Title Search Liability
Liability for negligent title searching is often pursued to bolster or ameliorate the effects of claims. Recent decisions from three different jurisdictions show how this gambit can affect title insurers, their agents and subcontractors.
Case #1:
Russo v. PPN Title Agency, et al. No. A-2297-15T4 (N.J. Sup. Ct., App. Div.) (July 20. 2017)(unpublished)
The Appellate Division upheld a grant of summary judgment in favor of the insurer. Russo had contracted to purchase the property in 2012, and sought a commitment for a $275,000 owner’s policy from PPN, acting as policy-issuing agent for Chicago Title. PPN subcontracted for a title search to fulfill its statutory obligation to conduct “a reasonable examination of the title” before issuing the commitment. The search failed to turn up a recorded mortgage burdening the property with an outstanding balance of $341,017.76 as of the date of closing.
When the omission came to light at the time of Russo’s sale to a third party, Chicago Title paid the full amount of the policy, leaving Russo liable for the remaining $66,017.76. He sued, alleging negligence in performing the title search, negligence in preparing and delivering an abstract of title, and breach of contract.
The Court made clear the statutory obligation to search does not expose the insurer or its agent to negligence liability in excess of the policy limits, unless the proposed insured requests, and the insurer/agent provides, a “title search” or “abstract of title.” However, Russo only purchased a policy. “No matter how much plaintiff tries to obfuscate the issue and conflate all of the terminology, he was not provided a title search or abstract of title that would confer liability upon PPN for negligence.”
Comment:
Many insureds and their counsel rely on the binder/commitment/report (depending on the local jargon) in lieu of their own due diligence concerning the title. This risk is magnified when the property is “underwater” with respect to a mortgage not disclosed in the binder.
The 2016 ALTA commitment form clarifies to prospective insureds the Commitment is not intended to disclose the state of title or serve as an abstract of title. For more info on the new form, the cover story in the July 2017 issue of Title News The 2016 ALTA Commitment: Expressing Limitations on Liability, (by Constructive Notice subscriber Christopher Smart, Esq.) is an excellent starting point.
Case #2:
Chicago Title Insurance Company v. Accurate Title Searches, Inc., No. 173 CA 463 (2017)(Ct. App., May 30, 2017)
Chicago Title settled a claim that had arisen from a subcontracted negligent title search. Accurate (the subcontractor) received no notice of, and did not participate in, the settlement process. Chicago then sued to recover the attorneys’ fees incurred resolving the claims. Accurate refused to pay, claiming that Chicago was barred from seeking indemnity due to the failure to inform and involve Accurate in the settlement discussions. The Appellate Court held Chicago’s action to be one for compensatory damages caused by Accurate’s negligence, rather than for indemnification. It reversed the trial court and remanded for a damages determination.
Comment:
The underlying facts of this case (which we will not recount here) illustrate the importance of thoroughly training underwriting personnel to recognize potential pitfalls lurking in ambiguous instruments. It’s hard to teach the “smell test,” but it’s frequently the most important tool in the underwriter’s kit.
Case #3:
Eastern Shore Title Company v. Ochse, et al., No. 16, September Term, 2016 (Md. App. May 31, 2017)
Ochse had filed claims with the Insurer based on the Agent’s failure to discover a recorded title defect. The Insurer denied coverage based on a policy exception (that later proved inadequate).
Due to the denial, Ochse retained their own counsel and brought an action against their sellers(“Henry”) for breach of the original sales contract, breach of warranty and fraud. The contract also included an attorney’s fee shifting provision. The litigation spawned numerous trips to various trial and appellate courts, but Ochse prevailed and was awarded damages, attorney’s fees and litigation expenses, which were collected from Henry.
After prevailing in the Henry litigation, Ochse sued the Insurer and the Agent for breach of contract and negligence. Eventually, Ochse won economic damages for the attorney’s fees and litigation expenses incurred in the Henry litigation.
Since Agent’s negligence caused the Henry litigation, the Court of Appeals held the collateral litigation exception to the American Rule applied to the instant case. Agent then argued the attorney’s fee recovery in the Henry contract litigation prohibited Ochse from recovering the same fees based on negligence in the instant suit. While rejecting applicability of the collateral source rule, the Court reasoned the Henry recovery precluded Ochse from demonstrating “actual injury” and they were not entitled to a windfall based on an alternative theory of liability.
Comment:
This case swirls together many issues found in the other two. First, it shows how some jurisdictions allow recovery based on negligent searching, while others limit exposure to policy language. Next, it demonstrates the importance of rigorous investigation of record and off-record indicia of potential claims. Third, but certainly no less important, it highlights the sensitive nature of the Insurer-Agent relationship, the agent’s need for adequate E & O coverage, as well as careful vetting and oversight of subcontractors and researchers.