In reliance on Gateway Abstract’s incorrect report, Express Financial issued a Chicago Title lender’s policy insuring The Money Store’s $220,000.00 mortgage as a first lien on the property, failing to except the Champion mortgage from coverage. Accordingly, when Champion Mortgage foreclosed the earlier mortgage and the property was sold at Sheriff ’s Sale, The Money Store mortgage was divested and it made a claim against Chicago Title under the lender’s policy. Because of the existence of the earlier mortgage, Chicago Title was required to pay its policy limits of $220,000.00. After payment, Chicago Title, in an action handled by Fox Rothschild LLP, recovered from Express Financial the full amount of the loss. Express Financial then sought to recoup its loss from Gateway Abstract since it was the search company’s error that caused the loss.

Finding that the limitation of liability language contained in the abstract of title created a binding agreement between the parties, the Monroe County Court ruled that Express Financial’s ability to recoup its losses from Gateway Abstract was limited to the cost of the abstract of title, i.e. $40.00. As a result, despite the fact that the loss sustained was due solely to the failure of Gateway Abstract to properly search title to the property, the actual burden of the loss fell on Express Financial, the agent.

The trial court’s decision in Express Financial Services, Inc. is important for several reason:

First, this case represents the first time, to our knowledge, that a Pennsylvania court has addressed the enforceability of a limitation of liability contained in an abstract of title. While these provisions have been upheld in other contexts, their application to the title insurance industry, where errors contained in inexpensive title searches often result in six-figure losses, has never been addressed.

Second, the case teaches us that title agents should be aware of the tremendous impact of limitation provisions and review their relationships with abstracters to determine their potential exposure to liability.  Title agents, armed with the knowledge that liability provisions may be enforced even in the absence of a formal, written contract, should object to the inclusion of limitations of liability in title reports or negotiate written agreements with their abstracters that address whether, and if, the abstract company’s liability for negligence, mistakes or omissions will be limited. As the trial court’s decision illustrates, it is likely that the agent, not the abstracter, will bear the costs of failing to address this important issue.

Finally, this decision may point out the importance of a title agent considering the use of its title underwriter for the supply of abstract services. Obviously, if a search is obtained from the title underwriter and a loss is sustained as a result of an error in that search, the risk of loss will lie with the title underwriter, not the title agent. Fox Rothschild strongly suggests that agents analyze their individual situations to determine if changes should be made to reduce the potential for loss.

The decision in Express Financial Services, Inc. was recently appealed to the Superior Court of Pennsylvania. We will continue to follow the case and report on additional developments as circumstances warrant.