Your analysis on contract law and privity of contract are correct, but there may be other remedies available to the title company's client. ..possibly negligent misrepresentation if it was reasonable for the abstractor to know that the title company's client would rely on misrepresentations contained in the abstract. However, it is questionable whether an insurance carrier would defend an insured on a contract claim. A lot of it would depend on the verbiage of the policy, and the insurance carrier's desire to deny coverage. E & O insurance is usually designed to protect an insured on claims of negligence.

I have never had ocassion to litigate a negligent misrepresentation case, but I do remember reading cases in which accounting firms were liable to third parties for the contents of their reports because it was reasonable for them to expect the third party to rely on the contents of the report.

When an attorney initiates litigation, he generally sues the defendant under every theory of recovery imagineable in the hope that one of them will stick. Generally tort cases are harder to prove than contract cases because so much of it depends on interpretation of the parties' conduct. In Connecticut there  is also a heightened burden of proof (clear and convincing evidence rather than just a preponderance of the evidence) for fraud (misrepresentation) claims