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When a title insurance company is prejudiced by a late notice of loss by the insured, the insurer can terminate the policy. The insurer needs to show it would have been able to assert meritorious defenses to defend the insured.

Countrywide Home Loans, Inc v Stewart Tile Guar Co, 2008 WL 2595185 (E.D. Wis., 2008)

The Heims in Wisconsin had two mortgages, one to ABN AMRO and another with Associated Bank in the form of a home equity line of credit (HELOC). A new mortgage loan from Five-Star Mortgage Service Corp. paid off the mortgage owned by ABN AMRO and the outstanding balance of the HELOC owed to Associated Bank. Then, the Heims refinanced the Five-Star mortgage with a new mortgage loan made by Countrywide.

Associated Bank never closed the HELOC account opened for the Heims and proceeded to advance the Heims another $22,490 in less than a month. The Heims failed to make payments on the HELOC and Associated Bank began an action for foreclosure. Countrywide was served with Associated's foreclosure action in which Associated alleged its mortgage was prior and superior to Countrywide's. Countrywide failed to provide notice of the action to Stewart Title and failed to file a response on its own behalf. A judgment of default was entered against Countrywide for not filing a response.

Stewart Title proceeded to deny the claim proffered by Countrywide because of the late notice of the action. However, Stewart did offer to reconsider if Countrywide could get the default judgment set aside. Countrywide tried to get the judgment set aside but was unsuccessful.

When Stewart filed a motion for summary judgment on Countrywide's policy claim, the court denied the motion because Stewart failed to establish it suffered any prejudice as result of the late notice. The court found that Countrywide failed to provide prompt notice as required by the title insurance policy. However, both late notice and prejudice are required in order for an insurer to be relieved of its obligations to defend and indemnify its insured. See Wis. Stat. &§631.81(1).

Stewart renewed its motion for summary judgment claiming it lost the benefit of a meritorious defense to the foreclosure action by Associated Bank. "A meritorious defense is a defense good at law that requires no more and no less than that which is needed to survive a motion for judgment on the pleadings."J.L. Phillips & Associates Inc. v E & H Plastic Corp., 217 Wis 2d 348, 363, 577 NW2d 13 (Wis, 1998). This is not to say the defenses submitted by Stewart would enable them to prevail, the defenses just need to meet the standard set forth inNeff v Pierzina. This standard is as follows:

Countrywide, in its response, argued the entry of judgment would not prevent Stewart from attempting to settle the title claim. Countrywide did not address the two defenses put forth by Stewart. The argument by Countrywide regarding Stewart's ability to attempt to settle the claim after a judgment has been entered was unreasonable. Once judgment is entered against a party, it is too late to assert a defense, regardless of how meritorious. However, if the judgment is vacated and the case reopened, then Stewart could attempt to settle the claim. Countrywide filed a motion to vacate judgment, but the motion was denied because Countrywide could not provide an excuse for not notifying Stewart.

The late notice by Countrywide to Stewart Title ended in "a serious impairment of the insurer's ability to investigate, evaluate, or settle a claim"Neff, 629 NW2d 177 (2001). Stewart may have been able to assert the defense located in Wisconsin Statutes Section 706.11(1m). This defense states:"[a]n advance of funds ... that is secured by a duly recorded mortgage ... and that is made after the mortgage has been recorded has the same priority as the mortgage if the advance is made before the mortgage has actual knowledge of an intervening lien..."Countrywide Home Loans, Inc. v Stewart Title Guaranty Co., 2008 WL 2595185 (E.D. Wis.). Associated Bank made advances to the Heims after the original balance was paid out and after the Countrywide mortgage was recorded. There is separate authority in Wisconsin for revolving credit mortgage advances to take priority as of the date the original mortgage is recorded, so this was an unlikely defense.

Another defense Stewart would have argued is the doctrine of equitable subrogation, which is often effective in Wisconsin. Under the doctrine of equitable subrogation, a lender may be subrogated to the lien of a prior mortgage where the money is advanced in reliance on the justifiable expectation that the lender will have the security equivalent to the debt in which the lender's advances discharged, provided no innocent third parties will suffer.Rock River Lumber Corp. v Universal Mortgage Corp., 82 Wis 2d 235, 241, 262 NW2d 114, 117(Wis 1978) This means when one mortgagee's loan proceeds are used to pay off the outstanding balance of an earlier mortgage, the later mortgagee's position may be "equitably subrogated into the position of the earlier mortgage, thus assuming priority over subsequent liens."Countrywideat *3. When Countrywide advanced money to discharge the existing mortgage held by Five-Star, both Countrywide and the Hiems agreed Countrywide would the lien position held by Five-Star.

Therefore, the late notice to Stewart prejudiced its ability to present its meritorious defenses in the foreclosure action. Timely notice was required by the title insurance policy issued by Stewart. However, late notice is not the only requirement for an insurer to be relieved of its obligations under the policy, prejudice is also required. The court of appeals found Stewart had been prejudiced and in consequence the court granted Stewart's motion for summary judgment as to Countrywide's claim for the $90,000 spent at the sheriff's sale.

Better late than never, as explained above, is not applicable in this situation. Countrywide did give Stewart notice of the foreclosure action, but judgment had already been entered. Therefore, Stewart was impeded in presenting its defenses and the contract released Stewart from its obligations to Countrywide. Attorneys for insureds under title insurance policies should be aware of this requirement and always advise clients accordingly.

THE TRUSTED ADVISER is published by Attorneys’ Title Guaranty Fund, Inc., P.O. Box 9136, Champaign, IL 61826-9136. Inquiries may be made directly to Mary Beth McCarthy, Corporate Communications Manager. ATG®, ATG® plus logo, are marks of Attorneys’ Title Guaranty Fund, Inc. and are registered in the U.S. Patent and Trademark Office. The contents of the The Trusted Adviser © Attorneys' Title Guaranty Fund, Inc.

[Last update: 3-24-10]