Real Estate Tip

Beyond the Policy: Are Title Insurers Liable for Negligence?

When Longview Power built a coal-fired power plant costing well over a billion dollars, its lender obtained $825 million in title insurance coverage from First American, and First American signed Reinsurance Agreements with Old Republic and Stewart for the balance. After First American paid $41 million in a partial settlement of mechanics’ lien claims, Old Republic paid its share and then sued First American for not being careful enough in assessing the potential mechanics’ lien risk and disclosing the relevant facts to the Reinsurers. Old Republic Nat’l Title Ins. Co. v. First American Title Ins. Co.,F.Supp.3d, 2015 WL 1349817 (M.D.Fla.).

Instead of simply suing under the Reinsurance Agreement, Old Republic and Stewart sued to rescind the Reinsurance Agreement altogether, expecting to recover tort damages and not just contract damages. This strategy served to position the suit well outside the usual scope of claims in reinsurance matters, and under title insurance policies in general. In order to recover tort damages, potentially including exemplary or punitive damages, a company must prove that the other side owed a duty of some kind, independent of the contract.  In this case, the court found that the very nature of the reinsurance relationship placed a duty on First American similar to that of a fiduciary, despite the fact that the contract created no duty of care.

The fully detailed facts in this case are very complex, the procedural history is convoluted and Reinsurance Agreements are a special type of insurance contract. For these reasons, courts may not extend the reasoning of this case to title insurance policies generally, but they are likely to be asked to do so. Claims by title insurance policy holders regularly assert negligence in failing to disclose certain adverse items that are in the registry of deeds or otherwise known to the title insurance agent. The courts will generally honor those claims only if the claimant can prove that the title agent or examiner had explicitly agreed to perform a professional service for the claimant. In those cases, the title agent or examiner, not the title insurance company, is responsible for paying the negligence damages.

Looking ahead, it would not be a long stretch for a court to decide that the insurer-policyholder relationship in a particular case was such that the title insurance company did owe a duty to the policyholder to disclose certain facts about the title or the property generally. For example, would the relationship itself put a duty on the title insurer to report claims of shoddy workmanship, known to the title insurance company because of past  mechanics’ lien claims against the property?

The protection from negligence claims that title insurance policies have created for title insurers is constantly under attack. This admittedly odd case may erode that protection.

Today’s real estate tip is brought to you by Rick Smith, a LEED Accredited Professional and member of Bernstein Shur’s Real Estate Practice Group and Green Building Team. Stay tuned for more useful tips for real estate professionals.

For more information, contact Rick at rsmith@bernsteinshur.com or 207 228-7228 or at 603 665-8829.