A new case from the Supreme Judicial Court should provide some relief to embattled title insurers.
Title insurance has traditionally been a field in which claims and trials were rare – because insurers can examine all the relevant documents in the property’s history before issuing the insurance. But in the wake of the foreclosure crisis, with sloppy practices coming back to put the bite on lenders as they attempt to foreclose, many more properties with “clouded” problematic titles are cropping up in court – and lenders have been pushing to spread as much of the liability for them onto title insurers as they can.
“From the industry’s perspective, this case is a pretty big victory for us,” said Steve Gottheim, legislative and regulatory counsel for the American Land Title Association. “We’ve seen a number of attempts by our insureds in recent years to try and get around the provisions of our title policies.” The SJC’s ruling should help put a kibosh on that, Gottheim said.
A recent ruling by the Massachusetts Supreme Judicial Court should help ease title insurers’ minds. The case, GMAC Mortgage v. First American Title Insurance Company, involved a Billerica home which was refinanced in 2001. Title to the property had been solely in the name of Thomas Moore, but when he refinanced, he added his wife, Elizabeth, to the deed. An error in the way the paperwork was registered left Elizabeth Moore listed as a co-owner of the property – but not named on the mortgage. When Thomas Moore died in 2007, the property passed into Elizabeth Moore’s hands – and GMAC’s ability to collect on its mortgage went up in smoke.
That sticky problem resulted in a flurry of litigation, with GMAC’s title insurer, First American, filing suit in the Land Court to try and fix the title problems, while Moore sued GMAC in Superior Court for the intentional infliction of emotional distress for trying to foreclose on her. Moore eventually came to a settlement with the lender – but GMAC then turned around and sued First American, saying that First American ought to be responsible for the court costs of the whole kit and caboodle, since they had insured the flawed title which started the whole mess.
The answer to that question – does a title insurer have to defend against any claim airing from a flawed title? – has important implications for the industry. Historically, claims against title insurers have been far more rare than claims against general liability insurers, and as a result title insurers don’t have pockets quite as deep as other insurers do. It remains unclear exactly how many titles have been clouded by the foreclosure mess, and industry observers expect that new cases of problematic titles may crop up for years – each a potential minefield of counterclaims and defenses which can keep a foreclosure tied up in court for months or years.
The Kitchen Sink
“These borrowers typically come up with a host of claims – wrongful foreclosure, 93A, federal debt collections – they throw the kitchen sink,” said Richard Vetstein, principal of the Vertstein Law Group in Framingham and a former in-house title attorney for First American.
The Supreme Judicial Court ruled, however, that title insurers were only responsible for claims related to the title itself. While Massachusetts law requires that general liability insurers are responsible for any claim arising from a policy they cover, title insurance is too different from regular insurance to be treated the same way, the court ruled. Unlike normal insurers, title insurers can attempt to spot and fix problems before issuing a policy, and the potential problems it attempt to cover are “narrow,” and limited compared with typical insurance. This makes it easy for any title problems in a complicated case to be handled separately from other issues, the court ruled.
“It reaffirms what we [title attorneys] had long thought, that title policies are only covering the title-related claims and nothing else,” said Vetstein. Now that the SJC has laid down a precedent on the issue, title companies can be certain they “won’t be left holding the bag,” he said.
Industry observers were hopeful that the case would provide a roadmap for other courts. Legal experts familiar with the case say the decision is the first in the country to draw a clear distinction between title insurance and other types of insurance. The federal Seventh Circuit Court of Appeals has recently taken up a case involving similar issues, and the Massachusetts case, because the ruling is from the state’s highest court, could prove influential, experts say.
First American declined to comment directly on the case. “We believe the decision speaks for itself,” said a spokesperson.
Email: csullivan@thewarrengroup.com
