Posting for

Monday, July 6, 1998

by: Bert Rush

brush@firstam.com

DUTY TO DISCLOSE/NEGLIGENCE/FIDUCIARY DUTY

The recent posting about "defining title insurance" caused John LaJoie (Tallahassee) to send me a copy of an appeals court decision from one of our claims. The cite is Daniel v. Coastal Bonded Title Co., 539 So.2d 567 (Fla. 5th DCA 1989).

Facts were that Mr. and Mrs. Daniels purchased a home in 1984, using Coastal Bonded Title Co. as closing and title insurance agent. At the closing Coastal gave the Daniels a commitment for a standard coverage owner's title policy--including standard exceptions for "easements or claims of easements, not shown by the public records" and "encroachments, overlaps, boundary line disputes, or other matters which would be disclosed by an accurate survey or inspection of the premises."

After the closing, Coastal added an exception for a "2.8' encroachment in rear utility easement as shown on survey." (The opinion implies this was added to a marked-up commitment.)

It turned out there were (allegedly) off-record easements and encroachments on the north, south and east boundaries of the property. The Daniels alleged that Coastal had in its possession at the time of closing a survey which showed these problems--but their existence wasn't disclosed to them. Later, they claimed they were unable to sell or refinance due to the easements and encroachments.

The Daniels apparently made a claim under their title policy, which was properly denied under the above standard exceptions.

The Daniels sued Coastal and First American for breach of the insurance contract, intentional breach of a fiduciary duty, negligent breach of a fiduciary duty, fraud and deceit, punitive damages, and denial of insurance benefits.

The trial court dismissed the suit for failure to state a cause of action, but the court of appeal reversed and remanded the case for further proceedings. While the court agreed that the off-record defects were clearly excluded from policy coverage, it said the Daniels might state a cause of action for breach of fiduciary duty and negligence if they could show that Coastal knew about the defects and failed to disclose them at or prior to closing. Likewise, the court said the Daniels should be given the chance to prove fraudulent intent--promoting the "title company's self-interest" or deceit--and to ask for punitive damages. There was little depth to the court's reasoning--no discussion of the supposed "fiduciary duty"--just a few citations for counsel to look up and ponder.

After this decision, John says we settled the case for $8,000 (he recalls the policy amount as about $80,000).

While this case was never tried--and we don't know what Coastal knew or didn't know--it reminds us of the dilemma which sometimes arises at a closing. An adverse matter is detected by the closer or agent--they don't know whether it's been disclosed to the buyer/lender--the matter is clearly someone else's responsibilty to disclose--the closer/agent feels he or she doesn't have authority or the right to raise the issue. So the closer/agent causes title insurance to be issued avoiding coverage for the matter, hoping all the while it's not going to be a problem.

Experience teaches that if there is a real problem--meaning non-disclosure of a material adverse matter--it's likely to be the bystanders (such as realtors and title people) who are blamed. This might not be fair--and it sometimes is clearly unjust--but that's the fun zone we're in.

Depending on the magnitude of the risk--the serious of the adverse matter and/or sophistication of the affected party--it's usually best to avoid transactions where there's apparent nondisclosure or misunderstanding involved. Big damages make big lawsuits.

This is reminding me of the insurance broker liability discussion here some weeks ago. If a party to a transaction is apparently facing some unseen (to them) risk, it might be an appropriate time for a title person to discuss with them the coverages and exclusions of their policy. And, in some cases, we may require that a party be advised by legal counsel--or we might decline to handle the transaction altogether. Food for thought.

Questions, comment, argument--just press the "reply" button....

**********

Boy, these are good...Donald Schenker (Madison, WI) writes:

Commonwealth Title is being sued under a variety of causes of action in suburban Milwaukee under the following scenario:

Seller signs a sellers affidavit.

Lenders policy issued with all of the standard exceptions remove (no survey, but we all accept this risk on a casualty basis on residential property). Owner's policy is issued leaving all of the standard exceptions in. The neighbor sues the owner/insured to quite title in a portion of the insured land under an adverse possession theory that does not rely on matters that a survey would disclose. Commonwealth Title denies the claim based on the standard exception for parties in possession. The insured attorney deposes the Commonwealth agent. The agent admits that the owner's affidavit was properly filled out and that it is the Commonwealth agent's file. When asked when they would delete the standard exception from the owner's policy when they have an owner's affidavit from the seller the agent replied: "Only when the buyers attorney asks to do it". (Most Wisconsin sellers and buyers are not represented by attorneys)

The judge has already tipped his hand by asking retorically: "So if a buyer or the buyers attorney is dumb enough to not ask to have the exception to coverage removed, then they are (expletive deleted)."

It is normally impossible for a title company to get hit with bad faith in Wisconsin. Commonwealth may have paved new ground.

Reply to Donald: The idea that title companies are expected to provide

CLE with each closing is frightening.

Jim DeCourcey (southwest Oregon) writes:

I'm dealing with the same wolf in different sheep's clothing at the moment. Our exchange accommodation company routinely discusses the mechanics of exchanging with the interested/involved parties. This is our stock in trade and we always liberally salt our discussions with the fact that we are not giving advice, rendering a legal or accounting opinion or dealing with the specific aspects of the individuals position, which should be thoroughly discussed with their tax adviser and legal counsel. We always do this. One would think that this would protect you against a claim, right?

So who do you think is being identified as the culprit when someone went through the mechanics of an exchange only to determine that they would have been better off to characterize the property as their residence and take the exclusion?

At this point I could wax philosophical about moral decay, social responsibility, litigiousness, the destruction of neighborliness, the decline of civilization, etc. but it wouldn't change things. Let the neutral third party beware!

Reply to Jim: Read: "Let the 1031 intermediary beware!" Taxpayers doing exchanges are notoriously thrifty (nice choice of words?). When they goof, hang onto your hat!