7th Circuit Dusts off the Erie Crystal Ball on Title Insurance Defense

Lawyers generally enjoy prognosticating future developments in the law. Under the Erie doctrine, federal judges have a legitimate need to engage in this pastime. Recently, in Philadelphia Indemnity Ins. Co. v. Chicago Title Ins. Co., No. 12-2525 (7th Cir. Nov. 13, 2014), the Seventh Circuit predicted how the Illinois Supreme Court would address a question of first impression regarding title insurance. The court's decision might be reasonably taken as a prediction as to what the Wisconsin Supreme Court would do with the same facts. But a recent unpublished decision by the Wisconsin Court of Appeals suggests some caution in setting the odds.

Philadelphia Indemnity centered around a failed commercial development on Chicago's South Side. After the lender initiated foreclosure proceedings, the developer responded with a separate lawsuit, alleging a flurry of contract, tort, and statutory claims. Because the developer's complaint included a quiet-title cause of action, the lender tendered the defense to its title insurance company. The title insurer agreed to pay costs associated with the title claims, but refused to subsidize the tangentially related contract and tort-claim defense. Ultimately, the lender's commercial general liability ("CGL") insurer sought a declaratory judgment against the title insurer to sort out their respective coverage obligations and rights.

The "complete-defense" rule requires an insurer with a duty to defend one count in a complaint also to defend against all the others. Wisconsin, like Illinois, has adopted this rule for CGL insurance policies. See School Dist. of Shorewood v. Wausau Ins. Co., 170 Wis. 2d 347, 366 (1992); Pekin Ins. Co. v. Wilson, 930 N.E.2d 1011, 1015 n.2 (Ill. 2010). In Philadelphia Indemnity, the CGL insurer argued that the complete-defense rule governed, while the title insurer relied on express coverage limitations in the policy.

Judge Sykes, joined by Judges Flaum and Rovner, aptly summarized the holding in one sentence: "Title insurance is different." Slip Op. 3. Relying on a recent opinion by the Supreme Judicial Court of Massachusetts, GMAC Mortgage LLC v. First American Title Insurance Co., 985 N.E.2d 823 (Mass. 2013), the Seventh Circuit noted that title insurance is "fundamentally different" from CGL insurance. Emphasizing the contractual nature of insurance coverage, the court distinguished the narrow coverage language used in title insurance policies from the typically broad terminology...