I'm not exactly sure what you are asking.  If you are asking what I think the liability IS, then I would agree with Kevin.  You are liable to your client, and your abstractor is liable to you.  If the mistake was due to the abstractor's negligence, then you would be liable for the full amount to your client, and the abstractor would be liable for the same amount to you.

If you are asking what I think the liability SHOULD be, then I would say that this is what title insurance is for.  The insurer charged the premium based on the risks involved and they should assume all of the risk over and above the cost of the search.  Abstracting is a human service and humans make mistakes - that is one of the risks incurred in issuing a policy.

The problem with seeking damages from the abstractor is that most abstractors can not afford to pay them and a couple of E&O claims could easily put them out of business. The current fee structure that abstractors are able to charge really only compensates them for their time - not the liability.  I think most of the clients know this and it is unrealistic to expect the abstractor to shoulder all of the liability.

So, the way it should work, in my opinion... the insurer should pay the claim and if they feel that their abstractor isn't producing the quality necessary for their purpose, they should not use that abstractor again.  On the other hand, if they know the abstractor produces high quality, but missed something due to the fact that "to err is human" than they just have to accept the fact that there was a loss.

I don't think anyone should be liable for anything until a claim on the policy has been submitted to the underwriter.  When agents try to "take care" of a potential problem on their own, without submitting a claim - I think that should be their burden. 

If a claim is made, then it should be up to the underwriter whether or not they want to seek damages from the abstractor.   In my opinion, the underwriters should only use that option when absolutely necessary - if the abstractor didn't conduct the search according to the local title standards then there should be some liability.  However if the abstractor did everything properly, and just made an "honest mistake," then I don't think it is appropriate to seek damages.

The problem here is that is not always easy to distinguish between gross negligence and an honest mistake.  It is a judgment call that the underwriters should have to make.

There are a lot of risks that the underwriters are willing to accept.  Many potential issues are knowingly insured over.  I think that an honest mistake should be one of the acceptable losses, especially since they are receiving a portion of the premium based on the level of risk.  They can minimize the risk of searching error by using skilled, professional abstractors, rather than the cheapest  available.

This is an issue that I have been thinking a lot about lately and I do have a possible solution.  I am hoping to discuss it with representatives from Fannie Mae, Freddie Mac, and HUD at the AFN conference next month.  I want to get their input, as the consumer, and then I will share it with everyone.

Thanks for the thread - great topic.

Best,
Robert A. Franco
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