Daily Development for Tuesday, May 3, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
This is another report from Jack Murray.
TITLE INSURANCE; ABSTRACTOR’S LIABILITY: Abstractor’s liability to title insurer to which it supplied erroneous abstract report limited to amount of fee, even where limit appears only in invoice of abstractor, and there is no preexisting agreement.
Express Financial Services, Inc. v. Gateway Abstract, Inc., No. 9144 CV 2001, Monroe County (Pennsylvania) Court of Common Pleas, 8/20/04)
In a recent interesting case of first impression (at least in Pennsylvania), a title insurance agent employed an abstract company (as is common) to perform title searches prior to the issuance of the agent's title-insurance commitments, and to provide abstracts of title for each property. There was no written contract between the parties regarding their respective duties and obligations, but the cover page of each abstract furnished by the abstractor contained language purporting to limit its liability for negligence, mistakes or omissions to a sum not to exceed the cost of the search, which was fixed at $40.00. Each search regularly was requested by the agent via facsimile; the abstractor used this system to perform approximately 416 title searches for the agent in 1997 and approximatel y 381 searches in 1998. The agent had never objected to this specific limitation of the abstractor's liability.
In 1998, one of the abstractor's reports missed a validly recorded $292,000 mortgage, and the title insurer (with whom the agent had an underwriting contract) was forced to pay the subsequent loss incurred by the insured, a mortgage lender that assumed it was obtaining a first lien on the property and in fact suffered a total loss on its $220,000 mortgage when the actual first lender foreclosed. The title company in turn sought and received reimbursement from the agent. But the agent was unsuccessful in its attempt to, in turn, recover from the abstractor because of the limitation of liability stated in the abstractor's reports, which the court found unambiguous, valid, enforceable and binding against the agent - even though there was no express contract and even though the abstractor acknowledged that the loss was caused solely by its negligence in performing the job it was hired to do (i.e., to properly search the title and disclose existing liens and encumbrances).
According to the court, "Based upon the testimony and the volume of title searches requested and performed, we believe that the parties had an ongoing agreement or contract." (Note: The case has been appealed to the Superior Court of Pennsylvania.)
Reporter’s Comment 1: This is not a surprising decision. In a 2002 Washington Supreme Court case, Puget Sound Financial LLC v. Unisearch, Inc., the court issued a similar ruling and upheld an express limitation for damages to $25 contained in a UCC search company's invoice. The court ruled that the limitation, which would prevent the plaintiff from recovering the losses it allegedly incurred as the result of the search company's failure to disclose a prior filing by another creditor, was valid and enforceable. (As a result of this ruling, the lender's $100,000 lien was unenforceable and it recovered nothing even though the search company was clearly negligent - but it cost the search company $250,000 in legal fees to take this case all the way to the state supreme court).
Reporter’s Comment 2: Although it has been suggested that the agent should either reject or negotiate the limitation of liability with the search or abstract company, this may not always be practical, as these companies (at least in some cases) argue that they are small businesses that could not withstand a large loss as the result of a negligent search and will not continue to supply searches or abstracts without such limitation. These companies also claim that they are reluctant to expose themselves to the possibility of consequential damages if search errors occur or certain filings or recorded documents are not disclosed. Given the quick turnaround demanded by their customers, and the large and continuous volume of requests processed by the companies, they argue that they do not have the time or inclination to negotiate the nature and scope of liability restrictions with each individual customer. They therefore attempt to limit their liability, on a generally uniform basis, t
o an amount not exceed ing the fee charged for the individual search. These companies assert that they do not wish to, and are not in business to, become insurers of customer losses based on claims for consequential damages- nor, they assert, do they charge fees sufficient to cover that risk, which would be economically inefficient for both the companies and their customers. But despite these arguments, there is something distasteful (and perhaps inherently unfair) about allowing a search or abstract company - whose business is, after all, searching the public records and preparing reports relied on by title agents and underwriters (and their customers) - to expressly limit its liability to a nominal amount when there is no actual contract signed by the parties agreeing to this limitation.
If the title insurer (or agent) is going to object to the limitation of liability, it should do so immediately upon presentation of the invoice; the limitation language cannot simply be continually ignored.
Reporter’s Comment 3: The insurer or agent ignores such limitations at its peril, because a court may well find (as evidenced above) that a "course of dealing" has been established, which is commercially reasonable where the parties are sophisticated businesspeople. (The search that was the subject of the action in the Puget Sound case was the 48th transaction between the parties, and every search invoice had contained the same limitation of liability - with no objection by the recipient.)
The Reporter for this item was Jack Murray of the Chicago office of First American Title Insurance Company
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