The following article is based on materials entitled "Overview of Title Insurance Claim and Litigation," written by John Dillard, Esq., Vice-President and State Manager of Stewart Title, Asheville, North Carolina.
Title insurance claims are certainly something that all attorneys and title insurance companies wish to avoid; however, they are a fact of life with which many of us will have to deal at some point in our legal careers. The purpose of this article is to address how to handle a claim or a possible claim when it arises and the responsibilities of the parties involved.
A title insurance policy is an agreement to indemnify against actual monetary loss or damage suffered by the insured. A compensable claim must arise from loss or damage which is insured under the policy. A.J. Appleman, Insurance Law and Practice, § 5201.
When a claim or potential claim arises, the insured must give written notice of the claim to the title insurer. Section 3 of the Conditions and Stipulations of the 1992 ALTA Policy requires prompt written notice as follows:
"The insured shall notify the Company promptly in writing (i) in case of any litigation as set forth in Section 4(a) below, (ii) in case knowledge shall come to an insured hereunder of any claim of title or interest which is adverse to the title to the estate or interest, as insured, and which might cause loss or damage for which the Company may be liable by virtue of this policy, or (iii) if title to the estate or interest, as insured, is rejected as unmarketable ."
If prompt notice is not given, the title insurers liability may terminate. The policy gives no specific time limit for giving notice, but the determination of whether notice was prompt depends on whether the title insurer was prejudiced. To deny coverage, the title insurer must show it was prejudiced by the delay. Section 3 of the Conditions and Stipulations of the 1992 ALTA Policy further provides:
" If prompt notice shall not be given to the Company, then as to the insured all liability of the Company shall terminate with regard to the matter or matters for which prompt notice is required; provided, however, that failure to notify the Company shall in no case prejudice the rights of any insured under this policy unless the Company shall be prejudiced by the failure and then only to the extent of the prejudice."
Under Section 5 of the Conditions and Stipulations of the 1992 ALTA Policy, the insured must also give the title insurer proof of loss or damage within 90 days after the loss or damage is determined. The proof of loss or damage must describe the defect, lien or encumbrance and state the amount of the loss or damage sustained. The title insurers obligations under the policy will terminate if it is prejudiced by the insureds failure to provide the proof of loss or damage.
The statute of limitations for enforcement of claims against a title insurer begins running the date the title defect was discovered. Tabachnick v. Ticor Title Insurance Co., 24 Cal. App. 4th (1994).
Therefore, it is in the insureds best interest to notify the title insurer of any potential problems that might affect title as soon as possible.
The title insurer must considered following factors before it can consider denying a claim:
1. Whether the claimant is an insured under the policy.
If the title insurer is liable under the policy, it must be determine if the insured has suffered an indemnifiable loss because the insurers duty is only to reimburse the insured for actual loss incurred. Whether an actual loss is suffered depends on the type of policy under which the claim is brought, i.e., lenders policy, owners policy, pre-1987 policy, post-1987 policy. With owners and lenders policies, different coverage and/or exceptions may have been taken. Post-1987 policies obligate title insurers to defend only against stated causes of action which allege a defect insured against in the policy, while pre-1987 policies do not limit the title insurer from defending only title matters.
Once a loss has been found to be compensable, the title insurer has five options under Item 6 of the 1992 ALTA policy:
Performing one of these options satisfies the title insurers legal obligation to the insured, and the title insurer cannot be required to do anything further. Martinka v. Commonwealth Land Title Insurance Company 836 S.W. 2nd 773 (1992).
If the title insurance company determines no liability exists under the policy, it should promptly send a letter to the insured stating its understanding of the facts that gave rise to the claim. It should then explain the steps taken to research and analyze the claim, outline any policy provisions, including exclusions and exceptions, which it relied upon in making its decision, and apply the provisions to the facts in the present case. Any other reasons for denial of the claim, such as statute of limitations or lack of actual loss or damages, should also be listed. The title insurance company should also encourage the insured to submit any other information that might change the title insurers assessment of the claim.
Insured Closing Letters
There are situations where a title insurer is liable under an insured closing letter but not under the title insurance policy itself. With an insured closing letter, the title insurer agrees to reimburse a lender for losses resulting from an approved attorneys failure to follow the lenders written closing instructions. Insured closing letters also provide protection to the lender against improper disbursement of funds, fraud or dishonesty of the attorney or failure to properly draft and record documents necessary to protect the lenders lien. However, if a commitment is issued in the interim, the insured closing letter does not extend to the approved attorneys failure to comply with instructions that are inconsistent with the commitments requirements. Insured closing letters also do not provide coverage to mechanics liens unless they are covered in the policy or commitment.
G.E. Capitol Mortgage Services, Inc. v. Avent, 114 N.C. App. 430 (1994) addresses an important distinction between liability under a title insurance policy and liability imposed by an insured closing letter. In this case, the court held that the title insurer was not liable to the lender who lost priority of its deed of trust when the closing attorney embezzled the closing funds and failed to pay off the existing mortgage. The courts reason for this holding was that the seller suffered the losses because the funds were to be paid to him. However, if there had been an insured closing letter, the buyer would have suffered the losses since the insured closing letter covers losses suffered though fraud or dishonesty of the approved attorney conducting the closing.
Trying the Lawsuit
Duty to Defend
When the title insurer has been properly notified of a claim covered by the policy, it has a duty to defend. The duty to defend is as follows:
A Reservation of Rights permits the title insurer to recover the cost of defense or to later deny liability under the policy if it subsequently turns out that the title insurer had no duty to enter a defense or had no liability under the policy. Safeco Title Insurance Co. v. Moskopoulas, 116 Cal. App. 3d 658(1981). A Reservation of Rights letter should summarize the allegations of the lawsuit and should discuss the causes of action covered under the policy, those which the title insurer will defend, and those not covered under the policy.
The title insurance policy allows the insurer to deny coverage as to certain allegations or causes of action in a complaint but still find coverage for others. In doing so, the title insurer does not reserve rights as to the uncovered matters. Since the title insurer does not reserve rights, there should not be a conflict of interest between the insurer and the insured. This is an important distinction because courts have held that counsel retained to represent the insured are obligated to notify their client of any potential conflicts of interest and to fully disclose any conflicts.
The title insurer has the right to select its own counsel whether it defends an action or takes action to clear title; it is also responsible for paying the associated costs.
If the title insurer reserves the right to defend, the insured may obtain its own counsel in order to control the conduct of his case and to avoid conflicts; however, if the title insurer is found to be liable under the policy, the insured can recover the costs of its independent counsel. First United Bank v. First American Title Insurance Co., 242 Neb. 640 (1993).
Obligation to Cooperate
Item 4(d) imposes upon the insured the duty to cooperate with the title insurer when defending a claim or when bringing an action to clear title. Included in this duty are allowing the title insurer to prosecute the action in the insureds name, helping to secure evidence, obtaining witnesses and any other lawful actions necessary to establish title to the property in question. The title insurers obligations to the insured under the policy will terminate if it is prejudiced by the insureds lack of cooperation.
Measure of Damages
The measure of damages varies depending upon the type of policy which is the subject of the claim and whether the failure of title is total or partial. Failure of title is total where title fails completely; failure is partial when a lien, encumbrance, encroachment, easement or other matter adversely affects the existence of title.
If there is total failure of title with an owners policy, the measure of damages is the lesser of the fair market value of the insured property or the face amount of the policy. Burke, Law of Title Insurance, § 13.3 (1986). Applied in Allison v. Ticor Title Ins. Co.,907 F2d 645 (7th Cir. 1990). There are two methods for calculating damages if there is partial failure of title with an owners policy. The first is the difference between the fair market value of the property with the defect and the value of the property without the defect. The second allows the title insurer to satisfy its obligation by bringing an action to clear title if doing so will cure the defect.
If there is total failure of title with a lenders policy, the measure of damages is the remaining balance on the mortgage, as long as it does not exceed the policys face value. American Title Ins. Co. v. East West Fin., 16 F.3d 449 (1st Cir. 1994).
If a junior lienholder forecloses or executes on a judgment but the insured mortgage is satisfied from the proceeds of the sale, the lender cannot collect from the title insurer for loss of title because the lender has been made whole. Where the title insurer successfully defends an insureds title and the insured suffers no loss because of the claim, the title insurer has no obligation to pay. Burke, Law of Title Insurance, § 13.3 (1986). Applied in Marriott Financial Services v. Capitol Funds, Inc., 288 N.C. 122 (1975).
Partial failure of title arises when an undisclosed lien constitutes a partial loss of the lenders title. Damages are measured in the same manner as owners damages with partial failure of title, i.e., the difference between the fair market value of the property with the defect and the value of the property without the defect or the title insurer can bringing an action to clear title if doing so will cure the defect.
The title insurer has all rights and remedies of the insured upon settlement and payment of claims under the policy. If the insureds loss is not fully satisfied by payment of the claim, the title insurers right of subrogation is proportionate to the amount paid in proportion to the amount of the loss suffered.
However, the title insurer can only pursue the insureds remedies to the extent it has discharged the primary liability of the insured. The insured must be made part of any action brought by the title insurer under the doctrine of subrogation if the insurer has not made the insured fully whole. Commonwealth Land Title Insurance Company v. Stephenson, 97 N.C. App. 123 (1990).
Reduction of Insurance
The amount of insurance under the title policy is reduced by payments made by the title insurer in satisfying a claim, exclusive of attorneys fees and costs. However, any amounts recovered through subrogation will not restore or increase the amount of coverage under the policy.
When counsel has been hired to represent the insured in an action involving a title matter, counsels primary responsibility is to the insured, and any matters disclosed the attorney will be subject to the attorney-client privilege. The fact that the title insurer may pay for the attorneys legal fees does not affect the attorney-client privilege.
Normally, upon employment of the attorney, the title insurer will send an attorney engagement letter setting forth the responsibilities of the legal counsel. The engagement letter should address that the title insurers primary concern is the best interest of the insured and what fees and expenses the title insurer is responsible for.