By James L. Windsor, Real Estate Claims & Title Insurance Solutions

A recent opinion from the United States District Court for the Western District of Virginia provides analysis to the contractual provisions that often govern the relationship between title insurance underwriter and agent. In Stewart Title Guaranty Co. v. Closure Title & Settlement Co., LLC, Case No. 3:18-cv-58 (a link to the opinion is provided – Stewart Title Guaranty Co. v. Closure Title & Settlement Co., LLC,) the title insurance underwriter (“Stewart”) entered into a Title Insurance Underwriting Agreement (the “Agreement”) with Closure Title & Settlement Co., LLC (“Closure”) to issue title insurance policies. Under the Agreement, Closure had, among other obligations, duties to:

• Issue title policies “according to the recognized underwriting practices”
• Issue title policies “based on a written report of title resulting from a complete search and examination of the public records, surveys, and inspection”; and
• Take “appropriate exception in title policies for liens, defects, encumbrances and/or objections disclosed by a complete search and examination of title”.

The Agreement also provided that Closure “shall be liable to [Stewart] for the first $2,500” of any “loss under a title policy issued pursuant” to the Agreement, unless the loss is due to Closure’s “negligence or fraud.”[1]

Closure issued a lender’s policy insuring two deeds of trust on a project in Albemarle County. However, the deeds of trust erroneously listed the incorrect grantor on each deed of trust. Other lenders subsequently recorded deeds of trust on the properties. The insured lender later commenced foreclosure proceedings, and then discovered that its deeds of trust did not have the correct grantor. Following litigation with the other lienholders, the parties settled. The Circuit Court entered a consent decree establishing title in accordance with the parties’ settlement, noting that the deeds of trust contained scrivener’s errors, and Stewart funded a settlement payment to other lienholders. Thereafter, Stewart sued Closure to indemnify it for the loss.

Closure moved to dismiss, arguing that because the insured’s attorneys prepared the erroneous deeds of trust, the settlement payment was voluntary, and thus, Stewart could not recover the full amount paid. Closure also argued that Stewart failed to state a breach of contract claim under the Agreement because the Agreement imposed no duty on Closure to inspect deeds of trust for scrivener’s errors. The Court rejected both arguments and denied Closure’s motion to dismiss.

First, the Court held that, although the Fourth Circuit and Supreme Court of Virginia have not specifically addressed the issue, they would likely follow the majority view that title insurance policies’ standard “Exclusion 3(a)” for defects “created, suffered, assumed, or agreed to” by the insured would only apply to intentional or knowing conduct of the insured, not mere negligence. Accordingly, Closure failed to establish, at the motion to dismiss stage, that Exclusion 3(a) applied, rendering Stewart’s settlement payment “voluntary.”

Second, the Court held that Stewart had sufficiently pled a claim for breach of contract against Closure. The Court agreed with Stewart that Closure “was under a duty not to issue a lender’s title policy without scrutinizing the underlying deeds for obvious errors and that Closure should have followed industry standards by undertaking a ‘reasonable inquiry into the status of title.’” (quoting the (Complaint ¶ 59)). The Court noted: “[t]hat the attorneys who committed the underlying scrivener’s errors may also have been negligent does not immunize Closure Title from breach of contract claims stemming from its own alleged negligence in failing to spot those errors before issuing the title policies.” Accordingly, the Court denied Closure’s motion to dismiss the breach of contract claim.

If you have any questions regarding this significant new case or title issues in general, please contact Jim Windsor at (757) 873.6308 or jlwindsor@kaufcan.com.  

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