When writing title policies, title companies need to give extra caution to how a simple error in procedure or recorded information can lead to paying out thousands of dollars and losing the trust of your real estate partners. Underwriters provide a plethora of resources and issue bulletins on best practices so their agents can perform their duties, like preparing documents for transactions and issuing title policies, to the highest caliber.
Unfortunately, sometimes agents miss the mark and are sued by their underwriters for not following the requirements.
Here are three cases that demonstrate how agencies can be held liable for damages beyond the limitation of liability clauses between underwriters if their actions are proven to be negligent and lead to a breach of contract.
Compliance is on the minds of agents
There are some common and obvious title search practices every title agent should avoid. Avoiding claims and issuing marketable title is the aim of every agent. Indeed, our State of the Title Industry report showed that monitoring compliance was a top-five priority for paralegals, processors, owners, and CEOs alike. Because an underwriter is assuming the financial risk and actually insuring the property against title defects, agents who issue policies on their behalf must meet strict standards to maintain good standing with their underwriters.
This means that agents and company owners are worried not only about complying with state and federal regulations but also complying with their underwriter’s standards.
When conducting title searches and writing policies on behalf of your underwriter, here are three key takeaways from these legal cases:
- When the closing gets pushed back, recheck your title search
- Get proper permissions from your underwriter before removing an exception
- Double-check the work of others when filing documents on their behalf
When the closing gets pushed back, recheck your title search
In Stewart Title Guaranty Co. v. Residential Title Services, Inc, failure of the agent to recheck title before closing which resulted in a gap claim was negligence under the contract that caused loss to the underwriter.
A homebuyer, Misook Choi Kim, financed a residential property purchase through BNC Mortgage, Inc. BNC ordered title insurance from Stewart Title through its agent, Residential Title Services, Inc. Residential conducted a title search on November 8th on the property in preparation for the November 27th closing. The effective date for the search was October 22nd, so any documents recorded between then and November 8th were not available yet. An updated search was conducted with an effective date of November 1st, and on November 5th, Countrywide Home Loans, Inc recorded a mortgage lien on Kim’s property for $175,000.
The closing between Kim and BNC was delayed until December 26th. Unfortunately, Residential didn’t update the title search, so the recorded lien was not found before the closing. Based on faulty information, Residential issued a title insurance policy to BNC in the amount of $200,000 on January 15th, without exception for the Countrywide mortgage.
Predictably, Countrywide initiated a foreclosure action against Kim on the property a couple of years later. Because their lien was recorded prior to the BNC mortgage, it was given priority.
BNC made a claim on its title insurance policy, which resulted in a payout of $194,508.42 to Countrywide in order to place BNC as first priority lien holder on the property.
Stewart sues for breach of contract due to negligence
After Stewart settled the title claim with BNC, a lawsuit was filed against their agent for breach of contract, claiming Residential was negligent in their title search. The contract between Stewart and Residential stated that the agent would be responsible for losses due to negligence, but negligence wasn’t clearly defined. Stewart argued that Residentials’ negligent acts included failure to discover instruments of record, to follow underwriting guidelines, and to prepare a title policy showing defects that were or should have been discovered in the title search.
After the testimony of several underwriting and title industry experts, the court concluded that it is a common and best practice to update the title search as close as possible to the closing and found the title company in breach of contract because they neglected this standard industry practice.
Not updating municipal information is another big mistake that can lead to missing violations and assessments that may become liens against the property as well. This case serves as an important reminder that agents should update all information impacting the property’s title when closings get pushed back.
Get the proper permissions from your underwriter before removing an exception
Usually, homebuyers, investors, and lenders can negotiate the exceptions listed on their title commitment and policy. This may require additional costs, but when additional due diligence is conducted, underwriters are usually comfortable with their removal.
A common exception removal is one that excludes coverage for easements or claims of easements not shown by the public records. Most underwriters approve the removal of boundary-related exceptions if a new land survey is obtained, but this approval varies from one underwriter to the next.
In the case of Fidelity National Title Insurance Co. v. Pitkin County Title Inc, however, the title company exposed their underwriter to additionals risks when an exception was removed from the policy without the underwriter’s consent. Although the original standard policy forms provided by Fidelity to Pitkin excluded coverage for “easements, or claims of easements, not shown by the public records,” Pitkin omitted that exception in the final policy they issued.
Inevitably, the insured owners made a claim based on an unrecorded easement on the property.
The court ruled that because Pitkin’s actions failed to comply with the terms and conditions of their agreement with Fidelity, they were liable for Fidelity’s entire loss. Once again, it was determined the negligent and reckless actions of the agent resulted in a breach of contract, and the title companies’ argument that they were only responsible for the $5,000 (the amount listed as their limitation of liability clause) of any loss incurred by Fidelity as a result of errors was struck down.
Double-check the work of others when filing documents on their behalf
Breach of contract is one of the common ways a realtor is sued by homebuyers. This is a common allegation levied against title agencies as well when title defects lead to losses. In the case of Stewart Title Guaranty Co. v. Closure Title & Settlement Co. LLC (U.S. District Court for the Western District of Virginia, No. 3:18-cv-00058)., Stewart Title asserted that Closure Title breached their expected duties as an agent by issuing title policies in which the owner of the lot was not the same entity listed in the deed of trust as the entity granting a lien, recording documents with incorrect information, and failing to make a reasonable investigation into the status of title for the deeds of trust.
Stewart sues title agency for listing the wrong grantor on a deed
This lawsuit stemmed from two real estate transactions in Virginia. The first was a transfer of title from BD Land Properties LLC to Willow Lake Land Trust for Lot C3 on March 5, 2015. The next sale was for Lot C6 from BD Land to Willow Lake. After the conclusion of the sales, Willow Lake secured two loans in the amount of $240,000 from Friendly Rehab Fund in exchange for first priority deed of trust on both lots to fund construction.
Closure Title coordinated the closing and issued a lender's policies to Friendly Rehab. The title company also recorded a deed of trust for the benefit of Rehab, but the deeds erroneously listed JB River Properties as the grantor instead of Willow Lake. A year later, Lot C3 was sold at a foreclosure sale to Biringer Builders. Friendly Rehab’s first priority lien wasn’t recognized because of the error on the deed. After two years of litigation, the settlement concluded that the errors in the deeds of trust were scrivener’s errors committed by Friendly Rehab’s own attorneys. The ruling established Friendly Rehab held title to Lot C3 and held title to Lot C6 subjected to various constructive trust and liens.
Stewart funded the settlement in the amount of $120,000 and paid $72,786.98 in attorney’s fees.
Subsequently, Stewart sued Closure Title for breach of contract, alleging that it breached its duties by issuing a policy in which the owners of the lots did not match the owner listed on Friendly Rehab’s two deeds of trust.
The outcome of the lawsuit and implications for other title agents
Stewart’s case hinged on the allegation that the oversight of the title company led to the loss of $192,786.98 despite that the mistake in question originated with the insured, Friendly Rehab.
Closure Title moved to dismiss the suit on the grounds that Stewart could not recover more than a set amount pursuant to the limitation of liability clause in the parties’ agreement and that Stewart Title failed to state a claim for breach of contract under Virginia law.
The Judge denied the motion to dismiss.
For title agents, this case has broader implications. The ruling in favor of Stewart establishes the assumption that the agreement between underwriters and agents imposed certain legal duties, including the duty to issue policies according to specific underwriting practices and to issue title insurance policies that reflect the correct titleholder with appropriate exceptions for liens, defects, and encumbrances.
In addition to checking or updating their own work and getting the proper permissions from underwriters, agents should be sure to check the work of others when acting on their behalf.
ALTA Title Counsel Committee
If you’re interested in learning more about the latest legal cases that affect title insurance and conveyance, be sure to check out ALTA’s Title Counsel Committee. The Committee gathers information on new cases that have ramifications for those working in the title industry and publishes the details in the Title News column The Docket.
For more information on general due diligence, be sure to download our State of the Title Industry Report. Check out this infographic for five quick statistics about working in title!