by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
TITLE INSURANCE; ABSTRACTOR'S LIABILITY: New York appellate court slams the door on title insurer's negligence liability. Citibank v. Chicago Title Ins. Co., Lexix 9628 (9/28/95).
Lender obtained title insurance for an $800,000 refinancing mortgage. The title report, and the final inurance policy, failed to disclose a recorded mortgage lien and a recorded judgment lien, together totalling over $1.4 million. Both of these unreported claims, however, were junior to the refinanced mortgage lien. After some litigation,Lender was able to establish its priority and successfully foreclose. But the property proved to have very little value and the Lender had a deficiency claim (including accrued interest) in excess of $900,000.
Lender sued the title insurer for damages, claiming that, although the undisclosed interests proved to be junior to its insured mortgage, information about them would have affected its lending decision in the first place. It reasoned that it would not have made the loan had it known of the borrowers true financial condition, and thus it would not now be stuck with the huge deficiency.
Held: In New York, there is no action against a title insurer for negligence, even negligent misrepresentation. The insurer's sole exposure is on its insurance contract. Under the contract, it had a duty to defend, and therefore had to pay the defense expenses by which Lender established its priority against the undisclosed and unexcepted liens, but otherwise the insurer is not responsible for Lender's loss, even if the insurer's negligence caused it.
Comment: Courts and commentators are split on the general issue of whether an insurer should have any liability for negligence. Although the real estate industry clearly does rely upon title insurers to give an accurate "readout" of the state of the title, the insurers are reasonably careful to limit the exposure for liability to the terms of the contract itself.
Of course, the title report, that precedes the issuance of the policy, is a separate document that does not itself provide insurance. The insurer is well aware that its issuance of the report will lead the receipient to believe that the insurer has carefully reviewed the title and found only the reported exceptions. On the other hand, the report itself usually disclaims any liability other than pursuant to the policy.
When trade practice analysis shows that parties rely upon the title insurer's report beyond the insurance function, and the insurer knows about the reliance, is the insurer liable for the expectations imposed upon it by the public? Or can the insurer avoid liability by disclaimer? Would the problem be made easier or harder if the insurer offerred a separate contract by which it actually warranted the quality of its search? Is the issue a different one when we are talking about million dollar commercial loans as opposed to residential sales? Clearly there is no agreement on any of these issues.
The editor's view is that if the insurer enjoys a special position of trust and confidence in the industry, and knows this and profits from it, the insurer has some special duty. Whether the insurer's duty is simply to make very clear that it is making no warranty of quality for its searches or whether, in the alternative, the insurer should be viewed as making a non-waivable warranty of quality, is a question with which the editor has not yet come to terms.
The editor does believe that insurers who offer a separate warranty for separate consideration should be able to avoid the implied warranty. But it is unlikely that insurers in New York will offer such a warranty any time soon.
Do Dirt readers see special circumstances in this case that might differentiate the case from a typical abstractor's liability situation? The editor doesn't.
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