First Midwest Bank, N.A. v. Stewart Title Guaranty Co

In First Midwest Bank, N.A. v. Stewart Title Guaranty Co. (2005) 355 Ill.App.3d 546, 548-549 291 Ill. Dec. 158, 823 N.E.2d 168, 171-172, the title insurer issued a policy to a lender regarding a loan that financed a purchase of property. In obtaining the loan, the borrowers executed a mortgage imposing a lien on the property. (Ibid.) The policy contained provisions materially similar to those stated above. (823 N.E.2d at p. 174.) Later, the borrowers obtained two additional loans from the lender secured by the property. (Id. at pp. 171-172.) The terms of those loans obliged the borrowers to use the proceeds to pay off the original loan. (Ibid.) After the borrower did so, the lender executed a full release of the borrowers' original mortgage. (Ibid.) Later, the lender initiated an action for declaratory relief, seeking a declaration that the insurer's policy--which was applicable only to the original loan--provided coverage for a restrictive covenant on the property that the lender discovered only after the execution of the release. (Id. at pp. 172-173.) In affirming summary judgment in favor of the insurer on the lender's complaint, the appellate court determined that condition 10(b) terminates an insurer's liability when the loan is paid off or the related mortgage is released, unless (as stated in condition 2) the property is conveyed to a third party in such a manner that the lender retains an interest in it. (First Midwest Bank, supra, 823 N.E.2d at pp. 176-177.) Noting that the pertinent property had not been conveyed to a third party, the appellate court concluded that prior to the discovery of the defect, the insurer's liability terminated for two independent reasons: the loan had been paid in full, and the lender had released the mortgage and all its interests. (Id. at pp. 176-177.)