Centerpoint Mechanic Liens, LLC. v. Commonwealth Land Title Insurance Company
Arizona Supreme Court
June 10, 2025
JSH Attorney: Robert Berk
Two commercial lenders loaned a total of $25 million to the developer of a large, residential project. The lenders secured the loans with deeds of trust (DOTs) against the property, and purchased two $5 million “lenders’ title insurance policies” insuring that the DOTs were superior to any other liens against the property. Later, after the developer went bankrupt, contractors working on the project recorded mechanics’ liens totaling $30 million against the property (which by that time was only worth $30 million), and suit was filed to determine whether the mechanics’ liens were superior to the DOTs. The two lenders tendered the defense of the “lien priority” suit to their title insurer, and the title insurer defended under a reservation of rights.
The property was sold and the lenders’ loans were fully repaid. The lenders and the mechanic lien claimants, however, entered into an agreement pursuant to USAA v Morris, 154 Ariz. 113, 741 P.2d. 246 (1987), wherein they stipulated among other things that (1) the lenders’ DOTs were inferior to the mechanic’s liens, and (2) the insured lenders were damaged in the amount of $10 million because of the inferiority of their DOTs even though they were fully repaid. The title insurer intervened in the lien priority suit to challenge the reasonableness of the settlement, and argued that the $10 million settlement amount was unreasonable because the insured lenders suffered no loss. The trial court, however, found the settlement was reasonable.
The title insurers then filed a declaratory judgment action seeking a determination that there was no coverage for the lenders’ claims; and the lenders counterclaimed for breach of contract and bad faith. The court granted summary judgment to the title insurers on the breach of contract claims, finding that the title insurers didn’t breach the policies because under lenders’ policies, coverage is limited to the unpaid balance of the loan. But the lenders’ bad faith claim proceeded to trial, and the jury found that the title insurers acted in bad faith and awarded the lenders $5 million. On appeal, the Court of Appeals held that the Morris agreement between the lenders and lien holders precluded the insurers from contesting whether the lenders suffered a “loss,” characterizing the dispute as “liability issue” rather than a coverage issue. When an insurer defends under a reservation of rights and the insured enters into a Morris agreement to protect itself from liability to a third party, the insurer can contest only facts of coverage, not liability. Because the lenders had no “liability” to a third party, however, the insurers sought review, which the Supreme Court granted.
Among the issues the Supreme Court considered were (1) whether the court of appeals erred in characterizing the issue of whether the insureds suffered a “loss” as one of liability instead of coverage, (2) whether the insurer, having acknowledged at the reasonableness hearing that the mechanics’ liens were valid and had priority over the lenders’ DOTs pursuant to the Morris agreement, was barred from arguing that it had no liability to its insureds because they suffered no loss, and (3) whether the insured lenders could have suffered a “loss” within the meaning of the policy due to a purported “diminution in the value” of a DOT caused by the presence of superior liens, even though the lenders were fully repaid.
As to the second issue, the Supreme Court, relying on Quihuis v State Farm Mut. Auto. Ins. Co., 235 Ariz. 536 (2014), held that because the only issue actually resolved at the reasonableness hearing was the priority of the lenders’ liens vis a vis the mechanics’ liens—and not whether the lenders suffered a “loss”–the insurer was not precluded from arguing, in the subsequent coverage case, that there was no coverage because there was no loss.
As to the first and third issues, the Court held that a where an insured lender is fully repaid, it does not suffer a covered loss even if, as a result of the DOT being other than as insured, the DOT is rendered worthless. Put another way, a DOT has no intrinsic value, and serves only to secure repayment of a loan; and where the loan is repaid, the purported “diminution in the value” of the DOT does not constitute a covered loss. As such, the insurer correctly denied coverage. The Supreme Court therefore reinstated the trial court’s entry of summary judgment for the title insurers on the breach of contract claim, and because the existence of a loss is a necessary component of a bad faith claim, remanded the case to the trial court with instructions to vacate the jury’s bad faith verdict and to enter judgment in favor of the title insurer.
Bob Berk, Chair of the firm’s Commercial Practice Group, represents both plaintiffs and defendants in contract disputes, insurance coverage and bad faith, professional liability, environmental and toxic tort, construction defect, and real estate. During his 36-plus-year career, Bob has tried numerous cases to verdict. He is a member of the American Board of Trial Advocates, which requires, as a condition of membership, a minimum number of jury trials to verdict, and he has been consistently recognized as one of the top commercial litigators in Arizona.
Bob also provides ADR services. He is a member of the American Arbitration Association’s (AAA) Commercial Panel, and he serves as both a mediator and an arbitrator. As both an advocate and neutral, Bob has participated in and conducted hundreds of successful mediations and settlement conferences. He has ADR experience in virtually every subject area, including multi-million dollar intellectual property disputes, auto accidents, multi-party construction cases, toxic tort class actions, eight-figure insurance bad faith claims, legal malpractice claims involving multiple firms, banking disputes, and cases arising out of real estate contracts. He has also arbitrated several cases.
rberk@jshfirm.com | 602.263.1782 | jshfirm.com/rberk