Daily Development for Monday, January 17, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

TITLE INSURANCE; ABSTRACTOR'S LIABILITY: Illinois court holds that title insurer can be liable in tort for negligent failure to disclose title defects in commitment notwithstanding fact that issued policy states that only claims lie in contract and notwithstanding "economic loss" rule.

Notaro Homes, Inc. v. Chicago Title Insurance Co.,1999 WL 1204749, No. 2981196 (Ill. App. 2 Dist. 12/15/99)

The local zoning authorities adopted a very narrow amendment to the zoning ordinance prohibiting development of ten lots in accordance with the ordinary zoning classification for those lots. This amendment was recorded in the land records.

When plaintiff later acquired one of the restricted parcels, intending to build on it, the title insurance company did not indicate the recorded zoning amendment in the commitment, nor did it show it as an exclusion in the policy. Plaintiff, in essence, invested in property that was useless to him.

Plaintiff fired a blunderbuss complaint at the insurer to recover for the resulting loss. Plaintiff made numerous allegations that the policy covered the loss but also sought to recover for negligent misrepresentation and for breach of the Unfair Business Practices Act. Following summary judgment for the insurer, plaintiff appealed.

The first part of the appeals court opinion reads like any experienced real estate lawyer would expect it to read. The court notes that zoning matters are expressly excepted from coverage both in the commitment and in the policy. It rejected plaintiffs all too clever argument that the recording of the zoning amendment constituted an "enforcement" of the zoning provisions against this property, and it held that, in any event, any contractual liability under the commitment was subsumed into the policy coverage by the language of the two documents. Consequently, it looked like the plaintiff was well on his way to defeat. But then the opinion takes a turn against the insurer. The court held that the plaintiff could survive a summary judgment motion on its allegation that the insurer's failure to disclose the recorded zoning amendment constituted negligent failure to disclose. Because this amounted to a negligent nondisclosure in a business context where the nondisclosure was providing a reporting service, the court note an exception to the "economic loss" rule permitting tort recovery in such cases notwithstanding the contractual relationship governing the parties.

The court noted that there was no exclusion of tort liability in the commitment language, and that the language of the policy subsuming all claims based upon the commitment into the terms of the policy applied only to contractual claims.

The court is careful to point out that it is not deciding that the failure to disclose the zoning ordinance in this case in fact was a cause of injury, or that the title company was negligent. It is just holding that it cannot dismiss the plaintiff's claim in this instance as a matter of law.

Comment 1: What the editor finds confusing is the fact that the court here seems to assume that there was a duty to disclose zoning information when all indications from the relationship of the parties is that there was no such duty. If there was no such duty, then why wouldn't summary judgment be the appropriate vehicle to resolve this issue. The function of the title commitment was to inform plaintiff of those recorded restrictions and encumbrances that would be specifically excepted from the title because the were not covered by the general exclusions and exceptions. But the court has already held that the zoning matters in question were covered by the general exclusions and exceptions. What else is there to argue about?

In short, even if we accept the notion of liability for negligence, there doesn't appear to be an adequate allegation of actionable negligence here.

Comment 2: The editor is unaware whether there is prior Illinois authority imposing tort liability for negligent misrepresentation upon title insurers. If there is no other case, then this one is clearly groundbreaking, and we undoubtedly will see it appealed.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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