What is a Title Insurance Company's Liability?

What is a Title Insurance Company's Liability When They Provide Title Insurance Versus the Free Information They Give You?

A relationship with a Title Insurance company agent is one of the important ones we need on our team for investing (building our team is an exercise we do in class). It's important as an active real estate investor to have this on-going relationship. Frequently, your Title Insurance agent can provide you with free information that is part of doing your due diligence on a deal. This is a great asset; however, we need to be careful on how much we rely on that FREE information.

Recently, there was a court ruling in California related to a Title Insurance company's liability for the free information it provides.

Case Summary: (Soifer v. Chicago Title) – Ben Soifer "was an investor in distressed real estate. His business plan involved the purchase of properties that were being foreclosed upon by mortgage holders. In order to decide whether to bid on a particular property, he needed to know if the foreclosing lender was in fact the senior lender on the property." So, as he had done so many times before, he contacted his Chicago Title agent, Miguel Escutia, and entered into an oral agreement "in which it was agreed that Escutia, on behalf of Chicago Title, would provide title information upon which Soifer would rely in deciding whether to make a bid at a particular foreclosure sale." In return for the information, Soifer agreed to place business with Chicago Title when he subsequently resold the properties. The information that Soifer needed "was limited, specific and time sensitive. He needed it usually within twenty-four hours before the specific foreclosure sale. The information he needed was somewhat simple – was the foreclosing loan the senior lien." The reason he needed that information is that if it was a junior lien holder, then Soifer would be on the hook for the senior lien.

In March 2008, Soifer requested such information regarding a property in Encino, CA, that was going to the foreclosure sale. He called his contact and requested the information on the property; he was told that "yes" the foreclosing loan in the amount of $990,000 was the senior lien. Soifer submitted a bid of $1,000,000.01 and acquired the property at the sale.

But, unfortunately, the foreclosing loan was not in senior position. In fact, quite to the contrary, it was a junior to a first trust deed held by Citimortgage, Inc. The sum of the senior lien was $1,600,000. Soifer was able to negotiate some reduction in the balance of the senior lien, but he could still only sell the property for $1,200,000. Soifer said that he lost $1,000,000 and, of course, he sued Chicago Title for the misinformation.

Soifer's attorneys argued that the information he obtained from Chicago Title through his oral contract constituted an "Abstract of Title" (Abstract of Title is – an outline history of the title to a parcel of real estate, showing the original grant, subsequent conveyances, mortgages, etc.) Chicago argued that a title company can only be liable for negligently misstating the status of a title if it issues an "Abstract of Title," and that the communications involved in this case were not proper abstracts. And the Court agreed.

The appellate court noted that Title Insurance is closely governed by the provisions of California's insurance code. It is spelled out there are only two types of instruments for which a title company has any liability. One, the most commonly known, is a policy of Title Insurance (Title Insurance is Insurance that covers the loss of an interest in a property due to legal defects and that is required if the property is under mortgage. Most Title Insurance is lender's Title Insurance, which is paid for by the borrower but protects only the lender); the other is an Abstract of Title which we defined earlier.

Title companies issue a whole variety of other reports for which they may or may not charge, but they cannot be held liable for errors or omissions in those reports. The reports that Soifer received were not abstracts nor were they policies of Title Insurance; hence, Chicago Title could not be held liable for them.

A couple of these other types of reports are:

Preliminary Title Report - Report issued by a title company before a transaction, stating a willingness to insure title upon closing.

Detailed Property Report - A complete and conventional Real Property Profile. This broad Property Profile contains entire information extracted from Public Real Estate Records. It is comprised of the prevalent property data acquired from County Records and Tax Assessor's Offices, and is distinctly more comprehensive than our Basic Property Report.

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