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Far-Reaching Decision On 3(a) Exclusions

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January 5, 2023

An important decision for insured parties was handed down in the Arkansas Court of Appeals in November. The court held that negligent recording of a mortgage by the insured precluded coverage under the title policy’s section 3(a) “created, suffered, assumed and agreed to” exclusion. The dispute arose from the dissolution of a two-owner LLC, in which one of the partners sold their business interests and real property interests to the other. The terms of the sale contained two important documents: (1) an LLC membership interest purchase agreement that set forth the terms and conditions of the transaction; a memorandum summarizing the terms of the purchase agreement, because the agreement had been designated confidential. Importantly, the agreement contained a provision granting a reversionary interest in the real property to the selling partner, which was indicated and summarized in the memo. At closing, the plaintiff, a bank, issued loans to the purchasing partner which were to be secured by mortgages on the real property involved in the transaction. In connection with these loans plaintiff purchased title insurance policies from defendant Old Republic National Title Insurance Company. The policies each contained standard restrictive exclusions which stated matters excluded from coverage by reason of defects, liens, encumbrances, adverse claims or other matters created, suffered, assumed, or agreed to by the insured claimant. Post-closing, plaintiff assumed responsibility for publicly recording the transaction documents, and had an employee mail the closing documents–including the memo–to the County Clerk for recording. However, the County Clerk recorded the Memo and its reversionary interest to the selling partner four minutes ahead of plaintiff’s mortgages, thus giving that interest priority over the mortgages. The purchasing partner later defaulted on his mortgage loans and plaintiff commenced a foreclosure action. In accordance with his reversionary interest, the selling partner filed an answer in the action asserting that he possessed a superior property interest to plaintiff by right of reversion. Plaintiff submitted a claim for coverage and defense with the insurer, who denied coverage. Plaintiff brought suit. The trial court ruled for the insurer, finding that plaintiff failed to fully review the documented materials; had an employee at the closing who had instructed the clerk concerning the order in which the materials were to be recorded, but couldn’t show whether the employee had misnumbered the order in which the documents were to be filed, or if the County Clerk had mistakenly failed to comply with the filing order indicated.  The trial court granted summary judgment to Defendant finding Exclusion 3(a) was applicable, as Plaintiff had assumed responsibility for ensuring the mortgage was properly recorded before the right of reversion. On appeal, the Court ruled that the plaintiff had possessed adequate “power to prohibit the memo from having priority” which it had failed to exert. Thus, the denial of Plaintiff’s claim was upheld. This is a potentially far-reaching holding which should be viewed in light of other decisions interpreting 3(a) exclusions, one of a growing body of case law extending exclusion 3(a) to negligent actions, in this instance negligent recording.

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