First American Title Insurance v. Johnson Bank

IN THE

SUPREME COURT OF THE STATE OF ARIZONA

FIRST AMERICAN TITLE INSURANCE COMPANY,
A CALIFORNIA CORPORATION,
Plaintiff/Appellee,

v.

JOHNSON BANK, A WISCONSIN BANK REGISTERED IN ARIZONA,
Defendant/Appellant.

No. CV-15-0244-PR
Filed June 13, 2016

Appeal from the Superior Court in Maricopa County
The Honorable Robert H. Oberbillig, Judge
No. CV2013-003634
REVERSED AND REMANDED

Opinion of the Court of Appeals, Division One
237 Ariz. 490, 353 P.3d 370 (App. 2015)
VACATED

COUNSEL:

Mark A. Nadeau, Courtney G. Saleski, (argued), DLA Piper LLP (US),
Phoenix, Attorneys for First American Title Insurance Company

William G. Ridenour, Timothy Berg (argued), Janice Procter-Murphy,
Fennemore Craig, P.C., Phoenix, Attorneys for Johnson Bank

Dennis I. Wilenchik, Tyler Q. Swensen, Wilenchik & Bartness, P.C.,
Phoenix, Attorneys for Amici Curiae Equity Income Partners LP and
Galileo Capital Partners, Ltd.

Ari Ramras, Ramras Legal, PLC, Phoenix, Attorney for Amicus Curiae
Land Title Association of Arizona
 FIRST AMERICAN TITLE V. JOHNSON BANK
Opinion of the Court

VICE CHIEF JUSTICE PELANDER authored the opinion of the Court, in
which JUSTICES BRUTINEL and BOLICK, and JUDGE ECKERSTROM*
joined, and CHIEF JUSTICE BALES dissented.

VICE CHIEF JUSTICE PELANDER, opinion of the Court:

¶1 This case presents the question of how to calculate damages
under a lender’s title insurance policy that failed to disclose encumbrances
substantially affecting the value of the property and thwarting its intended
use. Because the policy itself does not specify a valuation date, we are asked
to determine the appropriate date from which to measure the insured
lender’s loss. We hold that when an undisclosed title defect prevents the
known, intended use of the property and causes the borrower to default on
the loan, the lender’s diminution-in-value loss should be calculated as of
the date the title policy was issued rather than as of the date of foreclosure.
Because the record does not establish that the title defect caused the
borrowers’ default and the ensuing foreclosure, we remand for further
proceedings on that issue.

I.

¶2 In 2005 and 2006, First American Title Insurance Company
issued two title insurance policies to Johnson Bank for two properties that
secured the bank’s loans in the total amount of $2,050,000. The policies
failed to list certain covenants, conditions, and restrictions (“CC&R’s”) that
prohibited commercial development on either parcel. The property owners
defaulted on their loan obligations to Johnson Bank, allegedly because they
had intended to develop the properties and were prevented from doing so
by the CC&R’s. Based on the undisclosed CC&R’s, the owners successfully
sued First American to recover damages under their owners’ title insurance
policies.

*
Justice Ann A. Scott Timmer has recused herself from this case.
Pursuant to article 6, section 3 of the Arizona Constitution, the Honorable
Peter Eckerstrom, Chief Judge of the Arizona Court of Appeals, Division
Two, was designated to sit in this matter.
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 FIRST AMERICAN TITLE V. JOHNSON BANK
Opinion of the Court

¶3 In 2010, the properties were sold at a trustee’s sale. Johnson
Bank purchased the two parcels with a credit bid of $102,000. In 2011,
Johnson Bank notified First American of claims under its lender’s title
insurance policies, asserting that the CC&R’s prevented both properties
from being developed for commercial purposes, and that the CC&R’s were
not listed exceptions to coverage under the policies.

¶4 The parties agreed to arbitrate the damage claims but could
not agree on the date for calculating the alleged diminution in value of the
subject parcels. Johnson Bank argued that the date of the loans should be
used to calculate damages. First American argued that damages should be
based on the value of the properties at the time of foreclosure, after the real
estate market had precipitously declined.

¶5 Both parties sought declaratory relief in superior court. On
the parties’ cross-motions for summary judgment, the court granted
judgment in favor of First American, ruling that the parcels should be
valued as of the foreclosure date.

¶6 The court of appeals reversed, holding that “in the absence of
a specified date of comparative valuation identified in the policies, . . . the
date to measure any diminution in property value is the date of the loan.”
First Am. Title Ins. Co. v. Johnson Bank, 237 Ariz. 490, 494 ¶ 18, 353 P.3d 370,
374 (App. 2015). The court reasoned that because First American failed to
discover and timely disclose the CC&R’s, the policy was breached when the
loans were made. Id. at ¶ 17. Accordingly, the court remanded the case for
entry of judgment in favor of Johnson Bank on the valuation-date issue. Id.
at ¶ 18.

¶7 We granted review because the case presents an issue of first
impression in Arizona and of statewide importance. We have jurisdiction
under article 6, section 5(3) of the Arizona Constitution and A.R.S.
§ 12-120.24.

II.

¶8 We review a summary judgment de novo, viewing the facts
in the light most favorable to the party against whom judgment was
entered. See Ariz. R. Civ. P. 56(a); BMO Harris Bank, N.A. v. Wildwood Creek
Ranch, LLC, 236 Ariz. 363, 365 ¶ 7, 340 P.3d 1071, 1073 (2015). “We review

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 FIRST AMERICAN TITLE V. JOHNSON BANK
Opinion of the Court

de novo the interpretation of insurance contracts,” First Am. Title Ins. Co. v.
Action Acquisitions, LLC, 218 Ariz. 394, 397 ¶ 8, 187 P.3d 1107, 1110 (2008),
and construe provisions in such contracts according to their plain and
ordinary meaning. Sparks v. Republic Nat. Life Ins. Co., 132 Ariz. 529, 534,
647 P.2d 1127, 1132 (1982). We also interpret contracts so as to fulfill the
parties’ intent. Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 152,
854 P.2d 1134, 1138 (1993).

A.

¶9 The title insurance policies at issue here are standard form
American Land Title Association (“ALTA”) loan policies. The amounts
insured corresponded to the total amount of Johnson Bank’s loans
($2,050,000). Subject to various exclusions, exceptions, and conditions, the
policies insure “against loss or damage . . . sustained or incurred by the
Insured by reason of . . . [a]ny defect in or lien or encumbrance on the title.”
The policies do not define the term “loss or damage,” but require the
insured claimant to timely notify the insurer and provide proof of any
claimed loss or damage, including the basis of the claim and the “basis of
calculating the amount of the loss or damage.”

¶10 The policies do not specify the date to be used in calculating
loss or damage. In pertinent part, the policies provide:

7. DETERMINATION AND EXTENT OF LIABILITY

This policy is a contract of indemnity against actual monetary
loss or damage sustained or incurred by the insured claimant
who has suffered loss or damage by reason of matters insured
against by this policy and only to the extent herein described.

(a) The liability of the Company under this policy shall not
exceed the least of:

...

(iii) the difference between the value of the insured estate
or interest as insured and the value of the insured estate or
interest subject to the defect, lien or encumbrance insured
against this policy.

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 FIRST AMERICAN TITLE V. JOHNSON BANK
Opinion of the Court

¶11 Both parties argue that this policy language is unambiguous
and supports their respective view. Johnson Bank asserts that the phrase
“as insured” in § 7(a)(iii) refers to “when the property is to be valued” and
means that, for damage-calculation purposes, “the property should be
valued as of the date that the insurance policy issued.”

¶12 First American counters that the phrase “as insured,” used
throughout the policy, refers only to how the property interest is insured,
i.e., the policy’s conditions and exceptions. The policy is not ambiguous,
First American argues, merely because it does not specify a date for
calculating the loss. See First Tenn. Bank, Nat. Ass’n v. Lawyers Title Ins. Corp.,
282 F.R.D. 423, 427 (N.D. Ill. 2012) (stating that the absence of explicit text
establishing a valuation date “does not necessarily mean that the provision
is ambiguous”). According to First American, the policy implicitly
establishes the date of foreclosure as the applicable valuation date because
the policy indemnifies a loss from an undisclosed title defect only after the
lender forecloses on the property, and thus the insured lender incurs no loss
until then.

¶13 The court of appeals found the policy language in § 7(a)(iii)
ambiguous because it does not identify “the date the loss is to be
calculated.” First Am. Title, 237 Ariz. at 493 ¶ 12, 353 P.3d at 373. Under the
facts of this particular case, we agree. Because the relevant provision is
reasonably susceptible to differing interpretations, and because no other
evidence establishes any particular meaning mutually intended by the
contracting parties, the policy’s language alone does not resolve the
valuation-date issue before us today. See State Farm Mut. Auto. Ins. Co. v.
Wilson, 162 Ariz. 251, 258, 782 P.2d 727, 734 (1989) (stating that ambiguity
exists when a policy “presents conflicting reasonable interpretations”); cf.
Taylor, 175 Ariz. at 153–54, 854 P.2d at 1139–40 (discussing ambiguity
determinations, parol evidence rule, and court’s “primary objective—to
enforce the contract as intended by the parties”).

¶14 First American nonetheless argues that because the lender
must foreclose on the property to incur and claim a loss, the date of
foreclosure is the only reasonable valuation date. See, e.g., Marble Bank v.
Commonwealth Land Title Ins. Co., 914 F. Supp. 1252, 1254 (E.D.N.C. 1996)
(“In the court’s view, [the insured lender] did not suffer a loss until it

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Opinion of the Court

foreclosed on the project. Since a lender suffers loss only if the note is not
repaid, the discovery of an insured-against lien does not trigger recognition
of that loss.”). First American’s argument, however, conflates two concepts.
Although the insured lender’s exact loss might not be calculable until
foreclosure occurs, that calculation can be made using the property’s value,
with and without the defect, as of the policy date to determine the actual
loss on the date of foreclosure.

¶15 In addition, the policy contains several contractual
prerequisites that do not directly bear on damage valuation. For instance,
the lender must submit a written claim and proof of loss to the title
company after discovering a title defect, and the title insurance company
must decide whether it will exercise its rights under the policy to remove
or cure the title defect instead of paying money damages. Such policy
prerequisites, however, do not dictate the valuation date. Cf. Swanson v.
Safeco Title Ins. Co., 186 Ariz. 637, 641–42, 925 P.2d 1354, 1358–59 (App. 1995)
(concluding that the damage-valuation date under an owner’s title
insurance policy was the date the title defect was discovered).

¶16 We recognize that other courts have found the same or similar
policy clause (ALTA Loan Policy § 7(a)(iii)) unambiguous in circumstances
different from those presented here. See, e.g., First Am. Bank v. First Am.
Transp. Title Ins. Co., 759 F.3d 427, 430–33 (5th Cir. 2014) (noting that the title
defect was a maritime improvement lien); Associated Bank, N.A. v. Stewart
Title Guar. Co., 881 F. Supp. 2d 1058, 1062–63 (D. Minn. 2012) (noting that
the title defect was an undisclosed senior lien); First Tenn. Bank, 282 F.R.D.
at 427 (same); Marble Bank, 914 F. Supp. at 1254 (same). Unlike this case,
those cases involved undisclosed senior liens in which courts found that the
policy unambiguously requires using the date of foreclosure as the
valuation date.

¶17 When the title defect is an undisclosed lien, the foreclosure
date might well be the appropriate valuation date because the lender’s
damage results from not having priority in the foreclosure proceeds. See
First Tenn. Bank, 282 F.R.D. at 427; see generally Christopher B. Frantze,
Equity Income Partners LP v. Chicago Title Insurance Co. and Recovery Under A
Lender’s Title Insurance Policy in A Falling Real Estate Market, 48 Real Prop.
Tr. & Est. L.J. 391, 392 (2013) (surveying cases). But to the extent the
foregoing cases suggest that, regardless of circumstances, lenders’ title
insurance policies like that at issue here clearly establish the date of

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Opinion of the Court

foreclosure as the only damage-valuation date because the existence and
extent of any loss is unknown before then, we find them unpersuasive.

¶18 In any event, the title defect in this case is not an undisclosed
lien, but is instead undisclosed CC&R’s that prevented the
borrowers/owners from developing the property, which in turn allegedly
caused them to default on their loans. The policy does not clearly identify
the appropriate valuation date for calculating the lender’s loss in these
circumstances, and thus the court of appeals did not err in finding the
policy ambiguous on that issue. See Leo Eisenberg & Co., Inc. v. Payson, 162
Ariz. 529, 532, 785 P.2d 49, 52 (1989) (noting that a contract is ambiguous
when it “can be reasonably construed in more than one manner”).

B.

¶19 “If a clause appears ambiguous, we interpret it by looking to
legislative goals, social policy, and the transaction as a whole. If an
ambiguity remains after considering these factors, we construe it against
the insurer.” Action Acquisitions, 218 Ariz. at 397 ¶ 8, 187 P.3d at 1110
(citation omitted).

1.

¶20 Turning first to any pertinent legislative goals, like the court
of appeals, we find “no statute or other binding legal precedent in Arizona
that determines the starting date of comparative valuation of property for
calculating covered losses under a lender’s title insurance policy.” First Am.
Title, 237 Ariz. at 492 ¶ 10, 353 P.3d at 372. Under the relevant statute,
“[t]itle insurance” means:

insuring, guaranteeing or indemnifying owners of real
property or others interested therein against loss or damage
suffered by reason of liens, encumbrances upon, defects in or
the unmarketability of the title to such property,
guaranteeing, warranting or otherwise insuring the
correctness of searches relating to the title to real property, or
doing any business in substance equivalent to any of the
foregoing.

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A.R.S. § 20-1562(8); see also § 20-1562(11) (“‘Title insurance policy’ means a
written statement or contract by means of which title insurance liability is
accepted.”). A title “commitment” is defined as:

[A] report that is furnished in connection with an application
for title insurance and that offers to issue a title insurance
policy subject to the stated exceptions set forth in the report
or incorporated by reference. The reports are not abstracts of
title and the rights, duties and responsibilities relating to the
preparation and issuance of an abstract of title do not apply
to the issuance of a report. The report is not a representation
as to the condition of title to real property but does constitute
a statement of the terms and conditions on which the issuer is
willing to issue its title insurance policy if the offer is
accepted.

A.R.S. § 20-1562(5).

¶21 Under this statutory scheme, a party cannot reasonably rely
on a title commitment as a representation on the condition of title to the
property. Cf. Centennial Dev. Grp., LLC v. Lawyer’s Title Ins. Corp., 233 Ariz.
147, 149–50 ¶¶ 8–9, 310 P.3d 23, 25–26 (App. 2013) (stating that § 20-1562
“effectively bar[s] a common-law claim against an insurer whose title
commitment fails to identify a cloud on title,” and that a title commitment
issued in connection with the title company’s policy “was not a
representation of the condition of the title to the property” and could not
support a negligent misrepresentation claim). A party desiring to rely on a
representation on the quality of title must obtain an abstract of title. See
A.R.S. § 20-1562(1) (defining “abstract of title” as “a written representation
that is provided pursuant to a written or oral contract that is intended to be
relied on by the person who has contracted for the receipt of the
representation”).

¶22 First American asserts that the court of appeals erred by
establishing the date of the loans as the valuation date because only title
commitments had been issued when Johnson Bank made the loans, and the
bank could not have reasonably relied on title commitments as a
representation of the title. But Johnson Bank’s claim is not based on any
alleged misrepresentation, title commitment, or abstract of title; nor is the
bank seeking or entitled to reliance damages. Rather, Johnson Bank has

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 FIRST AMERICAN TITLE V. JOHNSON BANK
Opinion of the Court

alleged only a breach of the title insurance policy, a contract claim for which
proof of reliance is not required. See Graham v. Asbury, 112 Ariz. 184, 185,
540 P.2d 656, 657 (1975) (identifying the elements of a breach-of-contract
claim as: (1) the existence of a contract; (2) breach; and (3) resulting
damages). In short, no identifiable legislative goals affect or resolve the
issue before us.

2.

¶23 We next consider any pertinent social policies and the parties’
transaction as a whole. See Action Acquisitions, 218 Ariz. at 397 ¶ 8, 187 P.3d
at 1110. Because these topics implicate overlapping considerations, we
consider them together.

¶24 In this case, social policies and fundamental aspects of the
parties’ transaction support using the date of the policy as the valuation
date. The insurer has complete control of the title defects against which it
insures; it is in the best position to avoid such risks and prevent resulting
loss by conducting thorough and accurate title searches. Here, First
American’s deficient title search resulted in its failure to discover and
disclose the adverse CC&R’s that had been recorded against the property
in 1985. That encumbrance prevented the borrowers/owners’ intended use
of the property and consequently deprived Johnson Bank of the benefit of
not only its bargain with the borrowers to whom it loaned substantial sums,
but also its bargain with First American.

¶25 Significantly, the insurance premium First American charged
was based on the amount insured, which was the same amount as Johnson
Bank’s loans and corresponding security interest in the properties. And,
under its policies, First American agreed to pay up to that amount for any
“loss or damage . . . sustained or incurred by [Johnson Bank] by reason
of . . . [a]ny defect in or lien or encumbrance on the title.” Using the
foreclosure date as the damage-valuation date would allow the insurer to
profit from a depreciating market even when the title defect caused the
borrower to default. See Barlow Burke, Law of Title Insurance § 7.04 (3d ed.
Aspen Publishers 2004) (noting that if an insurer collects a premium based
on the loan’s face amount and then, when title fails in a falling market,
argues the decrease resulted from market conditions and thus “seeks to pay
less than the amount of the insurance purchased and the loss of capital sunk

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 FIRST AMERICAN TITLE V. JOHNSON BANK
Opinion of the Court

in the purchase price,” “the insurer is in a ‘tails I win, heads you lose’
position”).

¶26 In addition, by using the date of the policies as the valuation
date in circumstances such as these, a title insurance company can
accurately evaluate if it should exercise its rights under the policy to cure
the title defect or pay money damages. Finally, using the foreclosure date
when the title defect caused the borrower to default would unfairly allow
the title company to avoid the insured’s actual, resulting consequential
damages. Id. (“The choice of a date for measuring damages should not
provide the insurer with an opportunity to shield its eyes from the insured’s
actual, economic, and consequential losses.”).

¶27 In evaluating relevant social policy and the transaction as a
whole, we also must consider the assessment and allocation of risk under
circumstances which, as here, include a downturn in the real estate market.
First American argues that the court of appeals improperly allocated the
risks of a declining market and a borrower’s default. Under the policies,
First American did not expressly agree to indemnify or otherwise insure
against the risk of a drop in the real estate market. But the policies also do
not exclude coverage for loss resulting partly from such risk, nor do we
hold that a title company, as a general commercial matter, bears that risk.

¶28 When an undisclosed, material title defect completely
frustrates the borrowers/owners’ intended use of the property and directly
causes their default and the subsequent foreclosure, an insured lender’s
recoverable damages may include loss resulting from a declining real estate
market. We acknowledge that, for purposes of § 7(a)(iii) of the policy,
measuring the difference in value at the time of policy issuance for a loss
that does not occur until foreclosure in a down market may effectively shift
to the title insurer part of the loss attributable to the market downturn
(which could occur irrespective of any title defect or error in the title
search). Under these particular circumstances, however, that consequence
offends neither the policy language nor the relevant, identified social
policies. As a leading treatise has explained, reasons that support using the
policy date to measure the lender’s loss in a falling market include: “the
purpose of the policy from the standpoint of the insured is future
indemnification;” and “the policy date is consistent with fully
compensating the insured for his or her ‘actual losses’ under the policy.”
Id.

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¶29 Banks, of course, are in the business of assessing the risk that
their loans will not be repaid, including the risk of market declines. But that
risk assessment occurs when banks enter into a loan contract, not when a
default and foreclosure occur sometime later. Likewise, although a lender
bears some inherent risk of a possible market downturn, the value of the
lender’s security interest — again, taken at the time a loan is made — is the
lender’s hedge against that risk. Moreover, and importantly, owners are
less likely to default on the loan, even in a declining market, if their property
can be developed as contemplated. This too is a consideration for lenders
at the time a loan is made. Thus, in determining damages caused by First
American’s incomplete title search under the facts presented here, social
policy does not preclude using the date the policies were issued as the
valuation date.

¶30 Finally, the lack of a specific valuation date in title insurance
policies allows a case-by-case approach to value the insured’s loss. Joyce
Palomar, 1 Title Ins. Law § 10:16 (2015 ed.) (“Because ALTA policies have
not specified the date the value of the property is to be assessed to measure
an insured’s loss, courts need to determine the insured’s actual loss in the
particular circumstances.”). If the foreclosure date were the universal
valuation date to be used regardless of circumstances, then courts and the
parties could not evaluate the insured’s actual loss in a particular case. And
if title insurers desire to avoid all uncertainty by establishing the foreclosure
date or specifying some other damage-valuation measure to uniformly
apply in all situations, they can modify their policies accordingly. In sum,
neither social policy nor the transaction as a whole militates against using
the date of policy issuance as the date for measuring damages under
§ 7(a)(iii).

¶31 Contrary to First American’s assertion, this reasoning and
conclusion do not convert its indemnification policy into a mortgage
insurance policy or a guarantee of title. “Title insurance does not guarantee
perfect title; instead, it pays damages, if any, caused by any defects to title
that the title company should have discovered but did not.” Swanson, 186
Ariz. at 641, 925 P.2d at 1358; see Falmouth Nat. Bank v. Ticor Title Ins. Co.,
920 F.2d 1058, 1063 (1st Cir. 1990) (“[W]hat is insured is the loss resulting
from a defect in the security.”). Consequently, the mere existence of a title
defect is not a breach. See In re W. Feliciana Acquisition, L.L.C., 744 F.3d 352,
359 (5th Cir. 2014).

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Opinion of the Court

¶32 Indisputably, First American’s policy only agrees to
indemnify against actual monetary loss or damage; it is not “guarantee of
title.” See First Am. Bank, 759 F.3d at 433 (noting that title insurance does
not “guarantee either that the mortgaged premises are worth the amount of
the mortgage or that the mortgage debt will be paid”) (internal citation
omitted); Guarantee of Title, Black’s Law Dictionary (10th ed. 2014) (“A
warranty that the title to a piece of real property is vested in a particular
person, given by a title company or abstract company, and based on a title
searcher’s opinion of the status of the property’s title.”).

¶33 Using the date of the policy does not convert the
indemnification policy into a guarantee of title. First, the insurer will be
liable only if the loss results due to a discoverable defect or encumbrance
on the title. Swanson, 186 Ariz. at 641, 925 P.2d at 1358. Absent such a defect
in title, there would be no insured loss. Second, under the policy, the lender
must demonstrate an actual loss. See generally Eric M. Larsson, 46 Causes
of Action 2d 605, §§ 3–4 (originally published in 2010) (discussing the
differences between a claim under a title insurance policy and related
causes of actions). Third, the title insurance policy applies only if a title
defect caused the insured’s loss. Cf. Feliciana Acquisition, 744 F.3d at 359
(noting that the title defect must cause the loss). As Johnson Bank
acknowledges, “the insurer would have no liability if the borrower
defaulted because of personal circumstances wholly unrelated to a defect
in title or if the real estate market fell resulting in a default by the borrower
when there was no defect in title.” Using the date of policy issuance as the
valuation date under the circumstances here does not change the nature or
scope of the policy’s coverage.

3.

¶34 In support of its holding, the court of appeals relied largely
on Equity Income Partners v. Chicago Title Insurance Co., 2012 WL 3871505 (D.
Ariz. Sept. 6, 2012), an unpublished federal district court decision, which in
turn embraced the reasoning of Citicorp Savings of Illinois v. Stewart Title
Guaranty Co., 840 F.2d 526 (7th Cir. 1988). See First Am. Title, 237 Ariz. at
493–94 ¶¶ 13–14, 353 P.3d at 373–74. First American argues that the court
of appeals erred in adopting that “minority view” and should have instead
followed the “majority view” of cases such as First American Bank, 759 F.3d
at 432 (noting that “a majority of courts from other jurisdictions have held

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that, in the absence of specific policy language, a title insurer’s liability to a
mortgagee should be measured using the foreclosure date”).

¶35 The “majority view” identified by First American largely
involved situations where the title defect was an undisclosed senior lien.
See, e.g., First Am. Bank, 759 F.3d at 433 (mentioning that the title defect was
a maritime improvement lien); Associated Bank, 881 F. Supp. 2d at 1063
(noting that the title defect was an undisclosed senior lien); First Tenn. Bank,
282 F.R.D. at 427 (same); Marble Bank, 914 F. Supp. at 1254 (same). As noted
above, this case does not involve an undisclosed senior lien, and therefore
those cases are not persuasive or particularly helpful.

¶36 The “minority view,” as characterized by First American,
involved situations where, as here, a total failure of title occurred and courts
used the loan date to measure damages. See, e.g., Citicorp, 840 F.2d at 529–
30 (discussing that the insured’s lien was unenforceable ab initio); In re
Evans, 460 B.R. 848, 895–99 (Bankr. S.D. Miss. 2011) (discussing that the
lender had no right in the property). The Citicorp court reasoned that the
policy was breached when the lender made the loan. 840 F.2d at 530. The
district court in Equity Income Partners used that same rationale when the
title defect rendered the property essentially worthless because it lacked
ingress and egress. See 2012 WL 3871505 at *4 (using the date of the loan
for damage-valuation purposes, noting that “because the policy was
breached at the time of the loan, the title insurer should bear any risk of
market value decline in the property at that time”) (internal citation and
punctuation omitted). Thus, those cases that First American characterizes
as representing the “minority view” actually involve different reasoning
anchored in a different species of breach — the very species which, Johnson
Bank maintains, occurred here. In sum, the case law from other
jurisdictions does not influence the relevant social policies for determining
the appropriate valuation date in this case.

4.

¶37 “In interpreting an insurance policy, we apply ‘a rule of
common sense’ thus, ‘when a question of interpretation arises, we are not
compelled in every case of apparent ambiguity to blindly follow the
interpretation least favorable to the insurer.’” Employers Mut. Cas. Co. v.
DGG & CAR, Inc., 218 Ariz. 262, 264 ¶ 9, 183 P.3d 513, 515 (2008) (quoting
Wilson, 162 Ariz. at 257, 782 P.2d at 733). Rather, “[t]he ‘ambiguity’ rule

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Opinion of the Court

applies only after the court is unable to determine how the language of the
policy applies to the specific facts of the case.” DGG & CAR, 218 Ariz. at
264 ¶ 9, 183 P.3d at 515 (quoting Preferred Risk Mut. Ins. Co. v. Lewallen, 146
Ariz. 83, 85, 703 P.2d 1232, 1234 (App. 1985)). Our evaluation of legislative
goals, social policies, and the transaction as a whole does not eliminate the
policy’s ambiguity or resolve the question before us. Accordingly, we will
construe the policy, and particularly § 7(a)(iii), against First American. See
Action Acquisitions, 218 Ariz. at 397 ¶ 8, 187 P.3d at 1110. So construed, the
policy implicitly permits using the policy-issuance date as the date for
calculating damages under § 7(a)(iii), if the title defect caused the
borrowers/owners to default on Johnson Bank’s loans.

C.

¶38 The dissent advocates using the foreclosure date to measure
Johnson Bank’s loss. Infra ¶¶ 50, 58. We are unpersuaded because the
dissent rests on incorrect premises, uncontested but inapplicable legal
principles, and inapposite out-of-state cases. According to the dissent,
using the policy-issuance date to measure the bank’s loss “does not comport
with the expressed intent of the parties.” Infra ¶ 61. But how is the parties’
intent on the sole relevant issue here knowable or discernible when, as the
dissent acknowledges, the policy is “facially ambiguous” regarding the
proper damage-valuation date to use in this case? Infra ¶ 50. And the
record does not reflect, nor does the dissent cite, any extrinsic parol
evidence “to explain what the parties truly may have intended” on that
issue. Taylor, 175 Ariz. at 154, 854 P.2d at 1140.

¶39 The dissent also mistakenly asserts that we “impute[] duties
to the title insurer that are inconsistent with the policy itself and Arizona’s
statutory framework.” Infra ¶ 52. In its ALTA form policy, however, First
American broadly agreed to indemnify “against loss or damage . . .
sustained or incurred by the Insured by reason of . . . [a]ny defect in or lien
or encumbrance on the title.” And again, as the dissent concedes, the policy
does not clearly identify a valuation date for calculating the insured’s loss.
Our analysis and conclusion do not conflict with any of the policy’s
provisions.

¶40 Contrary to the dissent’s assertion, neither Johnson Bank’s
contract claim nor our analysis and determination of the appropriate loss-
valuation date contravene Arizona’s statutory framework. Infra ¶¶ 52, 55.

14
 FIRST AMERICAN TITLE V. JOHNSON BANK
Opinion of the Court

As noted above, supra ¶ 22, the contract claim at issue here is based solely
on the title insurance policy, not on an “abstract of title,” misrepresentation,
or any other tort theory.

¶41 Although it acknowledges that First American’s policy is
ambiguous, the dissent does not convincingly analyze the relevant social
policies and the parties’ transaction as a whole, as we must do given the
policy’s ambiguity. Action Acquisitions, 218 Ariz. at 397 ¶ 8, 187 P.3d at 1110.
Instead, the dissent incorrectly asserts that we impose common law and
statutory duties on First American that indisputably do not exist here.

¶42 In support of its position, the dissent relies on cases (not cited
by First American) that involve misrepresentation or other tort claims that
are neither asserted nor applicable here. See, e.g., Barstad v. Stewart Title
Guar. Co., Inc., 39 P.3d 984, 985–87 (Wash. 2002) (noting that lenders who
brought claims for negligent misrepresentation, violations of the Consumer
Protection Act, and civil conspiracy only received a preliminary title
commitment but did not purchase title insurance); Siegel v. Fid. Nat. Title
Ins. Co., 54 Cal. Rptr. 2d 84, 85–88 (Cal. Ct. App. 1996) (rejecting owners’
negligence and contract claims against an insurer that sold a title insurance
policy to the lender because the insurer did not have a fiduciary or
contractual relationship with the owners, who failed to purchase title
insurance); Hulse v. First Am. Title Co. of Crook Cty., 33 P.3d 122, 126, 134, 138
n.8 (Wyo. 2001) (rejecting insured’s negligence claim against insurer
because issuance of title commitment and title insurance policy did not give
rise to an implied tort duty to search for and disclose title defects, and
rejecting insured’s contract claim when access to property still existed).
And in the only Arizona case the dissent cites, the court rejected the owner’s
claims for negligent misrepresentation based on the title commitment, but
remanded for a determination on the owner’s breach of contract claim
based on the insurance policy. Centennial Dev. Grp., 233 Ariz. at 148 ¶¶ 1–
3, 310 P.3d at 24.

¶43 The dissent is puzzling for another reason as well. It asserts
that our analysis incorrectly “presumes” that First American “had any duty
to discover and disclose the title defects.” Infra ¶ 59. The dissent’s “no
duty” argument (an argument First American does not make and with
which we do not disagree) would make sense if Johnson Bank were alleging
a tort or claiming that the insurer breached the policy by not discovering
and disclosing the encumbrance. But because Johnson Bank makes no such

15
 FIRST AMERICAN TITLE V. JOHNSON BANK
Opinion of the Court

claim, the “no duty” argument is illogical and inapplicable. In accordance
with the policy’s language, the bank merely seeks “indemnity against
actual monetary loss or damage” it allegedly sustained “by reason of” the
title defect. That contract claim does not hinge on any extra-contractual
duty owed or breached, and the “no duty” proposition has no bearing on
how damages should be calculated under the indemnification policy’s
ambiguous § 7(a)(iii). First American concedes that it “is responsible for the
diminution in value of the collateral as a result of the title defect.” Thus, the
dissent’s “no duty” argument is not only off point but also inconsistent with
First American’s position.

¶44 In any event, we do not find or impose on First American any
extra-contractual tort or other common law duties. But in resolving the
ambiguity in First American’s policy by evaluating relevant social policies
and the parties’ transaction as a whole, we quite properly consider that First
American was in the best position to timely discover and disclose the title
defect, and to thereby avoid the risk of loss in a depreciating real estate
market, but failed to do so. See supra ¶ 24. Because evaluation of relevant
social policies and the parties’ transaction as a whole does not resolve the
policy’s ambiguity, and because we must then construe the policy against
the insurer, First American should bear that risk. That conclusion is not
based on inapplicable tort law or statutes, but rather on the analytical
framework this Court has adopted. Action Acquisitions, 218 Ariz. at 397 ¶ 8,
187 P.3d at 1110. The dissent is unpersuasive in arguing otherwise.

D.

¶45 First American argues that the court of appeals erred by
assuming, without any evidentiary support in the record, that the title
defect caused the borrowers’ default and Johnson Bank’s subsequent
foreclosure. First Am. Title, 237 Ariz. at 493 ¶ 14, 494 ¶ 17, 353 P.3d at 373,
374. We agree.

¶46 There is no evidence demonstrating that the undisclosed title
defect caused the borrowers’ default. Although Johnson Bank points to the
unpublished court of appeals’ decision that affirmed judgment in favor of
the borrowers/owners in their action against First American, that case does
not establish as a matter of fact or law that the title defect caused the
borrowers’ default. See Troon H Pad, L.L.C. v. First Am. Title Ins. Co., No.
1 CA-CV 11-0491, 2013 WL 440609, at *5 ¶ 24 (Ariz. App. Feb. 5, 2013)

16
 FIRST AMERICAN TITLE V. JOHNSON BANK
Opinion of the Court

(mem. decision) (noting some trial testimony that the owner “had lost an
investor because the title defect affected the ability of the parcels to be
developed”). Nor can we take judicial notice of that necessary causal link.
Cf. Ariz. R. Evid. 201. Accordingly, the court of appeals erred by directing
entry of summary judgment in favor of Johnson Bank. First Am. Title, 237
Ariz. at 494 ¶ 18, 353 P.3d at 374.

¶47 On remand, Johnson Bank will have to prove that the title
defect caused the borrowers’ default and subsequent foreclosure to justify
using the date of the policies as the valuation date. If Johnson Bank fails to
satisfy this burden, then the proper valuation date is the foreclosure date.

III.

¶48 For the foregoing reasons, we vacate the court of appeals’
opinion, reverse the judgment in favor of First American, and remand the
case to the superior court for further proceedings.

¶49 Johnson Bank requests attorney fees under A.R.S. § 12-341.01,
which permits an attorney fee award in contract actions. In our discretion,
we deny the request, without prejudice to Johnson Bank seeking in the
superior court any fees incurred in this Court, should Johnson Bank
eventually prevail on remand.

17
 FIRST AMERICAN TITLE INS. CO. V. JOHNSON BANK
CHIEF JUSTICE BALES, Dissenting

Bales, C.J., dissenting.

¶50 I agree with the majority that the title insurance policy is
facially ambiguous regarding the proper date (policy issuance versus
foreclosure) on which to measure an insured lender’s loss when an
undisclosed title defect, lien or encumbrance (a “title defect”) reduces the
value of property securing a loan. Supra ¶ 18. I also agree that the
diminution in value generally is measured as of the date of foreclosure.
Supra ¶ 47. Because I believe the same date should be used in the
circumstances of this case, I respectfully dissent.

¶51 The majority holds that the drop in value should be measured
as of the policy’s issuance when an undisclosed title defect prevents the
known, intended use of the property and causes the borrower to default.
Supra ¶¶ 1, 28. Recognizing that this approach shifts to the title insurer
“loss[es] attributable to [a] market downturn (which could occur
irrespective of any title defect or error in the title search),” id. ¶ 28, the
majority concludes that this result “offends neither the policy language nor
the relevant, identified social policies.” Id. The majority’s holding rests on
its repeated observations that First American “failed” to discover and
disclose the restrictive covenants for the subject property or that it
conducted a “deficient” or “incomplete” title search when First American
offered to extend title coverage before Johnson Bank issued loans to its
borrowers. Supra ¶¶ 1, 2, 24, 29.

¶52 Loss under the policy should not be measured by imputing
duties to the title insurer that are inconsistent with the policy itself and
Arizona’s statutory framework. Although the policy may be facially
ambiguous with regard to the date of valuation for calculating loss, the
nature of the parties’ transaction as well as the policies reflected in
Arizona’s title insurance statutes resolve that ambiguity: absent a contrary
indication by the parties, loss should be measured as of the date of
foreclosure. Cf. First Am. Title Ins. Co. v. Action Acquisitions, LLC, 218 Ariz.
394, 397 ¶ 8, 187 P.3d 1107, 1110 (2008) (discussing how facial ambiguity of
insurance policy may be resolved by “looking to legislative goals, social
policy, and the transaction as a whole”).

¶53 Title insurance, as the parties acknowledge, is a contract of
indemnity, not a guarantee of title. E.g., Centennial Dev. Grp. LLC v. Lawyer’s
 FIRST AMERICAN TITLE INS. CO. V. JOHNSON BANK
CHIEF JUSTICE BALES, Dissenting

Title Ins. Corp., 233 Ariz. 147, 149 ¶ 6, 310 P.3d 23, 25 (App. 2013); Associated
Bank, N.A. v. Stewart Title Guar. Co., 881 F.Supp.2d 1058, 1066 (D. Minn.
2012). A title insurer cannot “fail” to disclose title defects to a lender
seeking title insurance unless it owes a duty to the lender to discover and
disclose such defects when it offers to provide coverage on a property. See
Centennial Dev. Grp., 233 Ariz. at 150 ¶¶ 9–10, 310 P.3d at 26; First Midwest
Bank, N.A. v. Stewart Title Guar. Co., 843 N.E.2d 327, 335 (Ill. 2006); Barstad v.
Stewart Title Guar. Co., Inc., 39 P.3d 984, 987–88 (Wash. 2002).

¶54 Courts have consistently recognized that a title insurer has no
implied duty to search title records for defects when it contracts to provide
title insurance. E.g., Hulse v. First Am. Title Co. of Crook Cnty, 33 P.3d 122,
134–35 (Wyo. 2001); Barstad, 39 P.3d at 990–91; Greenberg v. Stewart Title
Guar. Co., 492 N.W.2d 147, 151–52 (1992); Lawrence v. Chicago Title Ins. Co.,
192 Cal.App.3d 70, 76–77 (1987). Therefore, any duty to investigate the
condition of title can result only from a voluntary assumption of that duty
in addition to the mere contract to insure title. Hulse, 33 P.3d at 134–36;
Greenberg, 492 N.W.2d at 152. If a title insurer undertakes no contractual
duty to discover or disclose title defects to a lender when it offers to provide
title insurance, then a lender could not reasonably expect such an offer to
serve as any kind of guide regarding “the value of the lender’s security
interest,” supra ¶ 29, or as a hedge against the risk of market downturns.
See First Midwest Bank, N.A., 843 N.E.2d at 335.

¶55 Under Arizona law, a duty to discover or disclose title defects
is imposed by an abstract of title, not by a title insurance policy. See A.R.S.
§ 20-1562(1) (requiring an abstract of title to disclose “all recorded
conveyances, instruments or documents that impart constructive notice
with respect to the chain of title to the real property”). When a title insurer
offers to provide title insurance for a property, it issues a title commitment.
See § 20-1562(5) (defining “title commitment” as an offer to issue a title
insurance policy subject to any stated exceptions). Once escrow closes and
the loan documents have been recorded, a title policy is issued based on the
precise terms of the title commitment. See § 20-1562(11) (defining “title
insurance policy” as the means by which title insurance liability is
accepted); see also Palomar, 1 Title Ins. Law § 5:29. Unlike an abstract of
title, a title commitment is explicitly exempted from any duty to discover
or disclose title defects. § 20-1562(5) (“the rights, duties and responsibilities
relating to the preparation and issuance of an abstract of title do not apply
to the issuance of a [title commitment]. The [title commitment] is not a

19
 FIRST AMERICAN TITLE INS. CO. V. JOHNSON BANK
CHIEF JUSTICE BALES, Dissenting

representation as to the condition of title to real property”). The parties, of
course, are free to contract around these statutory definitions, but we are
not so free to ignore our statutory scheme. See e.g., Tower Plaza Investments
Ltd. v. DeWitt, 109 Ariz. 248, 253, 508 P.2d 324, 329 (1973) (the laws of a state
are part of a contract and must be read into it).

¶56 Our sister courts in Washington and California – which share
the same statutory definitions of “abstract of title,” “title commitment,” and
“title insurance policy” as Arizona – have reached similar conclusions. The
Supreme Court of Washington, after discussing the same statutory
differences between an abstract of title, title commitment, and title policy
that are present here, expressly held that a title insurer owes no duty to a
lender to discover or disclose any information regarding the condition of
title when it offers to provide title insurance. Barstad, 39 P.3d at 988–89, 991.
Barstad emphasized that the party seeking title insurance has no reasonable
expectation to any information concerning the condition of title for the
subject property, and that any research conducted by the insurer was
exclusively for its own benefit, not for the benefit of the insured. Id. at 990–
91.

¶57 Similarly, California’s Court of Appeal has recognized that
the statutory definitions of “abstract of title,” “title commitment,” and “title
insurance policy” – which are virtually identical to Arizona’s – preclude
courts from imposing a duty on a title insurer to discover and disclose title
defects when it contracts for title insurance. E.g., Siegel v. Fid. Nat’l Title Ins.
Co., 46 Cal. App. 4th 1181, 1189, 1193 (1996). The statute makes clear that a
title policy is “not a summary of the public records, and the insurer is not
supplying information” regarding the condition of title to the insured.
Lawrence, 192 Cal.App.3d at 75. Like Washington, any title search that an
insurer chooses to conduct is strictly for the insurer’s own benefit and has
no bearing on the insured. Fid. Nat’l Title, 215 Cal.App.3d at 1175.

¶58 Under Arizona’s statutory framework and the policy at issue
here, First American did not undertake a duty to discover any title defects
or disclose them to Johnson Bank before the lender made the loan. Accord
Hulse, 33 P.3d at 134–36; Barstad, 39 P.3d at 988–91. Instead, the insurer
agreed that if an undisclosed title defect was later discovered and caused
“actual monetary loss” to the lender, First American would pay the lesser
of: the unpaid loan balance, the cost of curing the title defect, or the
diminution in value resulting from the defect. The appropriate date for

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 FIRST AMERICAN TITLE INS. CO. V. JOHNSON BANK
CHIEF JUSTICE BALES, Dissenting

calculating loss in this context is when it in fact occurred – the date of
foreclosure.

¶59 The majority’s conclusion that loss may be measured as of
policy issuance is both self-contradictory and inconsistent with the nature
of title insurance under Arizona law. The majority acknowledges that a
lender’s title insurance policy is not a guarantee of title, supra ¶ 21, and
denies imposing any “extra-contractual duties” on the insurer. Supra ¶ 47.
Nonetheless, the majority asserts that measuring loss as of the date of
issuance is appropriate because the insurer conducted a “deficient title
search” and its failure to disclose the defect caused “actual consequential
damages” to the lender. Supra ¶¶ 24, 26. This can only mean that the lender
was damaged because the insurer breached some duty (contractual or
otherwise) to properly investigate title and disclose it to the lender before
the loan was funded. (The treatise cited by the majority in support of
measuring loss by the policy date, supra ¶ 28, does not address Arizona’s
statutory framework and fails to adequately distinguish between a lender’s
policy and an owner’s policy, as the latter might warrant using date of
issuance to measure loss, since the owner’s equity is immediately impaired
by the undisclosed defect.) The majority argues that cases or statutes like
A.R.S. § 20-1562(5) recognizing that a title policy is not a representation
about the condition of title are inapposite because Johnson Bank is not
asserting claims based on tort or the title commitment. Supra ¶¶ 47, 48. The
relevant point is not the nature of the claims asserted by the lender, but
instead whether the title insurer had any duty to discover and disclose the
title defects, as the majority’s analysis presumes.

¶60 Based on a mistaken characterization of a title insurer’s
responsibilities to a lender, the majority ultimately concludes that it will
construe the “ambiguous” policy in favor of the insured, and thereby allow
the lender to measure loss as of the date of policy issuance if the defect
“caused the borrowers/owners to default on Johnson Bank’s loans.” Supra
¶ 37. To do otherwise, the majority states, would allow the insurer to
“unfairly” avoid paying the lender’s damages. Supra ¶ 26.

¶61 I respectfully disagree. Because First American did not
undertake by issuing title insurance to then discover any title defects or
disclose them to the lender, it is not appropriate to adopt a measure of loss
(date of policy issuance) that presumes such duties. If the lender wanted
some representation regarding the condition of title it could have

21
 FIRST AMERICAN TITLE INS. CO. V. JOHNSON BANK
CHIEF JUSTICE BALES, Dissenting

purchased an abstract of title; similarly, if it wanted to shift the risk of
market loss (an underwriting risk generally born by lenders rather than title
insurers), it might have contracted to do so. We should not, however,
interpret the title policy as implicitly adopting a measure of loss that does
not comport with the expressed intent of the parties, the nature of title
insurance, or Arizona’s policy as expressed in our title insurance statutes.

22