Toxic Torts and Environmental Title Insurance Litigation Committee*

Committee News

Fall 2009 Summer 2014

Toxic Torts and Environmental TitleLaw Insurance Litigation Committee Committee* CARBON NANOTUBES: THE NEXT ASBESTOS? Fionna Mowat, Exponent, [email protected] Joyce Tsuji, Exponent, [email protected]

EXTRA-CONTRACTUAL LIABILITY FOR AGENTS AND Carbon nanotubes (CNTs) hold asbestos fibers—discussions of First reported in 1991 , CNTs UNDERWRITERS PART ONE promise for many beneficial epitomize the emerging field of parallels between these two 3

applications. However, nanotechnology, defined by some substances are natural. Thus, given By: Randall K. Price there have been concerns and calls for a as the “ability to measure, see, the legacy of asbestos-related moratorium raised over “mounting manipulate, and manufacture injury and the thousands of cases This article is Part One of two articles written by Randall K. Price on the subject of Extra-Contractual Liability. Part Two between and evidence” that may be litigated each will appear in the CNT Committee’s Fall,the 2014 newslettter. Mr.year, Priceconsideration is a partner at of Canteythings Hangar,usually LLP’s Dallas, Texas 1 office which heasbestos,” founded in 11990. includes litigation and work in business law and4real estate. or His at practice least area CNTs are aThis type 100 nanometers.” “new possible implications of appellate the use of article was of originally at the TitleCNTs Insurance Litigation Committee’s Spring,o2014 deserving “specialpresented toxicological f c ameeting r b o n - bina Las s e dVegas, e n g iNevada. neered in research and in consumer Mr. Price can be reached at: (214) 978-4118; E-mail: [email protected]. attention” due to prior experiences nanoparticle generally formed by products is prudent. with asbestos.2 The shape and size Continued on page 18 of The somepurpose agglomerated CNTsisare of this article to discuss the issue of and not subject to drawing final conclusions in terms similar asbestos—the liability most (i.e., liability for of their impact on the title industry. The debate over potential toextra-contractual “desirable.” Andthan because CNTs for damages other a “loss” as defined in a title policy) Continued on page 9 Carbon Nanotubes: The Next Asbestos . . . . . . . . . . . . . . . . . . . . . . . 1 structural utility are long for title insurance agents andand underwriters resulting thin—characteristics from the standard andthought typical tointer-action between Editor’s Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 impart increased to their employees and potency their customers. This article is NoFor A Product? ...3 Tatera FMC Corporation: When Is A Product directed primarily at issues arising in Texas withv.parallel Extra-Contractual Liability Agents And 1references to other states. Underwriters PartProgram. One . . . . . . . . . . . . .. .. .. .. .. .. .. . . .14 Miller, G. 2008. Mounting evidence that carbon Mexico’s National Wastes Management nanotubes may be the new asbestos. Friends of the From The Chair . . . .Bankruptcy . . . . . . . . . .. .. .. . . .35 EarthThe Australia. Available at http://nano.foe.org.au. development of the law relating to extra- RiskLetter Environmental During Restructuring And 2 The Royal Society and Royal Academy of contractual liability (which will hereinafter be referred The Duty To Defend: Extrinsic Evidence Engineering (RS/RAE). 2004. Nanoscience and TTEL Programs And Meetings . . . . . . . . . . . . . . . . . . . . 6 to as “ECL”) hasSociety seenandthe use of severalUpcoming legal theories. nanotechnologies. Royal Royal Association Does Not Always Help . . . . . . . . . . . . . . . . . . 4 at under development of Engineers. London:are Thequite Royal Society. Availableare Some of these old; others Limitations Of Toxicogenomic Studies To Assess Toxic Exposures http://www.royalsoc.ac.uk/. Eminent Domain And Mortgage 3 Iijima, S. 1991. Helical microtubules of graphitic And Injury From Benzene . . . . . . . . . . . . . . . Perspective . . . . . . . . . . . . . .. .. .. .. .. . . .67 Foreclosure: A Florida

IN THIS ISSUE

IN THIS ISSUE:

carbon. Nature (London) 354:56–58. *Before citing any case or legislative enactment mentioned or discussed in this News4 National Science and Technology Council (NSTC). Burlington Northern: The letter, be sure that the decision has not been overruled or modified, or that the statute 2007. The National Nanotechnology Initiative. Strategic has not been amended, subsequent to the time these summaries Under were prepared. Cercla . . . . . . . . . . . Plan. Washington DC: NSTC, Committee on Technology, Subcommittee on Nanoscale Science, 2009-2010 TIPS Calendar Engineering, and Technology. December. Available at http://www.nano.gov/ NNI_Strategic_Plan_2004.pdf.

Arranger Liability Who is Requisite Insured?Intent FromFor Child to Ruggiri . . . 7 ..................................8 2014 TIPS Calendar . . . . . . . . . . . . . . . . . . 13

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Uniting Plaintiff, Defense, Insurance, and Corporate Counsel to Uniting Plaintiff, Defense, Insurance, and Corporate Counsel to Advance the Civil Justice System Advance the Civil Justice System

Title Insurance Litigation Committee Newsletter Chair

Eugene Beckham

Summer 2014 Dainen Penta

William Long

Beckham & Beckham PA 1550 NE Miami Gardens Dr, Suite 504 Miami, FL 33179-4836 (305) 957-3900 Fax: (305) 940-8706 [email protected]

Leahy McLean Fjelstad 901 Fifth Avenue, Suite 820 Seattle, WA 98164 (206) 403-1933 [email protected]

Chair-Elect

Raighne Delaney

Pite Duncan LLP 9311 SE 36th St, Ste 100 Mercer Island, WA 98040-3700 (206) 232-2752 Fax: (206) 232-2655 [email protected]

William Doiron

Balch & Bingham LLP 1710 6th Ave N Birmingham, AL 35203-2015 (205) 226-3421 Fax: (205) 488-5682 [email protected]

217 Dexter Ave Birmingham, AL 35213-3721 (205) 251-3000 Fax: (205) 244-5730 [email protected]

Ryan Squire

Garrett & Tully 225 S Lake Ave, Ste 1400 Pasadena, CA 91101-4893 (626) 577-9500 [email protected]

Last Retiring Chair Ronald Damashek

Stahl Cowen Crowley Addis LLC 55 W Monroe St, Ste 1200 Chicago, IL 60603-5127 (312) 377-7858 Fax: (312) 423-8160 [email protected]

Scope Liaison Patricia Hughes

Allstate Insurance Company 27555 Executive Dr, Ste 270 Farmington Hills, MI 48331-3570 (248) 324-1063 Fax: (248) 324-1489 [email protected]

Vice-Chairs

Steven Parker

4221 Appleton Ave Jacksonville, FL 32210-3320 (205) 383-9171 [email protected]

Kevin Razban

Fidelity National Financial Inc 601 Riverside Ave, Fl 4 Jacksonville, FL 32204-2957 (904) 854-8700 Fax: (904) 357-1261 [email protected]

Bean Kinney & Korman PC 2300 Wilson Blvd, Ste 700 Arlington, VA 22201-5435 (703) 525-4000 Fax: (703) 525-2207 [email protected] Fidelity National Financial Inc 601 Riverside Ave, Bldg. V, 5th Floor Jacksonville, FL 32204 [email protected]

Julia Phillips

Amelia Steindorff

Jennifer Stephens Gaytan Fidelity National Title Group 601 Riverside Ave, Bldg 5 Jacksonville, FL 32204-2901 (904) 854-8936 [email protected]

Richard Vanderslice

Jessica Hew

Richard L Vanderslice PC 1445 Snyder Ave Philadelphia, PA 19145-2317 (215) 667-8070 Fax: (215) 279-9229 [email protected]

Jerel Hill

Lowndes Drosdick Doster et al PO Box 2809 Orlando, FL 32802-2809 (407) 418-6403 Fax: (407) 843-4444 [email protected]

Burr & Forman LLP 200 S Orange Ave, Ste 800 Orlando, FL 32801-6404 (407) 540-6600 Fax: (407) 540-6601 [email protected]

James Walson

Law Office of Jerel J Hill 1420 Stonehollow Dr, Ste B Kingwood, TX 77339-2494 (281) 358-3560 Fax: (281) 358-0030 [email protected]

Ryan Hoffman

Johnston Allison & Hord PA 1065 East Morehead Street Charlotte, NC 28204 (704) 332-1181 Fax: (704) 376-1628 [email protected]

©2014 American Bar Association, Tort Trial & Insurance Practice Section, 321 North Clark Street, Chicago, Illinois 60654; (312) 988-5607. All rights reserved. The opinions herein are the authors’ and do not necessarily represent the views or policies of the ABA, TIPS or the Title Insurance Litigation Committee. Articles should not be reproduced without written permission from the Copyrights & Contracts office ([email protected]). Editorial Policy: This Newsletter publishes information of interest to members of theTitle Insurance Litigation Committee of the Tort Trial & Insurance Practice Section of the American Bar Association — including reports, personal opinions, practice news, developing law and practice tips by the membership, as well as contributions of interest by nonmembers. Neither the ABA, the Section, the Committee, nor the Editors endorse the content or accuracy of any specific legal, personal, or other opinion, proposal or authority. Copies may be requested by contacting the ABA at the address and telephone number listed above.

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Title Insurance Litigation Committee Newsletter

Summer 2014

LETTER FROM THE CHAIR A Passing of the Crown and Sceptre As the outgoing Chair of the ABA - TIPS Title Insurance Litigation Committee, I wanted to invite everyone to register for our CLE during the ABA Annual meeting in Boston on August 8, 2014. We have a great program planned, which will include a general counsel presentation with representatives from Fidelity, Stewart, and Old Republic. After the CLE is concluded, our committee will also have its annual dinner. Please contact me if you need any additional information regarding the CLE or ABA activities. Ryan Squire will take over as the Committee’s chairperson at the annual committee business meeting, and Steven Parker will become our chair-elect. Please contact either Ryan or Steven if you are interested in becoming more involved with the Committee. Finally, it has been a pleasure to serve as your committee chairperson. Should you have any suggestions about improving our committee activities, improving our website, or any general comments about your membership experience, please do not hesitate to contact me (as I will be sure of forward all comments to Mr. Squire’s attention). I look forward to seeing everyone in Boston. William J. Long, Chair Title Insurance Litigation Committee

Hypertext citation linking was created by application of West BriefTools software. BriefTools, a citation-checking and file-retrieving software, is an integral part of the Westlaw Drafting Assistant Platform. West, a Thomson Reuters business is a Premier Section Sponsor of the ABA Tort Trial & Insurance Practice Section, and this software usage is implemented in connection with the Section’s sponsorship and marketing agreements with West. Neither the ABA nor ABA Sections endorse non-ABA products or services. Check if you have access to West BriefTools software by contacting your Westlaw representative.

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Summer 2014

THE DUTY TO DEFEND: EXTRINSIC EVIDENCE DOES NOT ALWAYS HELP By: Thomas A. Ped Mr. Ped is a member of the Portland, Oregon office of Williams Kastner. He specializes in construction and real estate disputes, along with insurance coverage matters. He can be reached at: (503) 944-6988; E-mail: [email protected].

In the popular book and television series the “Game of Thrones,” the Lannisters “always pay their debts.” In some courts, title insurance underwriters must arguably do more than pay a debt owed under a policy of title insurance – they must provide a defense to an insured, even where extrinsic evidence may show irrefutably that there is no duty to indemnify.

the local jurisdiction adheres to the “8-corners” rule, which holds that if the claim stated in the underlying complaint, without amendment, could impose liability for conduct covered by the insurance policy, the insurer has a duty to defend the claim. The duty arises if the complaint provides any basis for which the insurer provides coverage.

This article discusses the relevance of extrinsic evidence in some jurisdictions in determining whether an insurer has a duty to defend its named insured, where coverage under the allegations of the complaint appears questionable. In some courts, extrinsic evidence showing that there is no duty to indemnify can be used to avoid the duty to defend. In jurisdictions such as my home state of Oregon, however, the duty often cannot be avoided, extrinsic evidence notwithstanding.

In California, there is a good chance that the defense could be avoided, using extrinsic evidence showing that the insured in our example created, suffered, assumed or agreed to the easement. In Montrose Chemical Corp. v. Superior Court, 6 Cal.4th 287, 861 P.2d 1153, 24 Cal. Rptr.2d 467 (1993), the Supreme Court of California quoted with approval the following statement of the lower court:

Section 5 of the 2006 ALTA loan and owner policies provides in relevant part: “Upon written request by the Insured, and subject to the options contained in Section 7 of these Conditions, the Company, at its own cost and without unreasonable delay, shall provide for the defense of an Insured in litigation in which any third party asserts a claim covered by this policy adverse to the Insured.” The allegations of a complaint do not always establish clearly that a claim might be covered. Let’s say for example an insured purchases real property subject to an off-record easement for access to the local beach. The right-of-way consists of a paved walking trail marked conspicuously by a sign labeled “Easement.” A modicum of investigation reveals the insured knew of the easement before issuance of the title policy. One would think that in any suit to enforce the easement rights, coverage could be disclaimed under the Section 3(a) exclusion. If the complaint filed by the benefited property owners does not allege whether the easement was of record or that the insured was ever aware of it, the decision on whether to provide a defense can present challenges. The issue might depend upon how closely 4

[N]either logic, common sense, nor fair play supports a rule allowing only the insured to rely on extrinsic facts to determine the potential for coverage. It would be pointless, for example, to require an insurer to defend an action where undisputed facts developed early in the investigation conclusively showed, despite a contrary allegation in the complaint, that the underlying acts occurred on a date when the policy was not in effect or at a location concededly not covered by the policy. Similarly, where extrinsic evidence establishes that the ultimate question of coverage can be determined as a matter of law on undisputed facts, we see no reason to prevent an insurer from seeking summary adjudication that no potential for liability exists and thus that it has no duty to defend. We see the critical distinction as not whether extrinsic evidence may be considered, but whether such evidence presents undisputed facts which conclusively eliminate a potential for liability. 4

Title Insurance Litigation Committee Newsletter Under Montrose, to avoid the duty to defend, an underwriter might need only to file an action for declaratory relief, establish through extrinsic evidence that there is no coverage, and there will be no duty to defend. Not so in Oregon. In my home state, “[t]he insurer’s knowledge of facts not alleged in the complaint is irrelevant to determining the existence of the duty to defend and consequently the insurer need not speculate as to what the ‘actual facts’ of the alleged occurrence may be.” Ferguson v. Birmingham Fire Ins. Co., 254 Ore. 496, 507, 460 P.2d 342 (1969). The continuing vitality of the rule in Ferguson was reaffirmed in the case of Bresee Homes, Inc. v. Farmers Insurance Exchange, 353 Ore. 112, 293 P.3d 1036 (2012), and relied upon by the court to uphold an insurer’s duty to defend in Navigators Ins. Co. v. K&O Contracting LLC, 2013 WL 6383878 (D. Or. Dec. 4, 2013). In K&O Contracting, the insured admitted to facts in the underlying proceeding showing that there was no coverage, but the district court still found there was a duty to defend based on the allegations of the pleadings alone and Oregon’s strict rules against consideration of extrinsic evidence. A similarly questionable result based on the absolute prohibition on consideration of extrinsic evidence was obtained in Hart v. Ticor Title Ins. Co., 126 Haw. 448, 272 P.3d 1215 (2012). In that case, the court held that Ticor was required to defend where the state of Hawaii’s answer to a land petition included a boiler plate affirmative defense as to “any interest in property that may have escheated to the State.” The court stated that Ticor’s duty was unaffected by the fact that in a legal memorandum filed in the underlying action, the state affirmed that it was “not pursuing any claim of escheat.” For the court, it was enough that the pleading alone – read in a vacuum, apparently – could establish a basis for coverage.

Summer 2014

Washington’s approach is different but, if not followed, can result in dire consequences for insurers. If coverage is not clear from the face of the complaint but may exist, the insurer must investigate the claim and give the insured the benefit of the doubt in determining whether the insurer has an obligation to defend. Facts outside the complaint may be considered if the allegations are in conflict with facts known to or readily ascertainable by the insurer, or the allegations of the complaint are ambiguous or inadequate. Campbell v. Ticor Title Ins. Co., 166 Wn.2d 466, 471, 209 P.3d 859 (2009). An insurer may not rely on facts extrinsic to the complaint in order to deny its duty to defend where the complaint can be interpreted as triggering the duty. Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 761, 58 P.3d 276 (2002). A breach of these duties can lead to “potentially disastrous findings of breach, bad faith, waiver, and coverage by estoppel.” Nat’l Sur. Corp. v. Immunex Corp., 176 Wn.2d 872, 880, 297 P.3d 688 (2013). In Washington, though, an insurer can still file an action for declaratory relief and ultimately “walk away” from the defense. Truck Ins. Exch., 147 Wn.2d 751, 761. One could contend that if there will never be a duty to indemnify, there should never be a duty to defend. In our example, the duty to defend could possibly disclaimed in California, but not in Oregon, Hawaii or Washington. This could be true, even if the underlying litigation leads inexorably to the conclusion that there is no duty to indemnify. For the most recent episode and the Lannisters’ doings in the “Game of Thrones,” check your local listings. For the proper approach regarding the use of extrinsic evidence with regard to the duty to defend, check the law of your jurisdiction carefully.

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Summer 2014

EMINENT DOMAIN AND MORTGAGE FORECLOSURE: A FLORIDA PERSPECTIVE By: Nick Dancaescu Nicholas Dancaescu’s article originally appeared in the Florida Eminent Domain Blog (www.florida-eminentdomain.com) published and maintained by Gray Robinson, LLP on February 17, 2014. Gray Robinson is a full service corporate litigation firm with offices in 12 cities across Florida. Mr. Dancaescu is a shareholder at Gray Robinson’s Orlando, Florida office where he specializes in Eminent Domain and has represented both owners and government entities. His litigation experience also includes title insurance and real estate. Mr. Dancaescu can be reached at: (407) 843-8880; E-mail: [email protected].

We live in the age of foreclosures. The courthouses are filled with pro se litigants, trying to find the proper hearing room, or showing up 20 minutes late and missing the hearing entirely.

contain provisions allowing the bank, either always or in situations where the owner is not appropriately defending their title, to hire attorneys to stand in the owner’s shoes and contest the taking or argue for No matter whether you are an owner, bank or appropriate compensation.

None of this has stopped represent a condemning authority, the first step is Florida’s population growth and The real Gordian Knot to check your mortgage. Most, if not all, have a the deterioration of our roads. comes where a condemning provision entitling the bank to some or all of the FDOT and other condemning authority needs only a portion of proceeds of any condemnation, provided they are applied to the outstanding balance. authorities can’t wait around for property already in a mortgage the foreclosures to work their foreclosure. There, a lis pendens snail’s pace through the system. So the ‘condemnation in has been filed on behalf of the bank seeking the foreclosure concert with foreclosure’ has become more of a rule than judgment. A lis pendens is a document filed in the public exception in residential eminent domain matters. records putting the world on notice that there is a lawsuit out there, or a claim, where someone other than the title holder Several of our attorneys are currently on all sides of is asserting a right to title to a piece of property. Anyone who this issue. In one case, we represent a property owner who acquires title to the property while a lis pendens is in place was already deep in a foreclosure case when he received may be doing so subject to the outcome of the litigation. notice of a taking, creating a tangled web of interacting and overlapping interests of the taking authority, bank, courts and This means the condemning authority may or may not property owner. (depending on who you ask) be willing to go forward and secure title to the property. The competing theories are as In other cases, we are working on behalf of a condemning follows: (1) with a lis pendens in place, any title transferred authority which needs a portion of property for a public is subject to the decision of the foreclosure court where project. The problem is the property is deep in foreclosure the case is pending. In this scenario, if a condemning and the owner is nowhere to be found. authority obtains title from the fee owner, ignoring the Finally, the third side. In yet other cases, we work on mortgage holder’s lis pendens, the condemning authority behalf of banks which have been put on notice that they could be taking the property subject to the outcome of have an interest in, or a property they are in the process of the foreclosure case. In this scenario, the condemning foreclosing has been slated for partial acquisition. authority may end up taking the property twice. Because The unique issues created when these two claims collide of this, many condemning authorities want clarity in the have yet to make it to the Florida appellate courts, and title and concert between the eminent domain case and the questions still abound. For example, does the condemning foreclosure matter. authority take subject to the foreclosure? Could they end up paying the wrong party if the Court grants the foreclosure? What are an owner’s rights to the proceeds in an eminent domain action where they are already in foreclosure? No matter whether you are an owner, bank or represent a condemning authority, the first step is to check your mortgage. Most, if not all, have a provision entitling the bank to some or all of the proceeds of any condemnation, provided they are applied to the outstanding balance. Moreover, many 6

Alternatively, the power of condemnation may not subject to a lis pendens, as all property is held subject to the sovereign’s ultimate right to retake it. While this is probably the legally correct view, the practical application of this in a system with title insurers who want title as clear as possible remains murky. The Contribution that is subject of the Publication Agreement was previously published by Gray Robinson, P.A. in its Florida Eminent Domain Blog on February 17, 2014.

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Summer 2014

WHO IS INSURED? FROM CHILD TO RUGGIRI By: William A. Doiron II* Mr. Doiron is an attorney in the Counsel Retention Group at Fidelity National Financial in Jacksonville, Florida. He is a 2013 graduate of the University of Florida, Fredric G. Levin College of Law, where he served as the managing editor of the Journal of Technology Law and Policy during Fall, 2012 and the Editor-At-Large of the Florida Journal of International Law. He can be reached at: (904) 701-6128; E-mail: [email protected].

“In essence, the insurance is of a state of ownership at a specific point in time1.” When it comes to title insurance, who is insured is just as important as what is insured. Title insurers only receive a single premium. If there were no limits on who can be “the insured” in a title insurance policy, premiums would certainly have to be higher. This is because “unlike regular casualty policy premiums, [title insurance is] based in part on the time of exposure to risk.”2 Thus, continuing coverage though a different entity than the original insured only extends the insurer’s risk.3 Title insurers have wisely taken steps to limit coverage in this manner. Section 1 of the 2006 ALTA Owners’ Policy Conditions defines that an “insured” includes “successors to the Title of the Insured by operation of law as distinguished from purchase, including heirs, devisees, survivors, personal representatives, or next of kin.”4 In addition, Section 2 of the Conditions, which addresses Continuation of Insurance, notes that coverage will continue only “so long as the Insured retains an estate or interest in the Land.”5 While the language in the ALTA policies seems to be clear, this has not stopped some would-be-insureds from probing its meaning. Sometimes an insured will transfer directly to another individual and allege it is by “operation of law”. On other occasions the insured will transfer their interest through a trust or LLC to the intended transferee. In general, courts have interpreted the “operation of law” provision as being when a person acquires rights without

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any act of their own.6 In other words, it allows involuntary or automatic transfers, as opposed to voluntary lifetime transfers.7 For example, lifetime transfers of the property from an insured to a trust and then back to the insured’s daughter have been found to not continue coverage.8 The same has been held for an insured entity transferring to an individual, 9 as well as a transfer from a general partnership to a limited partnership with the exact same partners.10 In the case of Fidelity National Title Insurance Co. v. Ruggiri,11 Cynthia Ruggiri (the insured), in anticipation of her death, conveyed the property in question to her husband Martin via quitclaim deed.12 In this instance, the title insurance policy also covered “anyone who received…title because of [the insured’s] death.”13 Martin Ruggiri claimed that this provision protected his title because Cynthia Ruggiri granted her property in anticipation of her death.14 The court disagreed. Using a similar analysis to the “operation of law” cases, the court found that the provision only covered the “passing of title through her estate” such as through the probate process.15 Since Cynthia Ruggiri conveyed the property to her husband Martin before her death through a quitclaim deed, the title insurer had no further obligations under the contract.16 The decision in this case makes sense not only in the context of precedent, but simple common sense: the insurer contracted with Cynthia Ruggiri, not Martin. Would-beinsureds will likely continue to attempt to circumvent the plain terms of their policies, but as seen in Ruggiri and other cases they are likely to fail.

1 Lee R. Russ & Thomas F. Segalla, 11 Couch on Ins. §159:5 (2012). 2 Shotmeyer v. New Jersey Realty Title Ins. Co., 195 N.J. 72, 86 (2008). 3 Id. 4 American Land Title Association, Definition of Terms §1(d)(i)(A), in Owner ’s Policy of Title Insurance (2006) (emphasis added). 5 Continuation of Insurance (2006). 6 Pioneer Nat. Title Ins. Co. v. Child, Inc., 401 A.2d 68, 71 (Del. 1979). 7 Carney-Dunphy v. Title Co. of Jersey & Chicago Title Ins. Co., 2009 WL 1874060 (D.N.J. 2009). 8 Id. at *6. 9 Child at 71. 10 Shotmeyer at 86-87. 11 Fid. Nat. Title Ins. Co. v. Ruggiri, 2013 WL 812502 (Conn. Super. Ct. 2013) 12 Id. at *2. 13 Id. 14 Id. 15 Id. at 2-3. 16 Id.

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Summer 2014

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EXTRA-CONTRACTUAL...

Summer 2014

Some states courts have held that:

“A title insurance policy is a contract of indemnity....In other words, the ECL problems has existed for over 50 years. As will be only duty imposed by a title insurance discussed herein, the liability issues are still evolving. policy is the duty to indemnify the The following is a list of causes of action which could insured against losses caused by defects be used to impose ECL: in title....issuance of a policy (does) (1) Negligence (usually Within the title insurance context, some courts not constitute a called “negligent have recognized the distinction between the representation misrepresentation,” limited scope of the agency relationship, and regarding the status and defined as others have not. of the property’s the failure to use title...”. “ordinary care”); Continued from page 1 1

(2) Gross Negligence (negligence combined with “conscious indifference”); (3) Fraud (usually called an “intentional misrepresentation”) and/or aiding and abetting a fraud; (4) Deceptive Trade Practices (a statutory definition, basically a representation that goods or services meet a particular standard or have particular characteristics); (5) Breach of the Duty of Good Faith and Fair Dealing (failure to exercise good faith toward the insured and with the term “good faith” commonly defined as “honesty in fact in the conduct or transaction concerned”); and (6) Breach of fiduciary duty (failure to use a high degree of care). Note: Items (5) and (6) will be discussed in this newsletter’s subsequent issue.

ABSTRACTOR LIABILITY OR CONTRACT LIABILITY? There continues to be a split among the jurisdictions as to whether an agent or underwriter should be liable on the same basis as an abstractor when a negligent error is made.

“The title insurance company is not a title abstract company employed to examine title, but rather it has a duty to indemnify the insured against loss suffered by defects in title.” See similar cases negating ECL exposure.2 In contrast courts in other states have held that: “(A) title insurance company which renders a title report and also issues a policy of title insurance has assumed two distinct duties. In rendering the title report the title insurance company serves as an abstractor of title and must list all matters of public record adversely affecting title to the real estate which is the subject of the title report....(this liability) is distinct from the insurance company’s responsibility existing on account of its policy of insurance.”. 3,4 There are similar cases which hold that an agent or underwriter does have ECL exposure.5 Many of these cases refer to the Restatement of the law (Second), Torts, Section 552. That section provides as follows:

1 Title Insurance: The Duty To Search, 71 Yale L.J. 1161 (1962); Does a Title Insurer Qua Title Insurer Owe a Duty To Any But Its Insured,7 Okla City U.L. Rev. 293 (1982); Title Insurance Company’s Liability For Failure To Search Title and Disclose Record Title, 20 Creighton L.R. 455 (1986-1987); Liability of One Preparing Abstract of Title for Deficiencies therein, To One Other Than Person Directly Contracting for Abstract,34 ALR 3d 1122 (1970); Negligence in Preparing Abstract of Title as Ground of Liability to One Other Than Person Ordering Abstract, 50 ALR 4th 314 (1986); Title Insurer’s Negligent Failure to Discover and Disclose Defect as Basis for Liability in Tort,19 ALR 5th 786 (1993). 2 Cases holding a title agent or title insurance underwriter do not have Extra-Contractual Liability based on the commitment or policy: Anderson v. Title Ins. Co., 655 P.2d 82 (Idaho 1982); Brown’s Tie & Lumber Co. v. Chicago Title Ins. Co., 764 P.2d 423 (Idaho 1988); Walker Rogge, Inc. v. Chelsea Title & Guaranty Co., 603 A.2d 557 (N.J. 1992); Warrington v. TransAmerica Title Ins. Co., 596 P.2d 627 (OR. 1979); Focus Invest. Assoc. Inc. v. American Title Ins. Co., 992 F.2d 1231 (1st Cir.1993); Stewart Title v. Cheatham, 764 S.W.2d 315 (Tex. App.-Texarkana 1988); Houston Title v. Ojeda de Toca, 733 S.W.2d 325 Tex. App.-Houston [14th Dist] 1987 rev’d on other grounds); Chicago Title v. McDaniel, 875 S.W.2d 310 (Tex. 1994); Culp Construction Co. v. Buildmart Mall, 795 P.2d 650 (Utah 1990); Breuer-Harrison, Inc. v. Combe, 799 P.2d 716, 730 (Utah Ct.App.-1990); Walker v Anderson Oliver Title Ins. Agency, 309 P.3d 267 (Utah App. – 2013); and Greenberg v. Stewart Title, 492 N.W.2d 147 (Wisc. 1992). 3 Heyd v. Chicago Title Insurance Company, 354 N.W.2d 154 (Neb. 1984). 4 John C. Tess v. Lawyers Title Insurance Corporation and Dakota Title and Escrow Co., 251 Neb. 501; 557 N.W.2d 696; 1997 Neb. LEXIS 20. 5 Cases holding a title agent or title insurance underwriter has Extra-Contractual Liability: Lawyers Title Ins. Corp. v. Vella, 570 So.2d 578 (Ala. 1990); Bank of California v. First American Title Ins. Co., 826 P.2d 1126 (Alaska 1992); Moore v. Title Ins. Co., 714 P.2d 1303 (Ariz.Ct. App. 1985) changed by statute, A.R.S. 20-1562(5); Bourland v. Title Ins. Co. of Minn., 627 S.W.2d 567 (Ark. 1982); Jarchow v. TransAmerica Title, 48 Cal. App. 3d 917 (changed by statute) (Cal.App. 4th Dist. 1975); Bridgeport Airport, Inc. v. Title Guar. & Tr.

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Title Insurance Litigation Committee Newsletter § 552 Information Negligently Supplied for the Guidance of Others (1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. (2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered (a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. (3) The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them. The split in authority discussed above has created two types of nomenclature. One is the “duty to discover and disclose,” which is also sometimes referred to as “abstractor liability” or as “tort liability.” The other is the “duty to indemnify” position; this is sometimes referred to as “contract liability.” In the “abstractor liability” jurisdictions, there are some courts that require proof of a deviation from the standard of ordinary care

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and others which have created a form of “strict liability.” In at least one case, negligence was proved as a matter of law just by failing to include in the title opinion the existence of a lien.6

UNDERWRITER LIABILITY FOR AGENT DEFALCATIONS Title insurance agents (sometimes called “title companies”) are usually locally-owned entities which provide closing and title services (note: there are instances where the title insurance agent is a whollyowned subsidiary of the title insurer). On the other hand, title insurance underwriters frequently operate “direct operations” in which the underwriter’s employees provide the same or similar services. The distinction between these two types of operational formats is required when determining the scope of liability for mistakes made by the personnel. In particular, a title insurance agent will often have contracted with multiple title insurance underwriters, which allows them to issue an underwriter’s title insurance commitment and/ or policy on any given transaction. These title agency contracts typically will provide that the title agent is a “limited agent” when acting on behalf of the underwriter. As a result, the scope of the agency (and the liability of the underwriter) is intended to be limited to acts directed at issuance of a title insurance commitment or policy of title insurance after complying with the underwriter’s guidelines. An exception to this limited scope of liability is known as the “insured closing letter” or “closing protection letter” (sometimes called by the acronym “ICL” or “CPL”). The ICL is a specific form document issued by an underwriter in which it agrees to indemnify for some, but not all, of an agent’s actions. Within the title insurance context, some courts have recognized the distinction between the limited scope of the agency relationship, and others have not. In reviewing the cases, it is often difficult to tell if the reason for the non-recognition of the limited agency issue is a matter of law in a particular state, or whether the agency agreement was never specifically addressed in analyzing the liability issues. For example, some rules of civil procedure (like those in Texas) require a defendant to specifically plead

Co., 150 A. 509 (Conn. 1930); Shada v. Title & Trust Co., 457 So.2d 553 (Fla. Dist. Ct. App. 4th Dist. 1984); 464 So.2d 556 (rev. denied, Fla. 1985); Lawyers Title Ins. Co. v. D.S.C. of Newark Ent. Inc., 544 So.2d 1070 (Fla. 4th DCA 1989); Lawyers Title v. Noland, 230 S.E.2d 102 (Ga. 1976); Chun v. Park, 462 P.2d 905 (Hi. 1969); Dinges v. Lawyers Title Ins. Corp., 435 N.E. 2d 944 (Ill. 5th Dist. 1982); Ford v. Guarantee Abstract & Title Co., 553 P.2d 254 (Kan. 1976); Kentucky Title v. Hail, 292 S.W. 817 (Ky.1927); Dorr v. Massachusetts Title Co., 131 N.E. 191 (Mass. 1921); Pruett v. Mississippi Valley Title Ins. Co., 271 So.2d 920 (Miss. 1973); Rosenberg v. Missouri Title Guar. Co., 764 S.W.2d 684 (Mo. Ct. App. 1988); Malinak v. Safeco Title, 661 P.2d 12 (Mont. 1983); Doble v. Lincoln County Title, 692 P.2d 1267 (Mont. 1985); Ruiz v. Garcia, 850 P.2d 972 (N.M. 1993); Calamari v. Grace, 469 N.Y.S.2d 942 (2d dept. 1983); American Title v. M-H Enter., 815 P.2d 1219 (Okla. Ct. App. 1991); Henkels v. Philadelphia Title Ins. Co., 110 A.2d 878 (Penn. 1955); Marandino v. Lawyers Title Ins. Co., 159 S.E. 181 (Va. 1931); and Denny’s Restaurant, Inc. v. Security Union Title Ins. Co., 859 P.2d 619 (Wash. 1993); Note: Possibly changed by statute. 6 Moore v. Title Ins. Co. of Minnesota, 714 P.2d 1303 (Ariz. App. 1985).

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Title Insurance Litigation Committee Newsletter the limited scope of the agency. And there are situations where defense counsel do not raise the limited liability issue when the agent is a wholly-owned subsidiary of the underwriter. This can make for difficult analysis of any individual case. The practitioner would be wise to obtain the agency agreement when examining liability issues, and then review the case law in the relevant jurisdiction to determine how its courts have developed the law applicable to the scope of the agency. The spectrum of legal thought runs from the Texas approach of no vicarious liability,7 to the other extreme.8 The author finds persuasive and instructive the decision of another court.9 This court looked at cases such as Ford v. Guaranty Title and drew a distinction which is relevant and cogent. Finding that the Ford case actually involved the fiduciary duty of a conveyancer (i.e., closer), the Idaho Court essentially says that the Kansas court used result-oriented thinking.

FIDUCIARY DUTY OWED BY CLOSER/ CONVEYANCER In Texas, like many other states, each closer/ escrow agent owes a fiduciary duty to the parties to the transaction.10 However, the insurer can have dual duties, contract liability (based on policy coverages), and liability for breach of the fiduciary duties owed to the customer. (This occurs when the escrow officer is an employee of the underwriter.) These duties are: (1) Duty of Loyalty; (2) Duty to make full disclosure; and (3) Duty to exercise a high degree of care to conserve money and pay only to those persons entitled to receive it. 11

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These duties create liability for failing to disclose known facts. 12, 13, 14 This theory of liability has been used in other states to establish liability which is not covered by a title policy when there was a “failure to disclose a known title defect”15 and failure to disclose a known fraud.16 However, if the closer does not know about fraud, there is no liability for “aiding and abetting” the fraud arising from merely closing the transaction.17 But simple things like signatures not matching, can support a claim for aiding and abetting.18 Other areas of concern include: (1) failure to deposit earnest money;19 (2) failure to follow contract instructions20; and (3) failure to disclose existence of “flip transaction.” 21

DECEPTIVE TRADE PRACTICES Several years ago the National Association of Insurance Commissioners (“NAIC”) adopted a Model Act which included in its “unfair and deceptive acts” definitions in the concept of misrepresenting pertinent facts and coverages in the insurance business. A number of states have adopted this model act in one form or another. The Texas statute has been used in the past to impose liability on the agent and the underwriter for misstatements in the title commitment and mistakes made by a closer.22 Later cases have limited the impact on the industry.23, 24 In Texas, the courts have ruled that a title commitment is intended to indicate what will be insured, and a title policy indemnifies against title being other than as insured. One case held the title insurer and agent liable

7 3Z Corp. v. Stewart Title, 851 S.W.2d 933, 937 (Tex. App. - Beaumont 1993, no writ history). 8 Ford v. Guaranty Title, 553 P2d 254 (KS. 1976). 9 Anderson v. Title Insurance Co., 655 P.2d 82 (Idaho 1982). 10 Trevino v. Brookhill Capital Resources, 782 S.W.2d 279, 281 (Tex.App.-Houston [1st Dist.] 1989, writ denied). 11 City of Ft. Worth v. Pippen, 439 S.W.2d 660 (Tex. 1969). 12 Stewart Title Guaranty Co. v. Sterling, 772 S.W.2d 242, 246 rev’d on other grounds, 822 S.W.2d 1 (Tex. 1991) (failure to disclose known title defects) 13 City of Ft Worth v. Pippen, 439 S.W.2d 660 (Tex. 1969) (failure to disclose City employee’s theft of funds) 14 Home Loan Corporation v. Texas American Title Company, 191 S.W.3d 728 (Tex. App. – Houston [14th Dist.] 2006, pet. denied) (No limit on scope of duty to make full disclosure). 15 Lawyers Title Ins. Corp. v. Vella, 570 So.2d 578 (Ala. 1990) 16 Burkons v. Ticor Title Ins. Co., 813 P.2d 710 (Ariz.1991) 17 Bosch v. Chicago Title, 2000 Tex.App. Lexis 1726 (Available on Westlaw at 2000 WL 280436) 18 Greenapple v. Capital One, N.A., 92 A.D.3d 548 (N.Y. App. – 2012). 19 Capital Title v. Donaldson, 739 S.W.2d 384 (Tex.App.-Houston [1st Dist.] 1987, no writ) 20 Zimmerman v. First American Title, 790 S.W.2d 690 (Tex.App-Tyler 1990) (broker not compensated with real estate as agreed to in contract) 21 Spring Garden 79U Inc. v. Stewart Title Co., 874 S.W.2d 945 (Tex.App-Houston [1st Dist.] 1994). 22 Stewart Title Guaranty v. Sterling, Supra; First Title Co. v. Garrett, 860 S.W.2d 74 (Tex. 1993), Commercial Escrow Company v. Rockport Rebel, 778 S.W.2d 532 (Tex. App. – Corpus Christi 1989, writ denied). 23 Chicago Title Co. v. McDaniel, 875 S.W.2d 310 (Tex. 1994); 3Z V. Stewart, supra; Tri-Legends Corp. v. Ticor Title Ins. Co., 889 S.W.2d 432 (Tex.App.-Houston [14th Dist.] 1994, no writ) and First American Title Ins. Co. v. Willard, 949 S.W.2d 342 (Tex.App.-Tyler 1997, no writ history). 24 Callaham v. First American Title Ins. Co., 837 P.2d 769 (Colo.App.-1992) and Hangman Ridge Training Stables, Inc. v. Safeco Title, 719 P.2d 531 (Wash. 1986).

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Title Insurance Litigation Committee Newsletter for a missed restrictive covenant.25 However, to the extent that an employee (closer, underwriting counsel, or claims counsel) has contact with the customer and makes a representation regarding the status of title (as opposed to the company’s willingness to insure title) a misrepresentation can arise.26 Thus, mistakes made in a commitment which are verbalized by a closer or others as a “status of title” will likely continue to result in liability. A legislative change to the Texas statutes would apparently exempt licensed closers from exposure to some of this type of liability (See §17.49, Texas Business & Commerce Code). However, the exemption has exceptions. The provisions of the statute are as follows: §17.49. Exemptions (c) Nothing in this subchapter shall apply to a claim for damages based on the rendering of a professional service, the essence of which is the providing of advice, judgment, opinion, or similar professional skill. This exemption does not apply to: (1) an express misrepresentation of a material fact that cannot be characterized as advice, judgment, or opinion;

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(2) a failure to disclose information in violation of Section 17.46(b)(24); (3) an unconscionable action or course of action that cannot be characterized as advice, judgment, or opinion; or (4) breach of an express warranty that cannot be characterized as advice, judgment or opinion. (d) Subsection (c) applies to a cause of action brought against the person who provided the professional service and a cause of action brought against any entity that could be found to be vicariously liable for the person’s conduct. The ramifications of a deceptive trade statute can be egregious. Often the causation standard (i.e., the degree of causal linkage between the event and the damages sought) is reduced from “proximate cause” to “producing cause” (this means that there is no requirement for foreseeability of the damages). Additionally, common law defenses can be unavailable; so we lose defenses such as “privity of contract,” etc. Such defenses as “privity” would otherwise be important.27

25 First Title Company v. Garrett, supra. (This case should be limited to its facts, and the policy language has been changed.) 26 First American Title Company of El Paso v. Prata, 783 S.W.2d 697 (Tex.App.-El Paso 1989, writ denied). 27 Jefmor, Inc. v. Chicago Title Insurance Co., 839 S.W.2d 161, (Tex.App.-Ft. Worth 1992, no writ); and Spring Garden 79U v. Stewart Title, supra. Also see, Williams v. Polgar, 215 N.W.2d 149 (Mich. 1974) where an index of then-existing privity requirements is provided for 50 states.

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2014 TIPS CALENDAR August 2014 4 Member’s Monday Contact: Ninah F. Moore – 312/988-5498 7-12

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ABA Annual Meeting Omni Parker Hotel Contact: Felisha A. Stewart – 312/988-5672 Boston, MA Speaker Contact: Donald Quarles – 312/988-5708

October 2014 6 Member’s Monday Contact: Ninah F. Moore – 312/988-5498

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15-19 TIPS Section Fall Leadership Meeting Meritage Resort and Spa Contact: Felisha A. Stewart – 312/988-5672 in Napa Valley Speaker Contact: Donald Quarles – 312/988-5708 Napa, CA 23-24 2014 Aviation Litigation Program Contact: Donald Quarles – 312/988-5708

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January 2015 15-17 LHPR Midwinter Symposium Loews Ventana Canyon Contact: Ninah F. Moore – 312/988-5498 Tucson, AZ 21-23 Fidelity & Surety Committee Midwinter Mtg Waldorf Astoria Hotel Contact: Felisha A. Stewart – 312/988-5672 New York, NY February 2015 5-8 ABA Midyear Meeting Hilton of the Americas Contact: Felisha A. Stewart – 312/988-5672 Houston, TX 13

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