Idaho Real Estate & Development Law Update: No Action for Negligence When a Title Company Errs in Preparing Legal Description for Title Commitment

In the case of Cummings v. Stephens released September 19, 2014, the Idaho Supreme Court reiterated some settled rules about when a title insurance company can be found liable for negligence. In the case, a title company prepared a legal description for a title commitment that included more land than the seller wanted to sell. The buyer and seller used the description in their purchase and sale agreement and in the deed. The mistake wasn’t discovered until after closing. When the title company realized the mistake, it apparently took it upon itself to revise the description in the buyer’s deed and re-record it, and then issued a title policy to the buyer based on the revised description. The buyer sued the title company alleging negligence and the district court found that the title company acted negligently “as a title and abstract company.” The Idaho Supreme Court undertook a long discussion of why, under settled Idaho law, a negligence theory was a poor choice. Perhaps one of the most important lessons in this case can be found in the Court’s brief observation that the buyer did not sue the title company for failing to issue a title policy insuring the land described in its title commitment.

Here then are the lessons from the case about why your claims against a title company hould not be based solely on a theory of negligence:

“A title insurance policy is a contract of indemnity. In other words, the only duty imposed by a title insurance policy is the duty to indemnify the insured against losses caused by defects in title. Thus, Chicago Title’s issuance of a policy did not constitute a representation regarding the status of the property’s title; rather, it constituted an agreement to indemnify the McDaniels against losses caused by any defects.” Quoting Chicago Title Ins. v. McDaniel, 875 S.W.2d 310, 311 (Tex. 1994).

“A title insurance policy is a contract of indemnity, and the only duty imposed by a title insurance policy is the duty to indemnify the insured against losses caused by defects in title. A title insurance company, like American Title, is not a title abstractor and owes no duty to examine title.” Quoting Hahn v. Love, 394 S.W.3d 14, 35 (Tex. Ct. App. 2012).

“The abstractor’s obligation is to make a full and true search and examination of the records relating to or affecting the title of the land in question, and to prepare an abstract thereof . . . .” Quoting 1 Am. Jur. 2d Abstracts of Title § 11 (2005) (footnotes omitted).

“Title insurance ‘is the certification or guarantee of title or ownership, or insurance of owners of property or others having an interest therein or liens or encumbrances thereon, against loss by encumbrance, or defective titles, or invalidity, or adverse claim to title.’ I.C. § 41-508(1). Title insurance does not include ‘the business of preparing and issuing abstracts of, but not certifying, guaranteeing, or insuring, title to or ownership of property or certifying to the validity of documents relative to such title.’” Id.

“Title insurers do not have a duty to conduct a reasonable search of title before issuing a policy.” Brown’s Tie & Lumber Co. v. Chicago Title Co. of Idaho, 115 Idaho 56, 60, 764 P.2d 423, 427 (1988).

“[C]ontracts for title insurance and policies are the source of the duties between the parties, not negligence principles.” Quoting Id. at 58, 764 P.2d at 425.

“Issuing a preliminary title report, a commitment for title insurance, or a policy does not make the title insurer an abstractor of title.” Id. at 59, 764 P.2d at 426; Anderson v. Title Ins. Co., 103 Idaho 875, 879, 655 P.2d 82, 86 (1982).

In order for the title insurer to be liable as an abstractor, ‘it must be shown that the act complained of was a direct result of duties voluntarily assumed by the insurer in addition to the mere contract to insure title.’ Quoting Brown’s Tie, 115 Idaho at 59, 764 P.2d at 426.

“The manager of [the title company] testified that she was contacted by the realtor employed by the [seller] and asked to start the initial title work with the buyer to be determined. The title work was done by the title department, and it consisted of ‘[s]earching the property, creating the documentation, putting together the legal descriptions, any special exceptions, taxes, anything that they would need to compile to go into the report for the commitment for title insurance.’ Thus, preparing a legal description of the property was part of the work done in order to issue the commitment for title insurance. In the commitment, the title company had to describe the land to be covered by the title insurance policy.”

There is no evidence that [the title company] assumed the duty of being an abstractor of title. Therefore, the district court erred in awarding damages against it on that ground.

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