Court Decides Bankruptcy doesn’t make Title “Free and Clear”

Many title agents and abstractors have looked at their fair share of real estate transactions surrounding a bankruptcy in the recent years.  The Great Recession caused many Americans to enter into short sales of their homes or even declare bankruptcy due to lost jobs and an expense load they couldn’t carry.  While tragic for the nation, this was the situation many real estate deals have and do occur in.

Section 363 of the Bankruptcy Code deals with property liens and other judgments.  This section make a provision for a “free and clear” sale of the property out of bankruptcy.  However, a recent District Court in California added some important clarification to this.

In a case dealing in an auto mall in the city of West Covina, the trustee sought to sell a property “free and clear” of all liens – but also of all encumbrances.  The particular parcel was under an operating agreement with the city for them to approve any future operators of the dealerships.  The trustee and even court initially allowed the sale to proceed without the city’s approval.  Later the appeal court reversed this decisions, stating that Section 363 would not apply.

Title agents who deal with bankruptcies are often asked to issue a title that has been cleared under this section.  However, it is important to note that the court clarified that only judgments and liens that can be monetized can be cleared.  Other issues such as covenants, restrictions, easements and even some taxes cannot be cleared because of a bankruptcy.

This case highlights the need to make the seller aware of these items even when a court approves the bankruptcy.  Buyers who purchase a parcel and then later discover that there are restriction on it after all will most likely turn to the title agent and abstractor for compensation of damages.  Title firms need to protect themselves from these allegations by carefully researching just what restrictions exist and continue in such matters.

It is also prudent for title firms to purchase professional liability insurance to protect against such lawsuits.  If your firm does not yet have this insurance in place or would like a review of your current coverage, contact us today.

Alarming New Escrow Fraud Tactic

As a part of our diligence as insurance brokers, we keep tabs on the industry and where the trends are going.  In our discussions with one particular insurance company, we have gleaned some interesting data on claim trends seen in the title industry revolving around escrow funds.

There has been an increased amount of theft of escrow funds in the past 12 months.  Much of this fraud takes place around falsified instructions to move money.  These thieves have used hacked email accounts to perpetrate the crime.  There were at least five separate claims this insurance company experienced.  Here are a couple examples along with their descriptions of what has taken place:

At the end of 2013, a claim was filed against a title agent who was acting as the buyer’s closing agent as well.  The seller’s agent had their email hacked and from this email an “updated” set of instructions was sent to the escrow agent.  Not to think this was a simple trick, the escrow agent also sent an email to the other closing agent to confirm these instructions.  This email was intercepted by the hacker and a fake reply created verifying the new (i.e. fake) instructions.  The agent wired the funds to the hackers and the FBI was never able to recover the assets.  The insurance company paid over $250,000 to settle.

In April of 2014, an unrelated settlement agent was set to wire the seller’s proceeds after a transaction closed.  The seller emailed the wire instructions to the agent.  The next day another email came in from this seller with a different account number.  The agent wired the funds to this new account number.  It was later discovered that a hacker had read this first email, then created an email address that was very similar to the seller’s.  The settlement agent didn’t realize the difference until it was too late.  The money was already withdrawn from the account before it could be recovered.  The insurance company paid nearly $3,000 and the insured paid a $5,000 deductible.

In September of this year, an escrow agent received instructions to release funds on a home purchase to the closing agent.  The only problem was that the email was not from the closing agent, but from someone posing as the closing agent and the account number given was the incorrect account.  The escrow agent notified the bank to reverse the transaction.  They explained that it was a legitimate transaction and they could not reverse it.  The FBI has been alerted but the money remains to be recovered.

These claims all have a similar train of events.  A fake email modifying or redirecting the course of a release of escrow funds.  In some cases, the escrow agent attempted to independently verify and in others they did not.  There are a few important risk management tips title agents can take away from this.

  • Verify Instructions – It is important to verify the instructions to release funds.  The verification should be performed using two mediums.  Relying solely on one medium can lead to problems.  Picking up the phone or asking for a fax to confirm can often save confusion – or even catch a thief.
  • Research Changes – When instruction on where to release funds is changed at the last minute – this should be a red flag.  It is again important to verify these changes with multiple parties.  It is often difficult to add extra steps to a busy day, but it might be worth it if it saves a firm from paying a deductible or going through the headache of a claim.

Contact us to discuss additional ways to protect and insure your title agency from legal malpractice claims.

RESPA Change is Increasing Enforcement

The Real Estate Settlement and Practices Act (RESPA) is by no means a new law to anyone in the real estate arena.  However, the implementation of the law might be – and the consequences are having serious implications.

RESPA was historically administered and enforced under the Department of Housing and Urban Development (HUD).  Under Title X of the Dodd-Frank Acts, the responsibility went to the Consumer Financial Protection Bureau (CFPB) and the power transition has been taking place over time.  As of June 14th, 2014, the responsibilities have been fully moved to the CFPB.

RESPA’s primary goal is to increase the clarity of settlement costs to consumers.  This is done by improved disclosure statements that must be provided prior to closing and eliminating kickbacks and other excessive referral fees.  The CFPB has been gaining a reputation for being hard-nosed on the enforcement of RESPA.  When HUD controlled it, the enforcement was spotty.  The CFPB is taking the matter much more seriously.  Title Agents should be particularly diligent when considering their compliance to RESPA.

Here are a few recent examples of how the CFPB is enforcing RESPA:

  • RealtySouth, an Alabama Real estate firm, has been fined $500,000 for directing their clients to their own title company.  Even though disclosures were signed by buyers/sellers, the CFPB said they were buried.  RealtySouth did not admit guilt, but were still required to pay the fine.
  • Stonebridge, a New Jersey title service company paid $30,000 because of being found guilty of illegal referral kickbacks.  The kickbacks were in the form of commission for policies sold.  However, the CFPB determined that the commissions were paid to people who were independent contractors rather than employees – making them illegal.  Stonebridge explained that they were employees and even issued a W-2 on each person.  The CFPB disagreed.

When it comes to protecting your firm against this risk, prudent actions will prevent most violations, but it is important to take the extra step and stay on top of all manifestations of the law.  Insurance can also play an important role.  Insurance will not cover the fines and penalties assessed for an actual violation of a law, but they can be structured to provide defense costs and money administrative matters when responding to a regulatory investigation.  It is important to note that not all title agent professional liability insurance policies provide regulatory coverage for potential RESPA violations.  It is important to speak to a knowledgeable insurance broker who can help you understand what your options are when protecting your firm.

Contact us to discuss whether your insurance is right for the risks your firm faces.

Lawsuit Breakdown – Title Company Misses Double Sale of Property

In the second post of our continuing Lawsuit Breakdown series, we will continue to assess and analyze various cases that have occurred surrounding title agents and the liability title agents face.  This second case is 100 Investment Limited Partnership v. Columbia Town Center Title Company.  It revolves around a missed deed and liability on a title company when the title insurance refuses to pay.

100 Investment Limited Partnership v. Columbia Town Center Title Company

In this case, 100 Investment Limited Partnership (100 Investments) sought to purchase a parcel of land.  Unfortunately, that parcel had previously been sold by the sellers.  While the deed was properly recorded, Columbia Town Center Title Company (Title Company) failed to uncover the deed and issued an abstract showing clean title.  The Title Company also issued a title insurance policy to 100 Investments.  The abstract was relied on by the insurance company when issuing the policy.

This error was discovered only after 100 Investments paid fair market value to secure the property.  Once discovered, however, a lawsuit was filed because the title policies denied coverage because of a special warranty deed that was filed by the investment firm.  The lawsuit alleged that the title insurance companies were vicariously liable since they relied on their agent’s – the title company’s – work.  The court found that the title company was liable, but that the insurance company was not.  This is in line with many other cases countrywide.

It is important that title companies, abstract firms, title agents and lawyers providing the opinion of title be well versed in searching for deeds.  If any of these parties rely on another’s work, it is important to maintain confidence in the party’s ability and monitor for this.  Finally, each firm should maintain the proper level of Errors and Omissions Insurance to protect the firm from acts of negligence.

Contact us to learn more about whether your firm has the right level and type of insurance.

Lawsuit Breakdown – Damages for Incorrect Title Abstract

While the title industry largely lacks the front-page lawsuits that the accounting and legal profession face, this does not mean that the title profession is without risks.  We are going to begin a series of posts designed to illuminate some of the relevant lawsuits that title agents, title abstractors and escrow agents need to be aware of while they operate their own company.  While the cases highlighted may only be relevant in a particular state, the precedence could certainly have a ripple effect into other geographies and court decisions.  As a title firm monitors their risk management system, it is important to note these cases and how they develop.

Whitlock Vs. Stewart Title Guaranty Company

In the case of Whitlock Vs. Stewart Title Guaranty Company, this South Carolina abstracting firm discovered that the date when a title defect was discovered is not always the date that the damages are calculated.

In 2006, an individual purchased land along the coast in South Carolina.  Stewart Title Guaranty Company (Stewart Title) performed the title search and issued a title policy with no encumbrances.  This proved to be untrue in 2010.  Whitlock went to build a home on the property in 2010 and discovered that there was a spoilage easement allowing for the construction and maintenance of the intracoastal waterway on the land.  Whitlock sued Stewart Title for issuing a title that failed to note this easement.  Whitlock argued that she never would have purchased the land in 2006 had she known about the easement and inability to build on the land.

Whitlock pursued damages based on the 2006 price and value of the land.  Stewart Title argued that the discovery of the error in 2010 should be used to calculated damages.  The South Carolina Supreme Court held that the 2006 date had to be used.  One reason stated was that the title policy did not provide a date for measuring the damages or provide a methodology for calculating the value lost.  This ambiguity meant that the court sided with the plaintiff.

Most states hold that the discovery of the error or omission is the date to be used when calculating damages.  This case highlights the need for firms to be cognizant of any ambiguity in the title insurance contract and make changes the firm may deem necessary.

Contact us to discuss ways to further protect your title firm.

Circuit Court Sides with Title Agent

On April 25th the U.S. Seventh Circuit appellate court ruled in favor of a title agent in a $3M failed development. The lawsuit was based on an allegation of a breach of fiduciary duty by Belco Title and Escrow by a group of real estate investors. The ruling is available here.

The real estate investors alleged that they believed they were closing a senior mortgage on the property in question when in fact there had been prior investors and their position was junior. When the project went south they sued the Escrow/Closing agent, which was Belco. The court found that Belco was acting as a closing agent for the plaintiff and owed a duty to act only according to the terms of the escrow instructions. There was no expectation that they should have clarified the details of the transaction with the investors. Interestingly, so far no claims are being pursued against the lawyers or investment managers involved in the project.

Title agents and title insurers continue to be dragged into real estate ventures gone wrong, driving up defense costs and premiums. Working with an expert title agent insurance broker ensures you are getting the best deal possible for your organization.

New York Shoots Down Direct Suit Against Insurer

The United States District Court for the Eastern District of New York decided in the case of Commonwealth Land Title Ins Co. v. American Signature Services, Inc that a Title Insurer could not directly sue the errors & omissions insurer of one of it’s agents.

American Signature, a title agent, was facing lawsuits from two title insurers over alleged errors. It’s E&O insurer, Alterra, had declined coverage and attempted to rescind the policy. The two title insurers attempted to directly bring an action against Alterra, but the United States District Court for the Eastern District of New York found that they did not have standing to do so.

The case highlights the need to read defense provisions in a Title Agent Professional Liability Policy closely. Many, but not all policies, contain “duty to defend” language. This is much broader than “duty to pay” provisions many insurers slip in to lower premiums. Under a true duty to defend policy an insurer must provide a defense for the insured until the point that the claim is settled or facts are presented that allow the claim to be denied. Under a duty to pay policy, the opposite applies and the insurer has the ability to reserve their rights and not defend an insured until it is proven that the claim is covered.

Title agents should understand the insurance they are purchasing, contact an expert broker today to discuss your coverage options.

Customer Funds Exclusion Case

In the case of Charles E. Bethel II and Jennifer Kalsow Frantz vs Darwin Select Insurance Company (available here) the 8th US Circuit Court of Appeals in St. Louis has upheld a ruling against the insured on a coverage dispute revolving around coverage over misused escrow funds.

St. Paul Minnesota based Zen Title LLC purchased an errors and omissions policy in 2007 from Darwin Select Insurance Company (which was purchased by Allied World Insurance Company in 2008). Zen’s E&O policy included a standard grant of coverage agreeing to defend and indemnify the insured for any negligent act, error, omission, misstatement, misleading statement, neglect or breach of duty… in the performance of or failure to perform Professional Services. The policy also included a standard customer funds exclusion – excluding any claim arising from any loss, disappearance, pilferage or shortage of, or commingling or improper use of, or failure to segregate or safeguard, any client or customer funds, monies, or securities.

Zen Title had been acting as an agent of United General Title Insurance Company, which terminated their contract in August 2007 and sued over misuse of escrowed funds. When Zen tendered this claim to their insurer, Darwin, for defense the company declined to provide coverage.  The matter was settled in 2009 and in 2011.  Minority owners of Zen sued Darwin to recover their expenses since they were not part of the misuse and therefore should have been protected under the “innocent insured” provision. Darwin argued otherwise.

The lower court ruled in Darwin’s favor and the district appeals court upheld it – citing that the policy language excluded coverage for allegation of fraud altogether, regardless of guilt.

This case highlights a number of title agent insurance issues that all firms should be aware of:

– First of all, it is important to understand and read the title agent errors and omissions insurance policy closely.  While the exclusion in question is common, many policies contain additional exclusions that are not as commonplace.  Since each insurance company has their own policy wording, it is important to engage with an experienced broker who will be able to explain and compare each option.

– Secondly, from a risk management perspective, strong internal controls are imperative.  This case shows how owners of a company – even minority shareholders – can become entangled in legal issues they have nothing to do with.  Simple protocols, independent oversight and verifiable procedures can quickly detect fraud before it becomes a bigger issue.

– Thirdly, it is important for title agencies to understand what insurance policies are needed.  Errors or mistakes in a title agent’s, abstractor’s or escrow agent’s professional services are covered by E&O insurance.  Theft of money by an employee of the firm would be covered by fidelity insurance (Crime insurance).  A firm needs to understand the risks they face and what insurance policy can protect them.

When looking for title agent insurance, this case highlights the need to understand all aspects of the firm’s operations and insurance requirements. Contact to discuss better protecting your firm from the rising tide of litigation risk.

Title Agent Insurance Options After a Claim

The housing downturn brought many lawsuits against everyone involved in the housing market and title agencies were no exception. Even if not named in a lawsuit many agents filed claims with their professional liability insurers when they discovered possible errors that could lead to a later claim.

Facing a tougher insurance market many title agents are regretting filing claims that did not escalate to a demand for damages from a property owner or title insurer. However, under claims made coverage they would have jeopardized coverage had they not alerted their insurer to the potential litigation.

The brokers are are regularly presented with coverage issues and non-renewals, premium increases or sky-rocketing deductibles are commonplace after a claim in this market. Our first advice is always to not panic, even with adverse market conditions our expert brokers can secure coverage for almost any situation.

The first thing to do is compile as much information about the claim, why it happened and what has been done to prevent a re-occurrence. Insurance company underwriters take a lot of risk and live in constant fear of making the wrong decision. The better you can help them document their files that your past is not an adequate predictor of the future the more likely you are to receive competitive terms.

The second potential solution is to make sure you are working with an expert broker who understands the market and has broad underwriter access. Most speciality insurance companies only work with speciality brokers, your local generalist agent does not likely have the relationships to keep up to date on the newest companies offering terms to title agents and abstractors.

The third solution is to take a higher deductible or lower limit. Our brokers can make the case that past claims are not predictive of future ones but nothing helps your case like putting your money where your mouth is and taking a higher deductible. Exploring lower limits, especially if your work is focused on middle market homes and not commercial structures, can also save money and potentially shows you are comfortable retaining risk. As a general statement, those who are most likely to get sued are the most likely to buy excess insurance.

The last and riskiest solution is to ”go first year claims made”. For several years after first buying coverage your premium steps up as more years of exposure are added to the policy, the increases generally level off after five years. By resetting your retroactive date your policy and pricing goes back to year one. This means that any claims from events before this reset will not have coverage and you could potentially be in violation of any abstracting or title clearance contracts. However, when faced with a lack of low cost coverage options some agents make this decision.

Claims from Online Searches has a great blog post on the errors that can come from using short cuts to ensure a title is free and clear.

Three cases are cited:

“a title examiner at Guaranty Title, performed a title search of the Property (the “Second Search”) using the Orbit search engine. 8:3-9:10. Edgeton’s title search did not reveal the federal tax lien, nor did it reveal the four judgments and the state tax lien found by West Title.” Link to case

“Columbia failed to report the earlier sale to Dr. Khan in the commitment or the policy. Cambridge and Columbia in performing the title search and failing to discover and report the Khan deed,” Link to case

“The land was burdened with an easement that was publicly recorded but was not indicated on numerous versions of a title commitment issued by Chicago Title Insurance Company” Link to case

Contact today to ensure your errors and omissions coverage is competitiveness priced and covers emerging risks.