                             In the

    United States Court of Appeals
                For the Seventh Circuit

No. 13-2785

BB SYNDICATION SERVICES, INC.,
                                              Plaintiff-Appellant,

                               v.

FIRST AMERICAN TITLE
INSURANCE COMPANY,
                                              Defendant-Appellee.


            Appeal from the United States District Court
                for the Western District of Wisconsin.
       No. 10-cv-195-wmc — William M. Conley, Chief Judge.



   ARGUED DECEMBER 11, 2013 — DECIDED MARCH 12, 2015



   Before WOOD, Chief Judge, and FLAUM and SYKES, Circuit
Judges.
   SYKES, Circuit Judge. This case involves the most litigated
provision in the standard-form title-insurance policy pur-
chased by real-estate lenders to protect their security interests
2                                                     No. 13-2785

in ongoing construction projects. The project at issue here—a
large commercial development in Kansas City, Missouri—was
aborted in the middle of construction due to cost overruns.
When the developer would not cover the shortfall, the con-
struction lender stopped releasing committed loan funds, and
contractors filed liens against the property for their unpaid
work on the unfinished project.
     Bankruptcy followed, and the contractors’ liens were given
priority over the lender’s security interest in the failed develop-
ment, leaving little recovery for the lender. The lender looked
to its title insurer for indemnification. The title policy generally
covers lien defects, but it also contains a standard exclusion for
liens “created, suffered, assumed or agreed to” by the insured
lender. The question is whether this exclusion applies to the
liens at issue here, which resulted from the lender’s cutoff of
loan funds. We hold that it does, and thus the title insurer owes
no duty to indemnify.


                         I. Background
    We begin with some background on how title insurance
functions in the construction context. Large construction
projects are typically funded by a combination of cash from the
developer and a construction loan. The loans are secured by
the construction project itself—the land and building in
progress. At the beginning, of course, the building has little
value, but as it is built, its value increases. If the construction
project fails and puts the developer into bankruptcy, the
lender’s loan is protected only by the unfinished project, which
is often worth far less than the money put into it.
No. 13-2785                                                        3

    To protect against this risk, construction lenders structure
their loans in two important ways. First, they require the
developer to spend its cash investment before tapping any loan
proceeds; this equity cushions the lender against losses if the
project falls apart. After the developer’s cash has been spent,
the loan is disbursed in increments as work is completed and
only in amounts necessary to fund the completed work (that is,
to pay contractors, subcontractors, and so on). This second
feature ensures that the lender’s actual outlay (i.e., the princi-
pal balance of the loan) will slowly increase with the approxi-
mate value of its security interest.
    To protect the priority of its security interest, the lender also
purchases title insurance. Unique in the insurance world, title
insurance differs from other forms of property and liability
insurance in that it only covers losses from defects in title and
lien priority (and similar title-related risks), usually requires
only a one-time premium, and lasts for as long as the insured
holds title (or, in this context, a security interest). See Phila.
Indem. Ins. Co. v. Chi. Title Ins. Co., 771 F.3d 391, 399–400 (7th
Cir. 2014) (explaining the differences between title insurance
and general liability insurance). This model works because title
insurance is retrospective rather than prospective; it generally
protects against defects in title that arose prior to the issuance
of the policy, allowing the insurer to reduce or eliminate risk
by conducting a careful title search to identify defects. These
features, however, cause some complications in the
construction-loan context.
    Many states give unpaid contractors a mechanic’s lien that
is superior to all other security interests. Because title insurance
4                                                     No. 13-2785

is retrospective, it generally doesn’t protect a real-estate lender
from liens arising after the issuance of the policy. If the lender
wants this protection, it must contract with the title insurer for
periodic updates or endorsements of the policy. Each time the
policy is updated, the title insurer conducts a “date down” title
search to check for new title defects. In addition, parties to
construction projects often designate the lender’s title insurer
as the disbursement agent for the loan funds. When the
developer submits a draw request as each phase of the project
is completed, the lender releases loan funds to the title com-
pany, and the title company (acting as disbursement agent)
verifies that the contractors are paid properly, obtains lien
waivers, and updates the policy accordingly.
    Especially in large construction projects, loan agreements
commonly give the lender the right to stop disbursing loan
funds if the loan becomes “out of balance”—that is, if revised
cost estimates exceed the committed loan amount plus the cash
the developer has invested. When the lender cuts off funding,
there will always be some outstanding unpaid work; contrac-
tors request payment as work is completed, but there is
inevitable delay from the time when work is completed to the
time when bills are submitted. If the title insurer last updated
the policy after the work was completed but before payment
was requested or funds were cut off, an issue arises about
whether the title policy covers the mechanics’ liens filed by the
unpaid contractors.
   That’s the question in this case. The standard-form title-
insurance policy contains a provision known as Exclusion 3(a),
which excludes coverage for liens that are “created, suffered,
No. 13-2785                                                   5

assumed or agreed to” by the insured lender. The issue here is
whether a construction lender “creates” or “suffers” a me-
chanic’s lien by cutting off loan funds when a project collapses
due to cost overruns, leaving some completed work unpaid.
Several cases have addressed this issue (this contractual
arrangement is widely used) but have come to different
conclusions.
                                  *    *     *
    We now turn to the specific facts of this case. Trilogy
Development Company, a real-estate developer, contracted
with J.E. Dunn Construction Company, a general contractor,
for construction of a mixed-use commercial development in
Kansas City, Missouri, called “West Edge.” The initial esti-
mated cost was $118 million, and funding for the project would
come from a $32 million investment by Trilogy—$12 million in
land and another $20 million in cash—and a construction loan
in the amount of $86 million from BB Syndication Services, Inc.,
a Wisconsin-based loan syndicator.1 The loan was secured by
the West Edge project, and BB Syndication obtained title
insurance from First American Title Insurance Company, a
California-based title insurer operating throughout the United
States. The parties designated First American as the disburse-
ment agent for the loan funds.
    Early on there were indications that costs would exceed the
initial estimate. The project had been “fast tracked,” meaning
that the contracts were signed and work started before the
design was finalized. About a year and a half after construction


1
    We’ve rounded off all figures for ease of reference.
6                                                           No. 13-2785

began, Dunn claimed that Trilogy’s changes to the plans had
increased the construction costs by $20 to $30 million. If Dunn’s
estimates were correct (as they later proved to be), the con-
struction loan would have been out of balance soon after the
project started, giving BB Syndication the right to cut off loan
disbursements. But the lender chose to continue funding the
project anyway. When the likely cost overruns first came to
light, BB Syndication had disbursed only about $5 million of
the $86 million loan commitment. By the time the project fell
apart, BB Syndication had paid out more than $61 million.
    The beginning of the end came about a year after Dunn first
identified the probable cost overruns, when Trilogy failed to
pay Dunn from the proceeds of a disbursement of loan funds.2
Dunn stopped all construction, and multiple subcontractors
filed liens against the project. Trilogy briefly hired a new
contractor to try to salvage the project, but within a few
months acknowledged that the development was now short by
about $37 million. Trilogy did not supply additional cash to
keep the project afloat and bring the loan into balance. At this
point BB Syndication cut off funding and declared the loan in
default, generating more liens for work performed during the
short interim period. When BB Syndication called for repay-
ment, Trilogy filed for bankruptcy protection.
    In the bankruptcy Trilogy initiated an adversary proceed-
ing to determine the amount and priority of liens and creditors.

2
 Trilogy later returned these funds to First American, and they were placed
in an escrow account over which BB Syndication had control.
BB Syndication ultimately released most, though not all, of them to pay the
subcontractors directly.
No. 13-2785                                                  7

In addition to the various subcontractor liens, Dunn had filed
a $12 million lien for its unpaid work. Many of the liens were
for work performed before First American’s most recent
update to the title policy, so BB Syndication looked to the
insurer for a defense and indemnification in the adversary
proceeding. Relying on Exclusion 3(a), First American rejected
the tender, taking the position that BB Syndication had created
the liens by cutting off loan funding.
   The bankruptcy court eventually allowed $17 million in
mechanics’ liens, all of which were given priority over
BB Syndication’s security interest. A judicial auction of the
unfinished project yielded only $10 million. All the creditors
eventually settled, leaving BB Syndication with a paltry
$150,000 on its $61 million claim.
    While the bankruptcy proceedings were ongoing,
BB Syndication sued First American in Wisconsin state court
alleging breach of the title policy and bad-faith denial of
coverage. First American removed the case to federal court.
The district court delayed the proceedings until the relevant
factual issues were determined by the bankruptcy court and
then resolved the case on cross-motions for summary judg-
ment. In a split ruling, the court held that First American
violated its duty to defend BB Syndication but had no duty to
indemnify because Exclusion 3(a) excluded coverage for the
disputed liens. The latter determination was fatal to the bad-
faith claim, so the court awarded BB Syndication its litigation
costs in the adversary proceeding (as damages on the duty-to-
defend claim) but otherwise entered judgment for First
American.
8                                                     No. 13-2785

    BB Syndication appeals, challenging the district court’s
application of Exclusion 3(a) and also seeking to revive its bad-
faith claim if the no-coverage determination is reversed. First
American did not cross-appeal the adverse duty-to-defend
ruling.


                          II. Discussion
   We review the district court’s interpretation of the insur-
ance policy and its resulting grant of summary judgment de
novo. Netherlands Ins. Co. v. Phusion Projects, Inc., 737 F.3d 1174,
1177 (7th Cir. 2013).
   The parties first dispute whether Wisconsin or Missouri law
controls. A federal court sitting in diversity applies the law of
the state in which it sits, including the state’s choice-of-law
rules. Auto-Owners Ins. Co. v. Websolv Computing, Inc., 580 F.3d
543, 547 (7th Cir. 2009). “[U]nder Wisconsin’s choice of law
algorithm, if the laws of the competing states are the same, a
court must apply Wisconsin law.” Cerabio LLC v. Wright Med.
Tech., Inc., 410 F.3d 981, 987 (7th Cir. 2005). Furthermore,
choice-of-law decisions are “made on an issue-by-issue basis.”
Beard v. J.I. Case Co., 823 F.2d 1095, 1099 (7th Cir. 1987); State
Farm Mut. Auto. Ins. Co. v. Gillette, 641 N.W.2d 662, 682 (Wis.
2002).
    The district court applied Wisconsin law to interpret the
insurance contract and Missouri law to the other issues—
namely, the bad-faith claim. Neither party has identified any
relevant differences between Wisconsin and Missouri law on
the interpretation and application of Exclusion 3(a). First
No. 13-2785                                                         9

American refers us to an Eighth Circuit case applying Missouri
law and addressing the precise issue in this case: Brown v.
St. Paul Title Insurance Corp., 634 F.2d 1103 (8th Cir. 1980). But
a circuit court’s interpretation of state law does not become the
law of that state. See United States v. Glaser, 14 F.3d 1213, 1216
(7th Cir. 1994). And First American does not explain how
Wisconsin law differs from Brown’s interpretation of Missouri
law. Accordingly, like the district court, we apply Wisconsin
law to the interpretation and application of the insurance
contract. Because we conclude that the liens are not covered by
the title policy, we do not need to address the bad-faith
claim—either the choice-of-law issue or the merits.3
    Under Wisconsin law “‘[t]itle insurance policies are subject
to the same rules of construction as are generally applicable to
contracts of insurance.’” First Am. Title Ins. Co. v. Dahlmann,
715 N.W.2d 609, 616 (Wis. 2006) (quoting Laabs v. Chi. Title Ins.
Co., 241 N.W.2d 434, 438 (Wis. 1976)). To resolve coverage
questions, Wisconsin courts “give effect to the intent of the
contracting parties” and interpret the policy “as [it] would be
understood by a reasonable person in the position of the
insured.” Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d
65, 73 (Wis. 2004). Wisconsin also adheres to the general rule
that ambiguities in policy language—including ambiguities
about the scope or effect of an exclusion—are construed




3
 Anyway, the parties agree that under both Wisconsin and Missouri law,
a finding of coverage is a prerequisite to a bad-faith claim.
10                                                              No. 13-2785

against the insurer.4 See, e.g., Phillips v. Parmelee, 840 N.W.2d


4
  There is reason to doubt the application of this rule of contract construc-
tion in this context. The Wisconsin Supreme Court has suggested various
justifications for the rule, but all rely on the assumption that insurance
policies are drafted by insurers. See, e.g., Folkman v. Quamme, 665 N.W.2d
857, 865 (Wis. 2003) (“Insurers have the advantage over insureds because
they draft the contracts. Thus, courts construe ambiguities in coverage in
favor of the insureds and narrowly construe exclusions against insurers.”);
Donaldson v. Urban Land Interests, Inc., 564 N.W.2d 728, 731 (Wis. 1997) (“As
the drafter of the insurance policy, … the insurer is the party best situated
to eliminate ambiguity in the policy … .”). In other words, this rule of
insurance-policy interpretation is a specific application of the more general
contra proferentum (“against the offeror”) principle of contract interpretation.
Wisconsin courts have recognized an exception for one form of insur-
ance—bankers bonds—because the standard-form contract was a joint effort
of insurers and the insured banking industry. See Tri City Nat’l. Bank v. Fed.
Ins. Co., 674 N.W.2d 617, 621–22 (Wis. Ct. App. 2003) (“[S]hould there be
any ambiguity, the wording of fidelity bonds is not construed strictly
against the drafter because the justification behind the rule—unequal
bargaining power—has been eliminated.” (citing State Bank of Viroqua v.
Capitol Indem. Corp., 214 N.W.2d 42, 43 n.1 (Wis. 1974) (“These bonds are not
the usual contracts of adhesion and the familiar rule of interpreting a
contract strictly against the insurer and liberally in favor of the insured
should not apply.”))).
     The same is true of title insurance in the construction-loan context. The
first standard-form policy—from which the more recent versions are
derived—was drafted by lenders, and the construction-lending industry has
since remained involved in the revision process. See Kenneth E. Dzien &
Keith Jonathan Turner, Not All Insurance Policies Are Adhesion Contracts: A
Case Study of the ALTA Loan Title Policy, 33 TORT & INS. L.J. 1123 (1998);
Quintin Johnstone, Title Insurance, 66 YALE L.J. 492, 504–05 (1957); Christian
Ness, Note, Insurance—Judicial Construction of the Lender’s Policy of Title
Insurance, 49 N.C. L. REV. 157, 160–62 (1970). To our knowledge, the
                                                                (continued...)
No. 13-2785                                                                   11

713, 716 (Wis. 2013) Still, “insurance policies, like other
contracts, are to be read as a whole.” Blum v. 1st Auto & Cas.
Ins. Co., 786 N.W.2d 78, 83–84 (Wis. 2010). “As a result, it may
be necessary to look beyond a single clause or sentence to
capture the essence of an insurance agreement, so that a policy
is not made ambiguous by isolating a small part from the
context of the whole.” Id. (internal quotation marks omitted).
Finally, insurance contracts should not be construed “to
provide coverage for risks that the insurer did not contemplate
or underwrite and for which it has not received a premium.”
Am. Girl, 673 N.W.2d at 73.
    Provision 7(a) of the First American policy insures against
losses incurred by reason of “any statutory lien for services,
labor or material” having priority over the insured lender’s
mortgage and arising “from an improvement or work related
to the land which is contracted for or commenced prior to Date
of Policy.”5
    Central here is Exclusion 3(a) of the policy, which excludes
any liens that are “created, suffered, assumed or agreed to” by
the insured. This exclusion is a standard feature in title policies,



4
 (...continued)
Wisconsin Supreme Court has on at least one occasion applied the contra
proferentum rule of construction against a title insurer, see First Am. Title Ins.
Co. v. Dahlmann, 715 N.W.2d 609, 620 (Wis. 2006), though never (as far as
we are aware) to title insurance in the construction-lending context.

5
 Provision 7(b) of the policy covers some mechanics’ liens arising subsequent
to the date of the policy. We’ll address the scope of that provision in a
moment.
12                                                  No. 13-2785

but it can’t apply any time the construction lender could have
prevented a mechanic’s lien from arising. After all, the lender
can always just pay the contractor’s claim and eliminate the
reason for the lien. But the exclusion must mean something, so
most courts imply a fault requirement. Laabs v. Chi. Title Ins.
Co., 241 N.W.2d 434, 439 (Wis. 1976) (suggesting that the
exclusion refers to “a conscious, deliberate causation or an
affirmative act which actually results in the adverse claim or
defect”); see also Home Fed. Sav. Bank v. Ticor Title Ins. Co.,
695 F.3d 725, 732–33 (7th Cir. 2012) (“[T]he clear majority
view … is that [Exclusion 3(a)] applies only to intentional
misconduct, breach of duty, or otherwise inequitable dealings
by the insured.”).
   The liens at issue here relate to outstanding work that
remained unpaid when BB Syndication cut off loan disburse-
ments due to insufficient funds to complete the project. As
such, the liens arose directly from BB Syndication’s action as
the insured lender, so coverage seems squarely foreclosed by
Exclusion 3(a).
   BB Syndication argues that it can’t be at fault because it had
a contractual right to stop disbursing loan funds if the loan
became out of balance. That is undisputed, but not dispositive.
The contractual provisions granting that right address
BB Syndication’s rights and duties vis-à-vis Trilogy, the
developer; they do not address whether BB Syndication owed
a duty to its title insurer to supply sufficient funds to cover
outstanding unpaid work. Furthermore, if BB Syndication in
some way caused the cost overrun, or had control over when the
project was aborted, then it could be deemed at fault for any
No. 13-2785                                                           13

resulting mechanics’ liens. Either action could significantly
affect the amount of outstanding unpaid work. Accordingly,
resolving the fault question requires us to examine
BB Syndication’s responsibility to discover and prevent cost
overruns.
    Before doing so, however, we must resolve a side issue
raised in the briefing. BB Syndication argues that First Ameri-
can agreed to cover liens arising from insufficient funds by
promising not to invoke Exclusion 6, another standard-form
exclusion. As an initial matter, First American has invoked
Exclusion 3(a), not Exclusion 6, so this argument seems off
point. But if Exclusion 6 directly addresses the liens at issue
here, then First American should not be allowed to rely on a
general exclusion after agreeing not to invoke a more specific
one. That said, the argument fails because Exclusion 6 ad-
dresses an entirely different set of circumstances.
    As we’ve explained, although title insurance generally
covers only liens arising from work performed prior to the
policy date, it sometimes also includes coverage for liens
arising from work subsequent to the policy date. Provision 7(b)
of the First American policy covers liens arising from subse-
quent work, but this coverage is limited to work that is
“financed in whole or part by proceeds of the [loan] secured by
the insured mortgage” and that the insured lender “has
advanced or is obligated to advance.”6 Exclusion 6 is just the


6
  Provision 7 of the First American policy, which applies to mechanics’
liens, covers:
                                                           (continued...)
14                                                                No. 13-2785

other side of the same coin: It excludes liens arising from work
performed subsequent to the policy date and not “financed in
whole or in part by proceeds of the [loan] secured by the
insured mortgage” and that the lender “has advanced or is
obligated to advance.”7
   Note that Exclusion 6 appears to be redundant here since it
excludes liens that are not affirmatively covered by Provision 7


6
    (...continued)
            7. Lack of priority of the lien of the insured mortgage over
            any statutory lien for services, labor or material:
           (a) arising from an improvement or work related to the
           land which is contracted for or commenced prior to Date
           of Policy; or
           (b) arising from an improvement or work related to the
           land which is contracted for or commenced subsequent to
           Date of Policy and which is financed in whole or part by
           proceeds of the indebtedness secured by the insured
           mortgage which at Date of Policy the insured has ad-
           vanced or is obligated to advance[.]

7
    The full text of Exclusion 6 is as follows:
           Any statutory lien for services, labor or materials (or the
           claim of priority of any statutory lien for services, labor or
           materials over the lien of the insured mortgage) arising
           from an improvement or work related to the land which is
           contracted for and commenced subsequent to Date of
           Policy and is not financed in whole or in part by proceeds
           of the indebtedness secured by the insured mortgage
           which at Date of Policy the insured has advanced or is
           obligated to advance.
No. 13-2785                                                    15

of the policy. That’s not entirely surprising. There are multiple
versions of the standard-form title-insurance policy in use;
some contain broader coverage grants than others. See generally
1 MICHAEL T. MADISON ET AL., LAW OF REAL ESTATE FINANCING
§ 6:19 (2001). Regardless of redundancy, the obvious purpose
of Exclusion 6 is to exclude coverage for liens arising from
future, unpaid work that is unrelated to the construction project
the insured lender is financing. Id. In other words, Exclusion 6
does not address liens that arise when the insured lender cuts
off loan funds; instead, it addressed liens from work financed
by an entirely different source of funds.
    Indeed, BB Syndication expressed a similar understanding
of Exclusion 6 in an email to First American:
       Can exclusion 6 of the policy be modified[?]
       Currently limits protection over mechanics liens
       financed in whole [or] in part by the loan pro-
       ceeds. Substantial equity funds will be contrib-
       uted to this project. Can the protection extend to
       those as well?
Rather than modify Exclusion 6, First American simply agreed
not to invoke it. By doing so, First American did not agree,
even implicitly, to cover liens arising from insufficient funds to
complete the project. First American’s agreement not to invoke
Exclusion 6 may not have affected the scope of coverage at all
(since the exclusion was probably unnecessary here), but at
most it expanded lien coverage to work on the project that was
financed by different (i.e., nonloan) sources—in particular, the
equity funds invested by Trilogy.
16                                                   No. 13-2785

    All the disputed liens in this case relate to work that was
financed by BB Syndication’s loan and went unpaid when it
shut off the funding spigot. First American’s agreement not to
invoke Exclusion 6 is simply irrelevant to the coverage ques-
tion here.
    We are left then to consider the whole of the contractual
arrangement to determine whether the lender or the title
insurer bore the risk of liens arising from the cessation of loan
funds due to cost overruns. We are not the first appellate court
to consider this question. Five cases—including one from this
circuit—have addressed the application of Exclusion 3(a) in
this situation: See Bankers Trust Co. v. Transamerica Title Insur-
ance Co., 594 F.2d 231 (10th Cir. 1979); Brown v. St. Paul Title
Insurance Corp., 634 F.2d 1103 (8th Cir. 1980); American Savings
& Loan Ass’n v. Lawyers Title Insurance Co., 793 F.2d 780 (6th
Cir. 1986); Chicago Title Insurance Co. v. Resolution Trust Corp.,
53 F.3d 899 (8th Cir. 1995); and Home Federal Savings Bank v.
Ticor Title Insurance Co., 695 F.3d 725 (7th Cir. 2012). Unfortu-
nately, the cases do not point in the same direction.
    The Eighth and Tenth Circuits have squarely held that
when a construction lender cuts off funding in this situation, it
“creates” or “suffers” any liens that arise from insufficient
funds, triggering the application of Exclusion 3(a). See Brown,
634 F.2d at 1110; Bankers Trust, 594 F.2d at 234–35. This is so,
those courts held, even though the insured lender had a
contractual right to cut off loan funding. See Brown, 634 F.2d at
1110 (“While [the lender] admittedly was under no obligation
to continue funding the project after the default, it seems clear
that the parties contemplated that [the lender] would provide
No. 13-2785                                                       17

adequate funds to pay for work completed prior to the
default.”). Both courts reasoned that insufficient construction
funding isn’t the type of risk that title insurance is built to bear.
Bankers Trust, 594 F.2d at 234 (“In effect, it is claimed that by
the issuance of a title insurance policy, [the insurer] became a
guarantor of payment for all work actually performed. That is
more than the insurance contract calls for.”); Brown, 634 F.2d at
1110 (“To hold otherwise would give the insured [lender] an
unwarranted windfall and would place the title insurer in the
untenable position of guaranteeing payment of work for which
loan funds were never advanced.”).
    Three subsequent cases, however, distinguished Brown and
Bankers Trust and reached the opposite result. In American
Savings the Sixth Circuit began by endorsing the reasoning and
result in Brown and Bankers Trust, explaining that had those
cases come out differently, “the [title] insurer would have been
in the unenviable position of insuring against events over
which the insured [lender] had responsibility and control.” Am.
Sav., 793 F.2d at 786. But the court thought its case was
different because the lender had fully disbursed its initial loan
commitment:
       [A]llowing [the lender] to recover from its in-
       surer would not make [the title insurer] the
       guarantor of work for which loan funds were
       committed but never advanced, but rather, the
       guarantor of work for which loan funds were
       never committed. The insurer would not be
       insuring against events that the insured could
       and was obligated to prevent, but would be
18                                                    No. 13-2785

       insuring against events that were beyond the
       control of the insured and that lay within the
       control of the developer.
Id.
    The Eighth Circuit engaged in similar reasoning in Chicago
Title. 53 F.3d at 905–07. There, the court relied on the fact that
the insured lender—“[u]nlike the lenders in Bankers Trust and
Brown”—had “advanced its full loan commitment, just as the
insured did in American Savings.” Id. Both American Savings and
Chicago Title held that the insured lender cannot be said to have
“created” or “suffered” liens that arise from insufficient project
funds once the lender has released all the loan funds it initially
committed.
    BB Syndication relies heavily on American Savings and
Chicago Title, arguing that it too disbursed the full amount of its
initial loan commitment. It points out that under section 2.2 of
the construction loan agreement, the loan was limited to the
lesser of: $86 million, or 80% of the appraised value of the
property, or 75% of the total costs of the project.
BB Syndication had disbursed $61 million when it cut off
funding, $25 million short of its $86 million total loan commit-
ment. BB Syndication argues, however, that the $61 million
represented more than 80% of the appraised value of the
property, fulfilling its loan commitment.
    This argument lacks a factual foundation. BB Syndication
did not supply evidence to support its claim about the ap-
praised value of the property. Indeed, the district court rejected
this argument precisely because no appraisal had ever been
No. 13-2785                                                    19

done. So even if we agreed with the line drawn in American
Savings and Chicago Title, BB Syndication would lose.
     Taking another tack, BB Syndication insists that this case is
closer to American Savings and Chicago Title than to Brown and
Bankers Trust for a different reason. In Brown and Bankers Trust,
the lenders cut off funding shortly after it became clear that
project costs would exceed the project budgets. See Brown,
634 F.2d at 1106; Bankers Trust, 594 F.2d at 235–37. In American
Savings and Chicago Title, on the other hand, the lender
continued to supply loan funds despite indications that the
project was underfunded. See Am. Sav., 793 F.2d at 781 (noting
that the lower court found that the lender knew the project
might be underfunded); Chi. Title, 53 F.3d at 902 (“Within
several months the project began to experience cost over-
runs.”). The insured lender in Chicago Title even went beyond
its initial commitment. 53 F.3d at 908 (“[The lender] not only
funded the full loan amount, but furnished additional funds.
It also sought more funding from the developer and gave up
interest payments. It did what it could to minimize the risk of
liens under the circumstances it faced.”).
    Similarly here, BB Syndication continued to fund the West
Edge project long after the writing was on the wall. It was clear
early on in the life of the project that cost overruns would put
the loan out of balance. At that time BB Syndication had only
disbursed $5 million in loan funding, yet it kept the spigot
open, ultimately releasing more than $61 million in loan funds
before declaring the project unfinishable and halting the flow
of money. BB Syndication insists that its forbearance demon-
strates good faith—a willingness to do everything possible to
20                                                    No. 13-2785

see the project through—so the fault for the liens cannot be laid
at its feet. Perhaps. An alternative interpretation is that its poor
business judgment precipitated the liens.
    Either way, BB Syndication’s argument exposes a flaw in
the reasoning of American Savings and Chicago Title. Contrary
to the assumption underlying those decisions, construction
lenders have significant ability to ensure that the projects they
finance remain economically viable—both at the beginning
when deciding whether to finance a project and how much
money to commit, and also throughout construction. The
contractual arrangements in this case are commonplace and
demonstrate the lender’s broad authority. As a condition to
closing, BB Syndication required Trilogy to submit, for its
approval, various documents that would allow it to assess the
project’s viability before closing the loan: e.g., financial
statements (both Trilogy’s and its owner’s); an appraisal of the
anticipated value of the completed project; the construction
plans; the construction contract between Trilogy and Dunn, the
general contractor; Dunn’s financial information; and a list of
Dunn’s previously completed projects. (Although the parties’
agreement required these disclosures, we do not know
whether these conditions were satisfied or waived prior to
closing.)
   The loan agreement also allowed BB Syndication to monitor
the project throughout construction to ensure its continued
viability. It could request financial reports from Trilogy and
conduct monthly on-site inspections of the project. If at any
point BB Syndication determined that the loan was out of
No. 13-2785                                                                  21

balance, it could require Trilogy to supply a cash infusion.8 If
the developer’s available funds were insufficient to complete
the project, BB Syndication could choose to cut off disburse-
ments—or not. BB Syndication had the discretion to continue
funding even a doomed project.9 See Chi. Title, 53 F.3d at 902



8
    Section 18.1 of the construction loan agreement provides:
              18.1 Additional Deposits: In the event that during the
          development of the Project … Lender should determine, in
          Lender’s reasonable discretion, that the balance of the costs of
          construction of the Project, together with all related costs
          and expenses, are likely to be greater than the undisbursed
          portion of the funds made available under this
          Agreement, … Borrower will, immediately upon receipt of
          written demand from Lender, deposit with Lender such
          amounts as Lender requires in order to assure that Lender
          may at all times have in its possession sufficient monies
          and undisbursed funds to pay the total estimated unpaid
          balance of the costs of construction and all related costs
          and expenses. Lender’s reasonable estimate of any such
          required deposit … shall be binding on Borrower. (Emphases
          added.)

9
    Section 8 of the disbursement agreement provides, in part:
              8. Construction Loan Balance. If at any time during the
          course of construction, Lender notifies the Disbursing
          Agent that the total of unpaid disclosed construction
          costs … exceeds the amount of the undisbursed Construc-
          tion Loan proceeds, the Disbursing Agent shall not make
          further disbursements of Funds … . Notwithstanding the
          above, the Disbursing Agent shall make any disbursement if
          specifically directed in writing to do so by Lender. (Emphasis
          added.)
22                                                    No. 13-2785

(noting that the lender “had a right … to halt construction …
but it did not exercise it”).
    In short, at the first sign of trouble, BB Syndication could
have used the threat of default to force the developer to supply
additional funds. If Trilogy was unwilling or unable to do so,
BB Syndication’s losses would have been less than $5 million—
and most likely zero—since the land alone was worth roughly
$12 million. Instead, BB Syndication chose to continue funding
the project. That was its prerogative, of course, but in the end
this risky business decision resulted in $17 million in liens from
unpaid work.
     BB Syndication now looks to First American to cushion its
losses, but this stretches title insurance too far. Finding
coverage in this situation—where the insured lender has the
sole discretion to either continue or cease funding a project that
is or has become unfinishable—would raise a serious question
of moral hazard. Most work on a construction project increases
its value (and in turn the value of the lender’s security interest),
but if the title company has to cover the costs while the lender
retains the benefit, then the lender obtains a windfall by
shifting a business risk to the title insurer. See Brown, 634 F.2d
at 1110. Since the amount of unpaid work will depend on the
timing of a doomed project’s inevitable termination, lenders
might strategically delay. That is exactly the type of problem
that Exclusion 3(a) is there to prevent.
   The line drawn in American Savings and Chicago Title—that
Exclusion 3(a) does not apply if the insured lender has dis-
bursed all of its loan proceeds—does not grapple with this
hazard. Knowing that unpaid contractors’ claims will be
No. 13-2785                                                    23

covered by title insurance once the loan proceeds run out may
in some circumstances encourage lenders to continue to fund
a project even after it becomes clear that it has no chance of
succeeding.
    A better interpretation is that Exclusion 3(a) excludes
coverage for liens that arise as a result of insufficient funds.
This interpretation makes the most sense of the respective roles
of the insured lender and the title insurer in this context. Only
the lender has the ability—and thus duty—to investigate and
monitor the construction project’s economic viability. When
liens arise from insufficient funds, the insured lender has
“created” them by failing to discover and prevent cost
overruns—either at the beginning of the project or later. This
interpretation also has the advantage of being a clear rule that
parties can bargain around.
    This understanding of Exclusion 3(a) does not “effectively
nullify the mechanic’s lien coverage,” as the court in Chicago
Title feared. 53 F.3d at 907. Title insurers remain “obliged to
protect against the possibility of [lenders] paying twice for the
same work.” Bankers Trust, 594 F.2d at 234. The construction
lender’s title policy insures against failures in the payment
process, not the business risks associated with project failure
due to insufficient funds. For example, if “the developer had
absconded with the loan funds,” Am. Sav., 793 F.2d at 783, then
the title insurer would be on the hook for the resulting
mechanics’ liens. To take a more pedestrian example: If the
developer or general contractor “improperly or erroneously
disburse[s] loan funds,” Brown, 634 F.2d at 1109, the title policy
would cover the resulting liens. Indeed, it is for this very
24                                                    No. 13-2785

reason that sophisticated parties to construction projects
designate the title insurer to act as the disbursing agent for the
loan funds. In this role the insurer is better able to control the
payment process and guard against the insured risk.
    Protecting construction lenders against the risk of cost
overruns is the job of other insurance products and financial
instruments. Performance bonds, for example, require the
bonding company to complete a project if the contractor
defaults. See generally 1 MICHAEL T. MADISON, supra, § 6:24
(2001). Or, as BB Syndication did here, construction lenders can
insist on a guarantee from a third party (in this case Trilogy’s
owner). That’s not to say that title insurance can never be used
to guarantee unfunded work; but the standard-form title policy
is not meant to cover this type of risk, so lenders need to
explicitly contract for this protection. One way to do so is to
purchase the so-called “Seattle Endorsement”—basically, a
promise from the title company not to invoke Exclusion 3(a)
for liens arising from insufficient funds. See id. § 6:19.
    This brings us to the last case in the list mentioned above:
Home Federal, a decision from this circuit. There, we noted that
the distinguishing feature in both Brown and Bankers Trust was
that the title insurer also acted as a disbursing agent. Home Fed.,
695 F.3d at 733–35. In that case a construction lender cut off
loan funding after the developer defaulted, leaving a $6 million
lien for unpaid work from the general contractor. When the
lender brought a foreclosure action, the contractor counter-
claimed, asserting that its lien had priority. The lender ten-
dered the defense to its title insurer, but the insurer rejected the
tender for two reasons: first, the contractor’s claim of priority
No. 13-2785                                                      25

was nearly frivolous because “Indiana … gives priority to a
commercial construction mortgage over all later-recorded
mechanic’s liens,” id. at 731; and second, Exclusion 3(a)
precluded coverage. The lender thereafter settled the claim by
agreeing to pay the contractor $1.8 million, then sued the title
insurer for breach of its duty to defend and indemnify. Relying
on Brown and Bankers Trust, the district court entered summary
judgment for the insurer, but we reversed.
    Our analysis in Home Federal rested largely on the premise
that the duty to defend is broader than the duty to indemnify.
Because “the duty to defend depends on what the claimant
alleges, not the ultimate merit or lack of merit of the claim,” id.,
the title insurer could not rely on the argument that the lien
didn’t have priority over the mortgage under Indiana law.
“[The contractor’s] claim might have been weak, even hope-
less, but that lack of merit could not absolve [the title insurer]
of its duty to defend against the attempted enforcement of a
mechanic’s lien with priority over the mortgage.” Id. And in
Indiana “[a]n insurer that refuses to defend its insured … is …
bound by the result of litigation,” including reasonable
settlements. Id. at 736 (internal quotation marks omitted).
Therefore, once a breach of the duty to defend was established,
the title insurer was “precluded from arguing that it was under
no duty to indemnify [the lender],” id. at 735, and thus was
required to cover the $1.8 million settlement.
    We also noted, however, that if the policy contained an
exclusion “that would have applied even if the underlying
claim had been valid,” the insurer may properly refuse to
defend. Id. at 732 (citing Cincinnati Ins. Co. v. Mallon, 409 N.E.2d
26                                                              No. 13-2785

1100, 1105 (Ind. Ct. App. 1991)). This prompted an analysis of
Exclusion 3(a). Reviewing the facts of Brown and Bankers Trust,
we reasoned that the outcome in those cases rested on the
existence of a disbursement agreement between the title
insurer and lender: “[T]hese cases involved breaches of a duty
because the insured banks had each agreed to make adequate
funds available to pay the developers and their contractors.”
Id. at 734. The title insurer in Home Federal, on the other hand,
was not the designated disbursing agent. Because “there was
no disbursement agreement, the lender had no obligation to
continue lending good money after bad.” Id. at 734–35. On this
reasoning, we held that the lender did not “create” or “suffer”
liens by cutting off funding, and Exclusion 3(a) did not apply.
Id.
    Home Federal supports our conclusion here because First
American was, in fact, the disbursing agent for the loan funds
in this construction project.10 But Home Federal may have relied
too heavily on the existence of a disbursement agreement.
First, the presence of a disbursement agreement doesn’t fully
explain the results in Brown and Bankers Trust. True, the


10
  BB Syndication disagrees, arguing that as in Home Federal, it was not
“bound to disburse the entirety of its loan commitment to [the developer]
even if [the developer] was in default.” Home Fed. Sav. Bank v. Ticor Title Ins.
Co., 695 F.3d 725, 734–35 (7th Cir. 2012). But that was also true in Brown,
and Home Federal acknowledged that Brown was rightly decided. Id. at
733–35; Brown v. St. Paul Title Ins. Corp., 634 F.2d 1103, 1110 (8th Cir. 1980)
(noting that the “[lender] admittedly was under no obligation to continue
funding the project after the default”). However, BB Syndication’s
argument underscores the flaw in making the presence of a disbursement
agreement dispositive, as we explain in the text.
No. 13-2785                                                            27

contractual arrangement in those cases, as here, required the
insured lender to supply the title company with funds to cover
the draw requests from the developer.11 But a duty to provide
sufficient funds when a project is going well doesn’t necessar-
ily translate into a duty to continue to provide funds when the
project has fallen apart. The contracts in those cases, as here,
also gave the lenders the right to cut off funding if the project
became out of balance. Brown, 634 F.2d at 1110.
     It’s true that both courts noted the presence of a disburse-
ment agreement, and Bankers Trust even called it “critical.”
Bankers Trust, 594 F.2d at 233; Brown, 634 F.2d at 1109–10. In the
end, however, the decisions relied more heavily on the fact that
title insurance isn’t built to cover this sort of risk. As the Tenth
Circuit explained, “[i]n effect, it is claimed that by the issuance
of a title insurance policy, [the insurer] became a guarantor of
payment for all work actually performed. That is more than the
insurance contract calls for.” Bankers Trust, 594 F.2d at 234; see
also Brown, 634 F.2d at 1110 (“To hold otherwise would give the
insured [lender] an unwarranted windfall and would place the


11
     Section 3 of the disbursement agreement provides:
               3. Conditions Precedent to Each Disbursement. Prior
           to each disbursement of Funds under this Agreement, it is
           a requirement of this Agreement that the Disbursing
           Agent … be furnished:
           …
           d. Sufficient funds to cover the requested advance.
           ….
28                                                           No. 13-2785

title insurer in the untenable position of guaranteeing payment
of work for which loan funds were never advanced.”).
    More fundamentally, placing decisive weight on the
existence of a disbursement agreement produces anomalous
results. Under Home Federal a title insurer that also acts as a
disbursing agent would not have to cover liens arising from
insufficient funds, whereas a title insurer (using the same
standard-form policy) that does not act as a disbursing agent
would have to cover them. The nondisbursing title insurer
would thus be assuming a greater risk. But if a title company is
both title insurer and disbursing agent, then it has more control
over whether mechanics’ liens will arise because it can ensure
that loan funds are disbursed to the right people and in the
proper amounts.12
    That’s not to say that Home Federal was wrongly decided.
To the contrary, the panel relied on another important factor—
namely, that Indiana “gives priority to a commercial construc-
tion mortgage over all later-recorded mechanic’s liens.”
695 F.3d at 731. It would have been strange indeed to require
the lender to pay off a lien that didn’t have priority just so its title


12
  Some have suggested that when the title company also acts as disbursing
agent, the scope of coverage is broader. See Michael F. Jones & Rebecca R.
Messall, Mechanic’s Lien Title Insurance Coverage for Construction Projects:
Lenders and Insurers Beware, 16 REAL EST. L.J. 291, 305 (1988) (“[T]he scope
of the coverage will be greatest where the loan is disbursed by the title
company rather than by the lender. In point of fact, the authors submit that
this has been recognized by sophisticated lenders and the title companies
used by them for years, and that many such lenders have long opted for
having the title company disburse for this reason … .”).
No. 13-2785                                                      29

insurer would defend the priority of its mortgage. The lack of
priority of the contractor’s lien over the mortgage obviated the
lender’s implied duty to its title insurer to release sufficient
funds to prevent that lien from arising. See id. at 734 (“[The
lender] owed no duty to [its title insurer] to disburse the entire
amount of the loan commitment to [the general contractor] to
pay its contractors. Because of the Indiana statute giving strong
priority to the construction lender’s mortgage, it should have
taken little trouble or expense for [the title insurer] to honor the
promise of its mechanic’s lien endorsement by defending
against the [contractor’s] counterclaim.”).
   In the end, this case is closer to Brown and Bankers Trust
than to Home Federal. The liens at issue here arose from
insufficient project funds, a risk of loss that BB Syndication—
not First American—had the authority and responsibility to
discover, monitor, and prevent. Accordingly, BB Syndication
can be said to have “created” or “suffered” the resulting liens.
Exclusion 3(a) applies, and the liens are not within the scope of
the title policy.
                                                        AFFIRMED.
