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ALTA's Position On Abstractor Liability
by Robert Franco
 | 2007/06/15 |
How many abstractors still belong to The American Land Title Association (ALTA)? Do you think that ALTA adequately represents the interests of title abstractors, along with their title agent and title insurance company members? Before you answer, consider the following...
Professional associations often file amicus briefs, as non-parties to lawsuits, to help shape legal precedents that may have an impact on their membership. ALTA filed an amicus brief in an Illinois case, First Midwest Bank v. Stewart Title Guarantee Company (decided Jan. 2006), and helped persuade the court that a title insurer could not be liable for negligence for failing to include an encumbrance on a title commitment. At the end of the day, it was a great ruling for the title industry, however, from an abstractor's perspective it was quite troubling.
First a little background on the case...
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John and Glenda Bergeron bought a parcel of residential property to use not only as their residence, but also for a home-office for their architectural and interior design business. First Midwest Bank loaned the Bergeron's $300,000 to purchase the property and obtained both a title commitment and title policy, neither of which mentioned a restrictive covenant prohibiting commercial use of the property. The policy was issued by Clear Title as an agent of Stewart Title.
A year later, First Midwest Bank loaned an additional $300,000 to the Bergerons for construction of a new building. Again Clear Title issued a commitment and policy, with no exception for the restrictive covenant, this time as an agent for Intercounty National Title Insurance Company.
Six months later, the Bergerons needed additional funds and First Midwest approved a $752,000 wraparound loan, paying off the first to loans. Clear Title again issued a title commitment with no mention of the restrictive covenant. However, when the policy was issued, by Intercounty, there was an exception for the restriction prohibiting the commercial use of the land.
Sadly, the Bergerons were unable to use the land for its intended purpose and they defaulted on their loan, and, both Clear Title and Intercounty had filed bankruptcy. First Midwest sued Stewart alleging that they would not have made the loans if the restriction had been shown on the original title commitment.
Stewart Title claimed that the purpose of a title commitment was not to supply information, rather it was a promise to insure a particular state of title and the scope of their liability was defined by the policy issued. However, because the first loan had been paid off, the title policy insured by Stewart was no longer in effect.
In support of Stewart Title's position, ALTA filed an amicus brief which states in part:
The economic loss doctrine bars a claim for negligent misrepresentation with respect to a defect in title resulting from a title commitment, because the ultimate result of a title commitment is a product, i.e., title insurance. Any search of title is done for the benefit of the insurer who bears the risk of liability in the event of a faulty search. An abstracter of title, by contrast, is in the business of supplying information for the guidance of others and has long been held liable in tort for negligent searches.
The Supreme Court of Illinois was convinced and ruled in favor of Stewart Title, affirming the lower court's decision. And, I do agree it was the right decision. The liability of the title insurer should be limited to the terms of the title policy.
However, I am troubled by the statement in ALTA's brief: "An abstracter of title, by contrast, is in the business of supplying information for the guidance of others and has long been held liable in tort for negligent searches." First of all, that statement is incredibly misleading. Consider this Ohio Supreme Court Opinion from 1910, which is still followed today:
So far as we have been able to discover, there has been no exception to the general rule that action against an abstracter to recover damages for negligence in making or certifying an abstract of title, must sound in contract, the general rule being that the abstracter can be held liable only to the person who employed him. Even in the exceptional cases in which courts have sought to mitigate the rigor of the rule, that object has been accomplished by straining the doctrine of privity of contract.
Second, ALTA's brief clearly shows where they stand on the liability of title abstractors in general. The difference between an action in contract and an action in tort is one of scope of liability. Under the contract theory, abstractors are only liable to those with whom they have a contractual relationship, i.e. their clients, and possibly to third-party beneficiaries under the contract. Liability in tort, however, can conceivably extend well beyond the abstractors' clients to those who may foreseeably rely on the search. Likewise, the amount of damages may be limited to the terms of a contract, while damages in tort may encompass the full extent of the harm suffered by a plaintiff.
Third, and lastly, doesn't ALTA's interpretation somewhat position the title abstractors as the real insurers of title; at least when it comes to errors and omissions from mistakes made by abstractors? Ask yourself, "Would First Midwest Bank have been better off with a $100 title search from an abstractor?" How much did they spend on the title policy? And, what good did it do them? According to ALTA, if the lender had simply contracted with a title abstractor, the abstractor would have been liable and the abstractor's errors and omissions policy would have likely had to pay the claim.
This does point out one thing, though. The area of abstractor liability is expanding and some jurisdictions are allowing tort based claims for negligence. This should make title abstractors re-think their pricing strategy. The fees abstractors command for their services is not commensurate with the liability they face. And, another thing to consider... the next time an abstractor is sued for negligence, do you think ALTA will represent him, and the interest of all abstractors, in the litigation?
Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com
Categories: Abstractors, Land Title Associations, Risk, Liability and Claims
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