Opinion ID: 2226623
Heading Depth: 1
Heading Rank: 9

Heading: Duty of Title Insurance Company

Text: At the outset, it should be noted that Tess' negligence claim is based upon alleged acts or omissions in the preparation of the September 9 title insurance commitment and not upon any responsibility imposed on the title insurance company on account of its October 7, 1986, policy of insurance. The title insurance commitment, oftentimes referred to as a binder, is not a title policy. As in the instant case, it is often in the form of a preliminary report on the status of the title. As such, it is issued at the end of the title search process undertaken by the insurer. D. Barlow Burke, Jr., Law of Title Insurance § 15.2 (2d ed.1993). In contrast, title insurance is a contract for indemnity under which the insurer is obligated to indemnify the insured against losses sustained in the event that a specific contingency, e.g., the discovery of a lien or encumbrance affecting title, occurs. See Heyd v. Chicago Title Ins. Co., 218 Neb. 296, 354 N.W.2d 154 (1984). In Heyd v. Chicago Title Ins. Co., 218 Neb. at 303, 354 N.W.2d at 158-59, we 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 abstracter 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. When a title insurance company fails to perform its duty to abstract title accurately, the title insurance company may be liable in tort for all damages proximately caused by such breach of duty. A title insurance company's responsibility for its tortious conduct is distinct from the insurance company's responsibility existing on account of its policy of insurance. Different duties and responsibilities imposed on the title insurance company, therefore, can be the basis for separate causes of actionone cause of action in tort and another in contract. In the instant case, Tess claims that Dakota Title is liable for either failing to discover or failing to disclose in its title insurance commitment the existence of protective covenants when Dakota Title had actual knowledge of such protective covenants. Tess claims that Lawyers Title is vicariously liable for Dakota Title's misrepresentation because Dakota Title was acting as Lawyers Title's agent. This case presents the question whether a title company has a duty to report known, but as yet unrecorded, matters affecting title to the real estate in a preliminary title insurance commitment. A majority of other jurisdictions have accepted the theory that a title company should be liable in tort for a misrepresentation made in a preliminary commitment of title insurance. See, e.g., Bank of California v. First American, 826 P.2d 1126 (Alaska 1992); Moore v. Title Ins. Co. of Minnesota, 148 Ariz. 408, 714 P.2d 1303 (Ariz.App.1985); White v. Western Title Ins. Co., 40 Cal.3d 870, 710 P.2d 309, 221 Cal. Rptr. 509 (1985); Shada v. Title & Trust Co. of Fla., 457 So.2d 553 (Fla.App.1984); Ford v. Guarantee Abstract & Title Co., 220 Kan. 244, 553 P.2d 254 (1976); Malinak v. Safeco Title Ins. Co. of Idaho, 203 Mont. 69, 661 P.2d 12 (1983). But see, e.g., Brown's Tie & Lumber v. Chicago Title, 115 Idaho 56, 764 P.2d 423 (1988); Walker Rogge, Inc. v. Chelsea Title & Guar. Co., 116 N.J. 517, 562 A.2d 208 (1989) (title company owes no duty beyond that which is assumed in its title policy). The cases which find tort liability generally stress that one function of the preliminary commitment is to give interested persons knowledge concerning the state of the title so that they may plan and structure transactions concerning the property. See Ford v. Guarantee Abstract & Title Co., supra . This is a function distinct from that of insurance, for a title policy may be issued without a preliminary commitment and without reporting what the state of the title is. Bank of California v. First American, supra . We agree with the authorities which hold that there may be tort liability for misrepresentations made in preliminary commitments for title insurance. In our view, the same reasoning would impose a duty upon a title company to report to interested persons known, but as yet unrecorded, matters affecting title to the real estate in a preliminary title insurance commitment. Such preliminary title insurance commitments provide an essential service to prospective buyers and lenders in this state. They are told what transactions must take place before they can receive clear title or an effective security. Bank of California v. First American, supra . Despite disclaimers, preliminary title reports are normally relied upon by insureds, escrow agents, and lenders with full knowledge, and sometimes with the encouragement, of the insurance company. If the insurer actually intended the list of title defects in the preliminary report to be used just to inform the potential insured of the proposed contract terms, the list could be presented in the policy at the time it is offered to the insured, as is the case with most other types of insurance policies. Instead, the title insurance company's preliminary report is issued prior to closing of the land contractat the same stage in the transaction as is the abstract or attorney's opinionand the company should know that it will likely be used in the same manner. Joyce Dickey Palomar, Title Insurance Companies' Liability for Failure to Search Title and Disclose Record Title, 20 Creighton L.Rev. 455, 480-81 (1987). We therefore hold that title insurance companies and their agents are required to exercise the degree of skill and knowledge normally possessed by members of the profession in good standing in the locality concerning preliminary title information which is transmitted to their customers. The above-stated duty is not that of a guarantor; instead, it is the duty to exercise reasonable care. See Restatement (Second) of Torts § 552 at 126-27 (1977), which provides in relevant part: (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. Appellees assert that our holding in Heyd v. Chicago Title Ins. Co., 218 Neb. 296, 354 N.W.2d 154 (1984), was abrogated in 1985 when the Legislature passed the Abstracters Act, Neb.Rev.Stat. §§ 76-535 through 76-558 (Reissue 1990 & Cum.Supp.1994), and defined those matters which constitute a report of title. Section 76-537(9) provides that a report of title shall not include a title insurance commitment or policy. Appellees claim that since a title insurance commitment is neither an abstract of title nor a report of title, an abstracter's duty can no longer arise from the issuance of a title insurance commitment. This argument is misplaced, as the duty announced herein is one of reasonable care under the circumstances and not an abstracter's duty as set forth in Heyd. Further, appellees assert that because the commitment for title insurance accurately reflected all matters of public record as of its effective date, September 9, 1986, there could be no breach of duty. This assertion, however, ignores Tess' claim that Dakota Title had actual notice of the protective covenants at issue when it conducted its title search for his title insurance commitment. Peabody, Dakota Title's vice president, notarized the protective covenants executed by Osborne and Rasmussen on the same day that an agent for Dakota Title with the initials E.P. conducted the title search with respect to Tess' property. Further, the protective covenants are noted on all other title insurance commitments prepared for the buyers of the 10-acre parcelsexcept the commitment prepared for Tess' father-in-law and mother-in-law. These other title insurance commitments were prepared contemporaneously with Tess' title insurance commitment. The evidence construed in a light most favorable to Tess reveals that appellees were on actual notice of something outside the record which clearly affected title, as Dakota Title had actual knowledge of the protective covenants at the time it prepared the preliminary commitment for title insurance. Here, an issue of material fact existed regarding the knowledge that appellees possessed at the time they prepared the preliminary title commitment and whether appellees' failure to note the protective covenants in the preliminary commitment for title insurance breached their duty as a title insurer rendering a preliminary title commitment. As such, it would be erroneous for the district court to grant appellees' motion for summary judgment, unless the court properly concluded as a matter of law that appellees' alleged breach of duty was not a proximate cause of Tess' damages.