Sixth Circuit Case on Meaning of “Foreclosure”—A Case Study in Lexical Ambiguity (or Vagueness)

In Provident Bank v. Tenn. Farmers Mut. Ins. Co., 2007 U.S. App. LEXIS 10671 (6th Cir. May 2, 2007), the Court of Appeals for the Sixth Circuit considered the meaning of the word “foreclosure.” (Click here for a copy of this case.)

Owners of a home in Tennessee obtained a mortgage on their home from plaintiff bank and insured the house with defendant insurance company against, among other things, the risk of loss from fire. The insurance policy named the bank as an insured. The bank initiated foreclosure proceedings against the homeowners, but those proceedings were stayed because the homeowners filed a voluntary petition for bankruptcy. Subsequently, the house burned to the ground. The insurance company refused to pay the bank’s claim, arguing that the bank had failed to comply with the following provision of the insurance policy:

If [the insurance company] den[ies] an insured’s claim, that denial shall not apply to a valid claim of the mortgagee, if the mortgagee … has notified us … of any … foreclosure … of which the mortgagee was aware prior to loss.

The bank sued, arguing in part that the term “foreclosure” in the insurance policy was ambiguous. The district court ruled in favor of the insurance company on cross-motions for summary judgment. The bank appealed.

The question facing the court was whether the term “foreclosure” as used in the insurance policy referred to foreclosure proceedings or to a foreclosure sale. If the former, the provision in question—a condition—would have been satisfied if the bank had notified the insurance company before foreclosure proceedings started. If the latter, the condition would have been satisfied bank had notified the insurance company any time before the foreclosure sale.

After considering arguments in favor of the alternative meanings, the Sixth Circuit reversed the judgment of the district court, holding that the insurance company wasn’t entitled to summary judgment because the term “foreclosure” in the insurance policy was ambiguous.

The Sixth Circuit apparently assumed that this case involves lexical ambiguity, which arises when context is insufficient to allow you to determine the sense of a word or phrase that has more than one meaning. (The word “bank,” for example, could mean “financial institution” or “edge of a river.”) But I could make a decent argument that in this case, “foreclosure” is more vague than ambiguous—the uncertainty relates to imprecision rather than alternative meanings.

But leaving such niceties aside, what I draw from this case is that drafters need to be careful when using words that could refer to either a process or a point in time. “Foreclosure” is one example; another might be “bankruptcy.” And more broadly, realize that confusion can lurk in provisions that appear entirely benign.