Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil Action No. 05-cv-00281) District Judge: Honorable Ronald L. Buckwalter.
The opinion of the court was delivered by: Ambro, Circuit Judge
Before: SCIRICA, Chief Judge, AMBRO, and SMITH, Circuit Judges
Nationwide Life Insurance Company ("Nationwide") appeals the District Court's dismissal of its claim under a title insurance policy issued by Commonwealth Land Title Insurance Company ("Commonwealth"). Nationwide seeks payment for a loss arising from land title restrictions that allowed a former owner of Nationwide's real property to prevent its sale by Nationwide. It asserts that the District Court erred in ruling that Commonwealth had "expressly excepted" from insurance coverage any loss related to these restrictions.
To decide this case, we interpret the standard-form policy drafted by the American Land Title Association ("ALTA") and used by Commonwealth. In particular, we determine what a title insurer must do to except restrictions from coverage under a specific endorsement to the policy. The District Court held that an insurer can do so merely by listing in a schedule of exceptions to the policy the document in which the restrictions are found. Because we believe that an insurer must list the actual restriction in such a schedule to except them, we reverse.
I. Factual and Procedural Background
PMI Associates ("PMI") purchased real property (the "Property") from Liberty Mills Limited Partnership ("Liberty Mills") in 1988. According to the complaint filed by Nationwide, PMI and Liberty Mills entered into a Declaration of Restrictions (the "Declaration"), vesting Liberty Mills with, among other things, the right to refuse approval of future purchasers of the Property.*fn1 The Declaration also gave Liberty Mills an option to repurchase the Property in certain circumstances.*fn2
In 2001, PMI borrowed $3.5 million from Nationwide, using the Property as collateral. Nationwide insured its lender's interest in the Property by purchasing a title insurance policy from Commonwealth. The policy contains a specific endorsement, known as an ALTA 9 Endorsement, that, among other things, covers Nationwide against loss from "a right of first refusal or the prior approval of a future purchaser or occupant" unless "expressly excepted" in a schedule of exceptions appended to the policy.
PMI defaulted in 2003 on the balance of its loan from Nationwide. As a result, PMI conveyed the Property to Nationwide by fee simple deed. Nationwide attempted to sell the Property to Ironwood Real Estate, LLC ("Ironwood"). This sale was halted, however, when Liberty Mills's successor in interest, Franklin Mills Associates Limited Partnership ("Franklin Mills"), refused to approve Ironwood as a buyer in accordance with Franklin Mills's rights conferred by the restrictions in the Declaration.*fn3
Following Franklin Mills's rejection of Ironwood, Nationwide submitted a claim for coverage to Commonwealth.
Nationwide alleged that Franklin Mills's rights of refusal were covered restrictions that made the Property unusable and unsalable. Commonwealth denied Nationwide's claim, stating that its policy expressly excepted coverage for loss resulting from Franklin Mills's invoked rights.
Nationwide responded by filing suit in the United States District Court for the Eastern District of Pennsylvania. It argued that the ALTA 9 Endorsement to its policy covered loss resulting from Franklin Mills's rights of refusal because those rights were not expressly excepted in the policy's schedule of exceptions. Commonwealth answered with a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). It asserted that the rights were expressly excepted from coverage provided by the ALTA 9 Endorsement because the Declaration, in which the rights were stated, was listed in the policy's schedule of exceptions.
The District Court granted Commonwealth's motion to dismiss. It held that the general listing of the Declaration under the heading "exceptions from coverage" in the policy's exceptions schedule unambiguously eliminated coverage for loss stemming from the rights of refusal. See Nationwide Life Ins. Co. v. Commw. Land Title Ins. Co., No. 05-281, 2005 WL 2716492, at *7 (E.D. Pa. Oct. 19, 2005). In doing so, it rejected Nationwide's claim that only a specific listing of the rights in the exceptions schedule could exempt them from ALTA 9 Endorsement coverage. See id.
Nationwide then filed a motion for reconsideration with exhibits, contending that the Court's interpretation of the policy and endorsement was inconsistent with industry custom and practice. The Court denied this motion and struck most of Nationwide's exhibits from the record. It reiterated its prior interpretation of the policy, rejected Nationwide's reference to custom and practice, and held that "it was [Nationwide]'s duty to exercise proper diligence before issuing the subject mortgage" on the Property. Nationwide Life Ins. Co. v. Commw. Land Title Ins. Co., No. 05-281, 2006 WL 1192998, at *1--3
(E.D. Pa. May 3, 2006). Nationwide appeals to us.
II. Jurisdiction and Standard of Review
The District Court had jurisdiction under 28 U.S.C. § 1332. We have jurisdiction under 28 U.S.C. § 1291.
We review de novo the District Court's dismissal of an action under Rule 12(b)(6). See Phillips v. County of Allegheny, 515 F.3d 224, 230 (3d Cir. 2008). "[W]e 'accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief.'" Rodriguez v. Our Lady of Lourdes Med. Ctr., 552 F.3d 297, 302--03 (3d Cir. 2008) (quoting Phillips, 515 F.3d at 233).
Interpretation of an insurance policy is a question of law over which we exercise plenary review. See Regents of Mercersburg College v. Republic Franklin Ins. Co., 458 F.3d 159, 163 (3d Cir. 2006). Under Pennsylvania law, which applies to this action, we ascertain the intent of the parties by reading the policy as a whole, and we give unambiguous terms their plain meaning. See Jacobs Constructors, Inc. v. NPS Energy Servs., Inc., 264 F.3d 365, 375--76 (3d Cir. 2001); J.C. Penney Life Ins. Co. v. Pilosi, 393 F.3d 356, 363 (3d Cir. 2004). We also consider evidence of industry custom and practice. Sunbeam Corp. v. Liberty Mut. Ins. Co., 781 A.2d 1189, 1193 (Pa. 2001) ("[C]ustom in the industry or usage in the trade is always relevant and admissible in construing commercial contracts and does not depend on any obvious ambiguity in the words of the contract."). We construe ambiguous terms strictly against the insurer, but avoid reading the policy "to create ambiguities where none exist." Sikirica v. Nationwide Ins. Co., 416 F.3d 214, 220 (3d Cir. 2005).
Nationwide claims that, under the policy issued by Commonwealth, it (1) is covered for loss arising from the rights of refusal contained in the Declaration, and (2) did not bear the burden of diligence to ensure that its title to the Property was free from harmful rights or restrictions. We agree on both points. The text and purpose of the policy, along with custom and practice in the title insurance industry, convince us that the ALTA 9 Endorsement covers loss stemming from rights of refusal unless those rights are explicitly noted in a schedule of exceptions to the policy. Insurers may not except rights of refusal or other title restrictions*fn4 from ALTA 9 Endorsement coverage simply by listing as exceptions the instruments in which they are embedded. Instead, the burden is on the title insurer to find and except them expressly.
A. Excepting a Restriction from ALTA 9 Endorsement Coverage
The title insurance policy that Commonwealth issued to Nationwide is a 1992 ALTA Loan Policy with an ALTA 9 Endorsement. Like all such policies, it contains six sections: (1) the Insuring Provisions stating the basic coverage terms; (2) the Exclusions from Coverage, which list standard coverage exclusions; (3) the Conditions and Stipulations that define relevant terms and note the parties' responsibilities; (4) Schedule A, which describes the Property and amount of insurance; (5) Schedule B, which lists, in two parts, coverage exceptions specific to the Property; and (6) the ALTA 9 Endorsement (also referred to hereinafter as "the Endorsement"), which, for an additional price, insures over certain exceptions in Schedule B. See Joyce D. Palomar, 1 Title Insurance Law §§ 5.17--9.4 (2005); Amy W. Beatie & Arthur R. Kleven, The Devil in the Details: Water Rights and Title Insurance, 7 U. Denver Water L. Rev. 381, 398--400 (2004); Charles B. DeWitt, III, Title Insurance: A Primer, 3 Tenn. J. Prac. & Proc. 15, 18--19 (2001). We read these sections together, giving effect to all their provisions. See Western United Life Assur. Co. v. Hayden, 64 F.3d 833, 837 (3d Cir. 1995); Eric Holmes, 4 Holmes' Appleman on Insurance § 20.1 (2d ed. 1998).
The Insuring Provisions of the policy state:
SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B AND TH E C ON D ITIO N S A N D STIPULATIONS, COMMONWEALTH LAND TITLE INSURANCE COMPANY, a Pennsylvania corporation, herein called the Company, insures, as of Date of Policy shown in Schedule A, against loss or damage, not exceeding the Amount of Insurance stated in Schedule A, sustained or incurred by the insured by reason of:
1. Title to the estate or interest described in Schedule A being vested other than as stated therein;
2. Any defect in or lien or encumbrance on the title;
3. Unmarketability of the title; . . .
6. The priority of any lien or encumbrance over the lien of the insured mortgage; . . . .
Together with Schedule A, which identifies the Property and sets a $3.5 million amount of insurance, these provisions obligate Commonwealth to insure Nationwide's interest in the Property against loss from any restriction not stated in the Exclusions from Coverage or listed as an exception in Schedule B.
Schedule B, which is captioned "EXCEPTIONS FROM COVERAGE," lists a number of instruments that affect the Property. Part I of Schedule B sets out matters excepted from coverage that might cause loss to Nationwide. Part II of Schedule B lists matters affecting the Property that are subordinate to Nationwide's interest. The Declaration containing the restrictions giving rise to Nationwide's loss is listed in Part I of Schedule B:
This policy does not insure against loss or damage . . . which arise by reason of:
5. Declaration of Restrictions between Liberty Mills Limited Partnership and PMI Associates dated August 15, 1988 and recorded in Deed Book FHS 1155, page 206, and First Amendment to Declaration of Restrictions between Franklin Mills Associates Limited Partnership and PMI Associates dated December 5, 1989 and ...