Alix - you do have my sympathy. 

My take on it is that you have found a fantastic title group that can cover the entire state for you; but now they are changing the rules of the game, regardless of what your requirements are.

If it was me I would probably be looking for someone else to do the work.  It's one thing to have clients tell me what they want- it's a whole different kettle of fish to have a subcontractor make decisions that will affect my bottom line.  If they won't negotiate based on what your clients' needs are, then they will have a choice to make which may entail their loss of a good client. 

I am somewhat perplexed though about the liability thing.  If their work is good enough, then why are they insisting on photocopies to escape liability issues?  Mostly, when I see errors, it's items not found in the indices, not documents misread or misunderstood. 

I also would be interested to know (not that it's my business) what your liability issues are with clients who do not want document copies.  I have clients like that; but I send the copies anyway; as I can print them off at no charge, on my computer. 

Best of luck on this.  I'm sure you will be able to bring the matter to an amicable conclusion