This case establishes a significant exception to the general principle that estoppel cannot be used to create insurance coverage where none exists. By adopting this exception, the court imposes a crucial duty on insurers to act promptly and transparently when a coverage dispute arises. The ruling effectively mandates that if an insurer wishes to defend a claim while preserving its right to later deny coverage, it must issue a formal reservation of rights. This decision strengthens the position of policyholders by recognizing that losing control over one's own legal defense and settlement opportunities constitutes prejudice, preventing insurers from controlling litigation while simultaneously building a case against their own insured.
