In Columbia Town Center Title Co., et al., v. 100 Inv. Ltd. P’ship, et al., No., 0915 Sept. Term 2009 (Feb. 2, 2012), the Maryland Court of Special Appeals reversed the judgment of the Circuit Court for Howard County. The Court held that in cases where a title company performs a title examination merely in order to issue title insurance, Maryland law limits the liability of the title company to breach of contract and does not extend tort liability for negligence.
Mr. and Mrs. Miller conveyed the same 1.145-acre parcel (the "Parcel") to two different purchasers; first in 1982 to Ashan Khan, M.D., then in 1986 to Appellee, 100 Investment Limited Partnership (the "Partnership") as part of a larger parcel (the “Miller Tract”).
In conjunction with the Partnership conveyance, Cambridge Title Company ("Cambridge"), and later, Columbia Town Center Title Company ("Columbia") were engaged to issue title insurance for the property that include the Parcel, as agents for a title insurance company. However, neither Cambridge nor Columbia discovered the prior conveyance of the Parcel to Dr. Kahn.
In 1994, the Partnership subdivided the Miller Tract, including the Parcel, for residential development, conveying part of the Parcel to a developer for townhouse lots and conveying the remainder to another developer, thereby eliminating the Partnership’s interests in the Parcel.
The Partnership first learned of the conveyance to Dr. Kahn in July 2001, when developers buying the Parcel from Dr. Kahn commissioned a survey which discovered townhouses located on Dr. Kahn’s portion of the Parcel.
To cure any title defect in its prior conveyances, the Partnership agreed to purchase the Parcel from the developer involved in the Kahn purchase, paying $175,348.56 for the Parcel and $16,162.32 in associated expenses.
Nevertheless, Dr. Kahn sued the Partnership for trespass in the District Court for Howard County. Even though judgment was entered against the Partnership, Dr. Kahn was only awarded one dollar ($1.00) in nominal damages.
As a result of the Kahn litigation, Chicago Title filed a suit for declaratory judgment against the Partnership in the U.S. District Court for the District of Maryland, to determine Chicago Title’s responsibilities under the 1986 title insurance policy. The federal court granted summary judgment in the Partnership’s favor and awarded $201,744.37 in damages for the 2001 re-purchase of the Parcel and expenses defending the Kahn litigation. On appeal the Fourth Circuit found that Chicago Title was only obligated to pay for the costs associated with the Kahn Litigation under the policy and was under no obligation to compensate the Partnership for the cost of re-purchasing the Parcel. The Court reasoned that the instruments of conveyance by the Partnership contained, at most, a special warranty “promising only that the Partnership had not itself created any defect in title”, and that Chicago Title’s duty to defend was limited to claims made against the Partnership for loss or damage occurring prior to the time it conveyed its interest in the Parcel.
Dissatisfied with the Fourth Circuit’s ruling, the Partnership filed a complaint in the Circuit Court for Howard County, Maryland, alleging negligence, against the Title Companies for failing to discover the Kahn deed, and vicarious liability, against Chicago Title for the Title Companies’ negligence. After a bench trial, the Circuit Court determined that the Partnership’s “economic injury was proximately caused by the title companies breach of the duty of care they owed to the Partnership,” and that “Chicago Title was vicariously liable for the negligence of the Title Companies” because the Title Companies its agents, awarding the Partnership $191,510.88. The Title Companies and Chicago Title appealed.
On Appeal, the Court of Special Appeals noted that title insurance is now the predominant method for real estate purchasers and mortgage lenders to protect themselves against title risks. Title insurance typically affords three "kinds" of coverage: (1) indemnity for loss or damage resulting from a title defect; (2) provide a legal defense if a third party attacks title through litigation; and (3) hire experts in title matters, if necessary. Title insurance policies are generally standardized and include the terms, dollar amount of coverage, exclusions from coverage, and any prerequisites required.
Title insurance differs from a title opinion based on a title abstract, which covers a particular period of time, reflects what appears in the public title records, and includes any conveyances or encumbrances on property discovered in a title search. Under the abstract-and-opinion method (i.e. "title reporting") the title abstract is reviewed by an attorney who issues a title opinion explaining any defects and the overall validity (or invalidity) of title as reflected in the abstract.
The Title Companies
The Title Companies argued that the trial courts finding of negligence was in error, citing Corcoran v. Abstract & Title Co. of Md., Inc., 217 Md. 633, 143 A.2d 808 (1958), to contend that Maryland law dispositively establishes that a title examiner's duties are contractual in nature, and therefore, the Partnership cannot recover damages in tort. The Partnership contended that a contractual obligation does not preclude the court from also imposing a duty in tort for a breach of that obligation citing Jacques v. First Nat’l Bank of Md., 307 Md.527 (1986), as a matter of public policy.
Ultimately, the Court was not persuaded by Jacques, rejected the determination that the Title Companies owed a legal duty to the Partnership, stating that an independent basis for a tort claim is required. Specifically, in Maryland, "[t]he mere negligent breach of a contract, absent a duty or obligation imposed by law independent of that arising out of the contract itself, is not enough to sustain an action sounding in tort," even though, in some situations, a duty imposed by law and enforceable in tort overlaps with a contractual obligation. In essence, the basis for liability was the breach of the agreed upon undertaking, rather than the negligent title search because absent a contract, a title company owed no duty regarding the status of title. Thus, the Court reaffirmed Corcoran which stands for the proposition that a title examiner is contractually bound to exercise "a reasonable degree of skill and diligence," but the contract establishes the bounds of the examiner's liability, whether enforced in tort or contract.
The Title Insurer
Whether a title insurance company can be vicariously liable for the actions of its agents in regard to title searches appears to be a question of first impression in Maryland. The Court stated that if the Title Companies do not owe a tort duty to the Partnership, Chicago Title would not be vicariously liable for the Title Companies' negligence. Nevertheless, in the Court’s view, even if the Partnership's tort claims against the Title Companies were cognizable, Chicago Title would not be liable for the negligence of the Title Companies.
While there is no Maryland decision directly addressing the duty of a title insurer or its agents to conduct a full title examination, the Court of Special Appeals adopted the view in Stewart Title Guaranty Co. v. West, 110 Md. App. 114, 131, 676 A.2d 953 (1996), that a title insurance policy is a contract for indemnity and not a guarantee of marketable title. Quoting West the Court stated:
[T]he insurer is not immediately in breach simply because title is defective on the day the policy is issued -- is more in line with both title insurance law and the standard form title insurance policy that we have before us. [A] title insurer does not guarantee the state of the title. Instead, a title insurance policy is a contract of indemnity. The view that a title insurer is in breach simply because there are defects in the title at the time the policy is issued would turn the title insurer into the guarantor of the grantee's title.
[T]he mere existence of title defects does not, in and of itself, mean that a title insurer is in breach of the insurance policy," because, "[o]nce advised of a title problem, the insurer still has the option of paying the insured's loss, clearing the defects within a reasonable time, or showing that the defects do not exist."
West, 110 Md. App. at 131-141 (emphasis added). The Court was persuaded that holding a title insurer liable in tort for a negligent title examination by its agents conflicted with its holding in West. To create a tort remedy for a negligent title search performed for the issuance of a title insurance policy would make the title insurer a guarantor of title and deprive the insurer of its option to cure the title or to pay for covered losses as contracted for in the title insurance policy. Jurisdictions that consider a title insurance policy as an indemnity contract do not provide an independent tort remedy because, to do so, would undermine an insurer's ability to manage its risks by the terms of its policies. That title examinations performed for the issuance of title insurance are essentially an underwriting function is consistent with the West decision and the statutory authority granted to title insurers to examine and insure title. Even if an agent of a title company is authorized to examine title, independent of the title insurance policy, there would need to be some special agreement outside of the title insurance commitment and the title insurance policy.
The Agency Agreement
The Court noted that the agency agreement unambiguously restricted the Title Companies’ authority to matters regarding the scope of title insurance, as an agent for Chicago Title "for the promoting and transacting of a title insurance business in the state of Maryland." Even though the Agency Agreement contained a provision indemnifying Chicago Title for acts by its agents, Chicago Title's liability to the Partnership was governed by the terms of the policy and did not turn on whether a covered defect could have been reasonably located. The Court stated that even though it is obvious that a title insurer would want to exclude a defect clearly shown on the public record from coverage, ultimately the provision indemnifying Chicago Title for errors in abstracting and examining title affirmed that the title search was for the benefit of the Chicago Title and would reimburse them for insured losses that could have been excluded from coverage based on an accurate title search.
The Title Insurance Policy
The Court of Special Appeals stated that as a general rule, the extent and scope of liability of an insurer is determined by the insurance policy itself. An insurance company that underwrites specific coverage "should not subsequently be expected to assume liability for a risk which it expressly excluded." Any clause in an insurance contract restricting liability or coverage will be held enforceable unless contrary to "the public policy of this State, as set forth in . . . the Insurance Code" or another statute.
In this case, the policy agreed to indemnify the Partnership related to any defect in title losses, but the policy did not guarantee title was without defect, or that the exclusions listed represented all defects disclosed in the public record. Any preliminary commitment issued by Chicago Title and the Title Companies related only to the issuance of a title insurance policy since it was not a title abstract or independent title opinion for which the title insurer would be liable outside the terms of its policy. As a result, the Court held that both policies and any binders put the Partnership on notice that the Title Companies were agents of the insurer only for the issuance of title insurance and did not confer actual or apparent authority on the Title Companies to provide the Partnership with a separate guarantee of title for which the insurer would be responsible. Similarly, the Court held that to permit an insured to sidestep the policy limitations through a claim of vicarious liability undermines the contractual agreement and potentially title insurance in general.
The Court went on to state that because of the essential and primary role that title insurance plays in the purchase and sale of real estate and the shift from title reporting to title insurance to protect both purchasers and lenders, a sea change would occur in allowing an action in tort against the Title Companies and the title insurers with the risk of unintended consequences would be better handled by the legislature and regulatory branches of government after appropriate study and hearings. Therefore, the Court is obligated to enforce the title insurance policy as written which does not conflict with any statute or regulation in Maryland.
Ultimately, the Court concluded that the Partnership could not hold Chicago Title vicariously liable for any negligence of the Title Companies related to the status of title to the Parcel and that the insurer's liability is limited to the terms of its policy, thereby reversing the decision of the trial court.
For advice on potential matters involving the defense of claims against title companies in Maryland, contact Deborah M. Whelihan, Esq. at 703-246-0900.