As a Title Agent, what is your responsibility to persons who are not your customers?

"DANCE WITH THEM THAT BRUNG YA."

Shania Twain

If you perform negligently services you are contracted to perform, then you face liability to your own customers. As a title agent, what is your responsibility to persons who are not your customers, i.e., the ones that didn't "brung ya"? Courts in three different states (California, Arizona and Washington) have dealt with this issue.

The most recent case is from Washington. The title company handled a complex series of recordations for real estate investment entities and one lender. The terms of the loan prohibited further encumbrances. The title company was aware of this restriction. Nevertheless, several owners, without the knowledge of the other owners, secured loans on the same property by later subordinate deeds of trust. These deeds of trust were recorded by the same title company. When the first-priority lender discovered the unauthorized subordinate liens, the lender called the loan into default. The investors who not did participate in the later encumbrances then sued the title company. These investors claimed that the title company should have not recorded the unauthorized subordinate liens because the title company actually knew about the restriction. The Supreme Court of Washington dismissed the claim and said, "Plaintiffs urge us to hold that justice requires title insurance companies to look behind the signatures on the document and police the parties' agreements against conflicting corporate documents or loan agreements. This is not a just result, and placing this burden on title insurance companies increases their costs, slows the recording process, and frustrates public policy, with no appreciable benefit."

In the Arizona case, the general partner of a limited partnership executed a deed of trust without the approval of the limited partners. The deed of trust was valid on its face but required the approval of the limited partners under the terms of the limited partnership agreement. The limited partners sued the title company. The Arizona court dismissed the claim because the instrument was valid on its face.

In the California case, a title company was held liable. A perspective buyer was unable to persuade the property owner to sell the property. However, the owner discussed a long-term lease with the prospective buyer. Apparently impatient, the prospective buyer unilaterally prepared a document entitled "Memorandum of Agreement". The prospective buyer signed the document himself and had his signature notarized. The prospective buyer was a regular customer of a local title company and asked the title company to record the "Memorandum" as a lease encumbering the property. Under California law, the "Memorandum" was invalid on its face. The title company was held liable with the prospective buyer for slander of title.

Our industry should find all three decisions both comforting and consistent with what we have understood to be our responsibilities: examine titles, issue policies of title insurance, and record instruments valid on their face. All three courts acknowledged that the title industry is part, and only part, of the purchase, sale and encumbrance of real property. All of these courts believed that the obligation to look behind an instrument valid on its face was the responsibility of the parties to the transaction and the attorneys representing those parties.

With this in mind let us look at two bigger picture issues: (1) how are other states handling the question and (2) why are litigants bothering to generate theories of liability that attempt to go beyond the terms of the title insurance policy.

Most states have addressed the question of whether a title agency or insurance company can be liable to persons other than insureds and whether a title agency or insurance company can be liable for damages in addition to the losses covered by the title insurance policy, such as the negligent failure to disclose or describe defects in the title in the preliminary report. Here is the current count. Virginia's courts have not decided the issue.

Yes

Alaska, Arkansas, Florida, Georgia, Hawaii, Indiana, Kansas, Missouri, Nebraska, New Hampshire, Oklahoma, Pennsylvania, South Dakota

No

Alabama, Arizona, California, Colorado, Delaware, District of Columbia, Idaho, Illinois, Maine, Maryland, Massachusetts, Michigan, Mississippi, Montana, Nevada, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island, Texas, Utah, Washington, Wisconsin, Wyoming

Undecided

Connecticut, Iowa, Kentucky, Louisiana, Minnesota, North Carolina, North Dakota, South Carolina, Tennessee, Vermont, Virginia, West Virginia

(Title Insurance: A Comprehensive Overview (Third Edition), by James L. Gosdin (published by the American Bar Association, Section of Real Property, Probate and Trust Law) pp 583-592.)

The states in the "No" column are fairly uniform in their reasoning for refusing to expand liability. The court in these states reason that the title insurance policy is the full extent of the bargain. Some also reason that the preliminary report is for the internal use of the agency and insurance company.

States in the "Yes" column rely on one or both of the following rationales. The first is that there is a duty under the state title insurance codes to use due care in issuing policies or a statutory prohibition against issuing policies without disclosure of all defects. The second reason is that any duty voluntarily assumed can be performed negligently and therefore result in liability for negligence, in addition to breach of contract.

Why do these issues matter? Why do litigants try to expand on the limits and conditions of the title insurance policy? The reason the limitation matters is that persons who did not obtain the policies may attempt to recover from the title agency or insurance company. For example, in the Arizona case described in Part I, the plaintiffs were the limited partners whose consent to additional encumbrances ought to have been obtained. Although the case does not say this, it is easy to imagine that the business partners of the wronged limited partners were not attractive or solvent candidates to sue. The title insurance company has more money.

The other reason appears to be that litigants may not want to wait for their actual damages to be fixed, the normal precondition to indemnification under a title insurance policy. In a 1992 case from Alaska, a title report and policy failed to disclose other potential ownership interests in the insured property. When the owner of the property went into bankruptcy, the lender had to begin bankruptcy proceedings in order to foreclose. The lender filed suit before the finalization of foreclosure proceedings and the ultimate quantification of its loss. The Alaska court held that the negligence portion of the case could proceed but the claim under the title insurance policy was premature because the loss had not yet been fixed.

Fortunately, Virginia has a relatively stable legal climate and well-established doctrines limiting parties to the remedies stated plainly in the policies of title insurance.