In First American Bank v. First American Transportation Title Insurance Company, 2009 WL 3285970 (5th Cir. 2009), the Fifth Circuit held that liability under a title insurance policy extends beyond foreclosure sale proceeds but does not encompass consequential losses.

The case arises in a rather interesting context. In 2004, First American Bank (“First American”) loaned Titan Cruise Lines, Inc., $28 million to fund Titan’s operation of a gaming vessel known as the Ocean Jewel. As collateral for this loan, Titan executed ship mortgages in favor of First American on the Ocean Jewel and on the Emerald Express and the Sapphire Express (two high-speed catamarans used to shuttle customers back and forth from land to the Ocean Jewel).

First American Transportation Title Insurance Company (“FATTIC”) issued two separate title insurance companies to First American. The first policy secured the Ocean Jewel, and the second policy (at issue in the case) secured the Emerald and Sapphire. The policies cross-referenced each other and provided a single aggregate coverage limit of $28 million, that is, the value of First American’s loan to Titan.

The Policy’s insuring agreement provided that FATTIC shall be liable for “actual loss or damage sustained or incurred by [First American] by reason of” any of 19 specifically enumerated risks. Covered risks included “unmarketability of the title,” “failure of the insured mortgage to have the equivalent priority of a preferred mortgage,” and “lack of priority of the mortgage … over any statutory lien for necessaries.” Of proximate concern, Section 7 of the Policy provided:

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 Title as insured and the value of the Title subject to the defect, lien, or encumbrance insured against by this policy….

Finally, the Policy provided for the application of Louisiana law. 

In August 2005, Titan filed for bankruptcy. At the time, the Ocean Jewel, the Emerald, and the Sapphire were encumbered by necessaries liens resulting from debts owed by Titan to suppliers of necessaries for the vessels. In January 2006, the bankruptcy court approved the sale of the Ocean Jewel and the Sapphire.

Before the vessels could be sold at auction, the Sapphire sank at her moorings. In consequence, the bankruptcy court issued an order assigning “super-priority” to the costs Tampa Bay Shipbuilding and Repair Company (“TBSR”) incurred in keeping and maintaining the Sapphire. In consequence, TBSR’s claims were superior to any other maritime lien on the vessel.

The bankruptcy court also issued an order approving Titan’s abandonment of the Sapphire. TBSR then filed an in rem action against the Sapphire. As a result of those proceedings, U.S. Marshals seized the Sapphire and sold it to TBSR at public auction for $99,227, the value of TBSR’s liens.

Thereafter, Eastern Shipbuilding Group, Inc. (“Eastern”) filed an in rem action against the Emerald. U.S. Marshals seized the Emerald and sold it to Eastern at public auction for a credit bid of $10,000, which represented a portion of Eastern’s $597,352.72 necessaries liens.

First American presented a claim to FATTIC under the Policy. FATTIC responded that its liability was limited to the amounts paid to TBSR and Eastern in the foreclosure sales. First American then filed a breach of contract action against FATTIC.

FATTIC filed a motion for partial summary judgment that its indemnity is limited under Section 7(a)(iii) of the Policy to the amounts by which the payments of the holders of the liens for necessaries reduced First American’s recovery on its mortgages. The district court granted FATTIC’s motion and also held that the Policy did not afford First American coverage for consequential damages. On interlocutory appeal under 28 U.S.C. § 1292(b), the Fifth Circuit reversed the district court’s determination regarding the extent of liability under the Policy, but affirmed the district court’s determination that the Policy did not provide coverage for consequential losses.

In regard to Section 7(a)(iii), the Fifth Circuit concluded:

While we agree that FATTIC’s liability under the Policy is limited to the difference between the value of First American’s ship mortgages when unencumbered and the value of First American’s ship mortgages subject to the necessaries liens, we disagree that the difference in values is to be determined solely by the proceeds recovered from the foreclosure sale.

The court rested this conclusion on Volunteer State Life Ins. Co. v. Union Title Guar. Co., 143 So. 43 (La. 1932), in which the Louisiana Supreme Court held that courts must take into account other information, in addition to foreclosure sale proceeds, when assigning a value to property for title insurance purposes. On the authority of Volunteer State Life, the court held that “a determination of the value of First American’s unencumbered ship mortgages and the value of the mortgages subject to the necessaries liens raises genuine issues of material fact based upon any appraisals, the foreclosure proceeds, and other market data.”

The court affirmed the district court’s determination that the Policy did not provide coverage for consequential losses. The Policy’s insuring agreement “insures ‘against actual loss or damage’” and that “Section 7 also reiterates that the parties entered into a ‘contract of indemnity against actual monetary loss or damage’.” As evidence of the “generally prevailing meaning” of the phrase “actual loss or damage,” the court consulted Black’s Law Dictionary, which defines “actual loss” as “[a] loss resulting from the real and substantial destruction of insured property.” The court further found material that Black’s “separately defines ‘consequential loss’ as ‘[a] loss arising from the result of damage rather than from the damage itself’.” Therefore, “a plain reading of ‘actual loss or damage’ does not include ‘consequential loss’ or ‘consequential damage.’”