“When the Debt is Gone, So Is the Coverage” – Arizona Supreme Court Narrows Lender Title Insurance Liability and Bars Collateral-Source Shielding of Loan Repayments

I. Introduction

In Centerpoint Mechanic Lien Claims, LLC v. Commonwealth Land Title Insurance Co., CV-23-0164-PR (Ariz. June 10 2025), the Arizona Supreme Court delivered a landmark opinion that reshapes the contours of lender’s title insurance and bad-faith litigation in the state. The dispute, born out of the collapse of construction financier Mortgages Ltd. and over $30 million in mechanics’ liens on the stalled “Centerpoint” condominium development, ultimately turned on three deceptively simple questions:

Does a lender’s title policy cover losses once the underlying loans are fully repaid?
Can diminution in the “value” of a paid-off deed of trust constitute damages to sustain a bad-faith claim?
May the insured invoke the collateral source rule to hide evidence of third-party loan repayments?

Answering all three in the insurer’s favour, the Court:

Held that coverage under a lender’s title policy is coterminous with the unpaid indebtedness; once the debt is satisfied, the insurer’s liability terminates.
Rejected the theory that a deed of trust has “intrinsic value” independent of the debt it secures; therefore diminution in lien priority cannot be damages if the note is paid.
Clarified that the collateral source rule does not apply to loan repayments that are integral to the insured transaction.

By vacating much of the Court of Appeals’ contrary ruling and reinstating summary judgment for Commonwealth, the Supreme Court set a new, sharp precedent limiting exposure for title insurers and narrowing the scope of bad-faith damages in lender-policy disputes.

II. Summary of the Judgment

Justice Bolick, writing for a unanimous Court, remanded the case with instructions to enter judgment for Commonwealth on both the breach-of-contract and bad-faith claims. The principal holdings are:

No Coverage After Repayment. Policy conditions 8(a)(ii) and 10(b) — capping liability at the “Indebtedness” and terminating liability upon voluntary satisfaction of the insured mortgage — are enforceable coverage provisions, not mere “payment defenses.” Because Universal’s and VRCP’s loans were fully repaid, the insureds incurred no covered loss.
No Bad-Faith Damages Without Pecuniary Loss. Even assuming Commonwealth unreasonably reserved rights, VRCP and Universal suffered no actual economic damages; diminution in lien priority has no stand-alone value once the debt is gone.
Collateral Source Rule Inapplicable. Loan payoffs by affiliated entities are not “collateral”; they are intrinsic to the same transaction. Evidence of those payments was therefore admissible.

III. Analysis

A. Precedents Cited and Their Influence

United Services Auto. Ass’n v. Morris, 154 Ariz. 113 (1987) – Established the framework for “Morris agreements” permitting insureds, faced with a reservation of rights, to settle liability and damages with claimants subject to later coverage litigation. The Court distinguished traditional third-party Morris agreements from the first-party variant at issue and emphasised that such agreements bind an insurer only on liability issues, not coverage.
Quihuis v. State Farm, 235 Ariz. 536 (2014) – Reaffirmed that insurers may litigate pure coverage questions even after a Morris agreement fixes liability. The Supreme Court used Quihuis to overturn the Court of Appeals’ conclusion that Commonwealth could not raise the “no-loss” coverage defence.
Blackhawk Prod. Credit Ass’n v. Chicago Title, 423 N.W.2d 521 (Wis. 1988) & Falmouth Nat’l Bank v. Ticor, 920 F.2d 1058 (1st Cir. 1990) – Both decisions highlight the fundamental difference between owner and lender title policies, noting that a mortgagee’s loss does not materialise until the loan is unpaid and inadequately secured. The Court relied on this distinction to reject lien-value damages.
FDIC v. United Pac. Ins., 20 F.3d 1070 (10th Cir. 1994), Leprino Foods v. Factory Mut., 653 F.3d 1121 (10th Cir. 2011) – Cited for the proposition that the collateral source rule does not bar evidence of payments relating to the same transaction or common damages.

B. Legal Reasoning

Coverage Terminates Upon Loan Repayment.
The policy’s “Exclusions from Coverage” expressly remove protection for defects “resulting in no loss or damage,” while Conditions 8(a)(ii) and 10(b) cap recovery at the unpaid “Indebtedness” and terminate liability upon satisfaction of the mortgage. Because the insureds’ loans were paid in full (Universal through other collateral, VRCP through a disguised payoff labelled a partnership-interest purchase), there was no outstanding indebtedness; hence no coverage.
Distinguishing Liability from Coverage in a First-Party Morris Agreement.
The Court observed that in a first-party setting “liability” equates to whether the insurer must indemnify the insured, collapsing the liability/coverage dichotomy common in third-party cases. Therefore, Commonwealth was entitled to litigate whether any covered loss existed notwithstanding the Morris agreement, correcting the Court of Appeals’ misapplication of Quihuis.
No Intrinsic Value in a Repaid Deed of Trust.
A deed of trust is purely security for a debt; once the debt ceases to exist, the lien lacks independent worth. Successfully avoiding junior mechanics’ liens after the loan has been repaid does not place the insured in any better or worse pecuniary position.
Collateral Source Rule’s Limited Reach.
Because the repayments originated from affiliated entities (Loan LLCs and CMLC) that were parties to the very transaction insured, they were not “wholly independent” sources. Moreover, the repayments were central to whether a covered loss existed; excluding them would distort rather than advance the search for truth.
Bad Faith Without Damages Fails.
Even if the insurer unreasonably reserved rights, an essential element of a first-party bad-faith claim is actual pecuniary loss. Without unpaid indebtedness, the insureds suffered no compensable harm, so the $5 million verdict could not stand.

C. Likely Impact on Arizona and National Title Insurance Practice

Predictability for Title Insurers. Insurers can now rely on loan payoff as a bright-line endpoint for liability. Pricing of lender policies will better reflect the limited tail risk.
Constraining Bad-Faith Exposure. Plaintiffs in Arizona must now plead and prove out-of-pocket loss; theoretical or “paper” diminutions in lien priority will not suffice.
Limited Use of Collateral Source Rule. Litigants may not cloak integral transaction payments to manufacture damages or keep them from juries.
Guidance for First-Party Morris Agreements. Although such agreements remain permissible, parties must recognise that coverage defences overlapping with liability are still fully litigable.
Influence Beyond Arizona. Sister jurisdictions may cite Centerpoint when confronting similar lender-policy disputes, especially given the Court’s synthesis of national precedent.

IV. Complex Concepts Simplified

Lender vs. Owner Title Policy – An owner’s policy protects the property’s market value. A lender’s policy protects only the collectability of the loan: if the borrower pays, the insurer owes nothing.
Morris Agreement – A settlement device allowing an insured to fix liability/damages with a claimant when the insurer defends under a reservation of rights; coverage can still be contested later.
Reservation of Rights – The insurer provides a defence but preserves the right to deny coverage, creating potential conflicts between insurer and insured.
Collateral Source Rule – Generally bars reduction of a damages award by payments from independent third parties. Does not apply when the payments are part of the same transaction at issue.
Indebtedness (Policy Definition) – The unpaid balance of the loan secured by the insured deed of trust, reduced by any payments, voluntary or otherwise.

V. Conclusion

Centerpoint v. Commonwealth cements a pivotal principle: lender title insurance is a shield only while the debt is alive. By tethering coverage, bad-faith damages, and admissibility of repayment evidence to the existence of unpaid indebtedness, the Arizona Supreme Court brings clarity to an area fraught with sprawling multi-party disputes. Future litigants must now grapple with a straightforward question before advancing coverage or bad-faith claims under a lender policy: “Has the loan been repaid?” If the answer is yes, the policy — and the lawsuit — is effectively over.