Mass. Appeals Court hold that title insurer is not subrogee of mortgagee absent express subrogation clause in insurance contract

I'm always excited when I see a title insurance case, because they are so few and far between.  When such a dispute does arise it is not unusual to cite case law from a century ago.

In 2003, Shane Kelly took out a first mortgage with Chevy Chase Bank for a property he owned in Boston. 

In 2007, Kelly took out a second mortgage on the property with JPMorgan. JPMorgan retained Attorney Roseann Conti to conduct the closing.  Conti had also conducted the closing on the first mortgage.  Although Conti had knowledge of the first mortgage, which was recorded at the Registry of Deeds, she did not notify JPMorgan of it. 

JPMorgan obtained title insurance from Stewart Title Guaranty Company.  Conti acted as Stewart Title's agent.

JPMorgan eventually learned of the first mortgage.  It made a written demand on Kelly that he discharge it, based on a provision of the second mortgage that allowed it to require Kelly to discharge a priority lien on the property.  Kelly did not discharge the first mortgage.  He also stopped making payments on the second mortgage. 

In response to a claim by JPMorgan on the title insurance policy, Stewart Title paid $268,084.83 to discharge the first mortgage.  It did not inform Kelly that it had taken this action. It asserted an attorney malpractice action against Conti, which it settled for less than the amount paid to discharge the first mortgage.

Stewart Title then sued Kelly, seeking the difference between the payment it made to discharge the first mortgage and the sum recovered from Conti. In Stewart Title Guaranty Co. v. Kelly, 97 Mass. App. Ct. 325 (2020), the Massachusetts Appeals Court affirmed summary judgment for Kelly, who was acting pro se.

The court first addressed Stewart Title's allegation that Kelly breached the mortgage contract when he failed to discharge the first mortgage upon demand.  Stewart Title was not a party to the mortgage. It alleged that it was the subrogee of JPMorgan.

Subrogation is a doctrine that in the context of insurance allows an insurer who has paid a loss to a policyholder to bring suit against the person who caused the loss, standing in the shoes of the policyholder.  Insurance policies typically have a clause allowing the insurer to do so.  In this case, however, the title insurance policy did not have a subrogation clause.

 (In the trial court Stewart Title had submitted a motion for reconsideration of the granting of summary judgment to Kelly to which it attached a jacket to the policy that contained an express subrogation provision.  The Appeals Curt held that the trial court judge acted within her discretion to deny the motion to reconsider.) 

Stewart Title argued that the trial court judge's reliance on its failure to produce an express subrogation clause was error because it was not aware that its status as subrogee was disputed.  However, Kelly had denied Stewart Title's allegation that it was a subrogee to JPMorgan throughout the litigation, beginning with the answer to the complaint.  (Even if that were not the case, it's hard to see how Stewart Title could succeed on such an argument where it has the burden of proof on breach of contract.)

Stewart Title then argued that it is entitled to pursue the claim under the doctrine of implied subrogation.  It argued that JPMorgan would otherwise receive a windfall because it would have benefited from the removal of the first mortgage.

The Appeals Court noted that allowing Stewart Title to pursue a claim against Kelly would not avoid a windfall to JPMorgan.  In addition, Kelly was not primarily responsible for JPMorgan's loss.  He did not represent that the property was clear of encumbrances.  Rather, Stewart Title, through its agent, Conti, knew that the first mortgage encumbered the property and failed to disclose that fact to JPMorgan.  The court held that the doctrine of implied subrogation did not apply to such a situation.

The court also held that Stewart Title could not recover against Kelly on a theory of unjust enrichment, because there was no evidence that Kelly had accepted the actions of Stewart Title with knowledge that Stewart Title would expect reimbursement from him.  

Mass. Appeals Court finds title attorney liable to title insurance company

Stewart Title Guaranty Company, a title insurer, retained Attorney Robert Kelley to issue title insurance policies to owners and lenders in connection with real estate transactions.

Stewart sued Kelley for negligence and sought indemnity with respect to several  closings.  In Stewart Title Guaranty Co. v. Kelley, 89 Mass. App. Ct. 1121, 2016 WL 1741537 (unpublished), the Massachusetts Appeals Court held that Kelley was liable for breaching the standard of care at least with respect to two of those closings. 

In the first, Kelley issued a title insurance policy even though the property was encumbered by a prior mortgage and two attachments that were recorded in the Plymouth Country Registry of Deeds.  Kelley's defense was that he hired a reputable title examiner for the title review.  The court adopted Stewart's argument that "while a shortcoming in the performance of the examiner may create rights of Kelley against the examiner, the examiner's good reputation is not a defense to an action for negligence by Stewart against Kelley." 

(That discussion illustrates the fact that indemnity clauses in contracts by which title insurers retain attorneys to issue title policies have the effect of transferring risk from the title policy to the attorney's malpractice policy.) 

The court also held that expert testimony was not required on the issues of negligence, because the claimed legal malpractice was so gross or obvious that laypeople could rely on their common knowledge or experience to recognize it from the facts.

In another closing, Kelley mailed sufficient funds to close out a previous line of credit with Citizens Bank so that a different mortgage would be the senior mortgage on the property.  His file did not contain a standard letter instructing the lender to close the line of credit.   Citizens did not close out the line of credit and the borrower thereafter withdrew additional funds, resulting in a loss to Stewart. 

The court held that Kelley's failure to send the letter or to keep a copy of it deprived Stewart of the material it needed to establish that the credit line was  closed and thereby to extinguish the Citizens claim. The court again held that no expert testimony was necessary to prove negligence in that instance.

 

Massachusetts Appeals Court holds that attorney who conducted negligent title search may be liable to title insurer for breach of contract but not malpractice

Fidelity National Title Insurance Company of New York appointed George Crowley as its agent to issue title insurance.  The agreement provided that if Crowley were grossly negligent by issuing policies for properties with existing liens and encumbrances he would indemnify Fidelity for its loss, including attorney's fees. 


Fidelity alleged that in five instances Crowley issued title insurance in its name despite the existence of title defects, causing Fidelity to incur a loss. 


In Fidelity Nat'l Title Ins. Co. of N.Y. v. Crowley, 2015 WL 4887598 (Mass. App. Ct.) (unpublished), the Massachusetts Appeals Court  held that the contract statute of limitations of six years applied, rather than the legal malpractice/tort statute of limitations of three years.  Although the mortgage lenders would have malpractice claims against Crowley, there was no attorney-client relationship between Fidelity and Crowley.  The agency agreement did not required the issuing party to be an attorney.  (I need to think this one through.  I'm not a real estate attorney so I'm probably missing some subtleties in the difference between Crowley doing a title search for Fidelity and Crowley doing a title search for a mortgage lender.) 


In this case the word "grossly" was typed above the word "negligent," so that unlike other title insurance agency contracts I have seen Crowley can only be liable if he was grossly negligent.  The effect of the contracts without the word "grossly" inserted is that the cost of indemnifying losses from clouds on a titles is effectively transferred from the title insurer to the real estate attorney's malpractice insurer.  (Although here, where the court has held that the suit is not one for malpractice, perhaps there is no coverage under the malpractice policy.  I  have no idea.) 

SJC further limits title insurer's duty to defend

Accredited Home Lenders issued a loan, secured by a mortgage, to Karla Brown for her purchase  of a house, and bought a title insurance policy from First American which provided coverage to it and its successors and assigns.  The mortgage was subsequently assigned to Morgan Stanley, of which Deutsche Bank is the trustee. 

Three years after taking out the mortgage loan Brown filed suit seeking to rescind the mortgage and void her debt.  She alleged that she was the victim of a predatory lending scheme, that the defendants unilaterally misrepresented her income to justify higher interest rates and higher monthly payments, and that they coerced her into accepting loans that she could not afford. 

Deutsche Bank requested that First American defend its mortgage interest.  First American denied the claim.

In Deutsche Bank Nat'l Ass'n v. First Am. Title Ins. Co., 465 Mass. 741 (2013), the court examined First American's duty to defend.  It turned to the very problematic decision in  GMAC Mortgage, LLC v. First Am. Title Ins. Co., 464 Mass. 733 (2013), which I discussed (and strongly criticized) here.  That case held that a title insurer, unlike a liability insurer, does not have duty to defend all claims in a complaint against an insured if less than all the claims are covered by the policy.  

In Deutsche Bank the court further ate away at a title insurer's duty to defend.  It held that unlike a liability insurer a title insurer does not have a duty to defend simply because the allegations in the underlying complaint are reasonably susceptible of an interpretation that they state or adumbrate a claim covered by the policy terms.  "Application of this standard threatens to sweep a whole host of uncontemplated risks into the ambit of title insurance.  . . .  To avoid such an aberration, we conclude that a title insurer's duty to defend is triggered only where the policy specifically envisions the type of loss alleged." 

The supposedly new standard stated by the court for title insurers is not new; it is the standard for liability insurance.  There is no duty to defend where a complaint does not allege a covered loss.  That is the meaning of the "state or adumbrate" standard.  It's odd and disturbing that the court does not understand this.

What the court really meant was that even if a complaint states or adumbrates a covered loss, a title insurer does not have a duty to defend if the covered loss is not the main thrust of the complaint.  That was made clear when the court turned to the allegations asserted by Brown. 

The court noted that the policy covers loss or damage sustained or incurred by the insured by reason of the "invalidity or unenforceability of the lien of the insured mortgage upon the title."  The policy provided that First American would defend the insured "in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against." 

The court held that Brown's allegations did not assert invalidity or unenforceability of the lien.  She alleged the debt should be voided because she was the victim of a predatory lending scheme, and that she was entitled to rescind the security interest and void the loan indebtedness. 

The court held, "Where the substance of Brown's complaint is concerned with the validity of the underlying loan and whether it was procured by a 'predatory lending scheme,' not whether the mortgage was improperly executed, improperly recorded, or otherwise procured by fraud, we conclude that its claims were not specifically envisioned by the terms of the title insurance policy.  Consequently, the allegations of the complaint fall outside the scope of the policy."

In a footnote, the court stated, "We do not construe the complaint to allege that the mortgage instrument itself was forged or that its execution was the product of fraud.  Assuming such a claim had been made in the present dispute, it might have been specifically excluded by Exclusion 3(a), which denies coverage to defects created by the insured."

The court noted that Brown's attempt to rescind the security interest was only a "collateral consequence" of the main relief sought, voiding the loan indebtedness.  "We are aware that, if Brown prevails and her underlying debt is extinguished, this would have the practical effect of dissolving Deustche Bank's mortgage interest, insofar as there would be no debt to secure.  However, given that Deutsche Bank and its predecessors in interest, rather than First American, were in the best position to ensure that the underlying debt was valid, it is for them to bear the burden of any loss."

As a matter of public policy I like the result of this decision.  Predatory lending is a scourge on society, and mortgagees are complicit in its widespread use.  There should not be insurance coverage for claims alleging it.

But the lack of insurance coverage should come from an exclusion, perhaps Exclusion 3(a), referenced by the court, or an intentional acts exclusion or the like.  There is no need to eat away at the duty to defend or to make distinctions without a difference. 
 

SJC issues problematic decision on title insurers' duty to defend

The Supreme Judicial Court of Massachusetts has held that a title insurer does not have a duty to defend an insured against all counts of a complaint, and that a title insurer engaging in litigation to cure a title defect covered by the policy does not have a duty to defend the insured against reasonably foreseeable counterclaims.

Elizabeth Moore lived with her husband Thomas Moore.  The title to the house was in Thomas's name.  In 2001, as part of refinancing, Thomas executed a note and mortgage to a predecessor of GMAC, which obtained a First American title insurance policy. At that time he conveyed the property to himself and Elizabeth. 

Due to an error in how the paperwork was filed, when Thomas died in 2007 the property vested in Elizabeth, to the exclusion of GMAC. 

First American could have resolved this title defect through negotiation or by initiating litigation.  It chose to initiate litigation on behalf of GMAC against Elizabeth.  Elizabeth brought counterclaims against GMAC, alleging intentional infliction of emotional distress, violation of Mass. Gen. Laws ch. 93A, and money had and received for mortgage payments alleged to have been made to GMAC in error.

GMAC sought from First American costs incurred in defending the counterclaims. 

In GMAC Mortgage, LLC v. First Am. Title Ins. Co., 464 Mass. 733 (2013), the Supreme Judicial Court of Massachusetts assumed that the counterclaims were not causes of action that were covered by the insurance policy.  It addressed whether First American was nevertheless obligated to defend. It noted that the situation was analogous to a complaint that alleges some causes of action that are covered by an insurance policy and other causes of action that are not covered.  In those situations, liability insurers have a duty to defend the whole action.  (The court called this the "in for one, in for all" rule; I generally refer to it simply as the duty to defend.) 

The court held that the in for one, in for all rule of general liability insurance defense does not apply to title insurance, because title insurance is fundamentally different from general liability insurance.  Title insurance does not insure against future risks; it insures against risks (clouds on a title) that were in existence (but unknown) when the policy was issued. 

The court's analysis is incorrect.  Liability insurance often covers risks that are in existence but unknown when the policy was issued.  Long-tail losses come to mind.  Those are claims for environmental contamination or asbestosis, for example, where the loss occurred but was undiscovered over a long period of time.

The court continued, "in light of the limited purpose and scope of title as compared to general liability insurance, title insurers should not be obliged to defend against non-covered claims just because they may be asserted in litigation that also implicates title-related issues to a limited extent.  Moreover, because title issues are discrete, they can be bifurcated fairly easily from related claims, . . . thus, the central policy behind that 'in for one, in for all' -- that parsing multiple claims is not feasible -- is not implicated to the same extent in the title insurance context as in the general liability insurance context."

The court also held that a title insurer has no duty to defend counterclaims that were a reasonably foreseeable response to a choice by the title insurer to institute litigation. 

Somewhat offensively, in my view, the court noted that "because the issues covered by a title policy are relatively discrete, an attorney for a title insurance company (who typically specializes in real property issues) feasibly can defend only the title-related issues."  While I am sure there are some attorneys for title insurance companies whose practices are limited to real estate litigation, title insurance companies are perfectly capable of hiring attorneys who have knowledge of both real estate litigation and tort litigation deriving from real estate disputes.  But because the court thought that would be asking too much of title insurance companies, it declined to impose a complete defense obligation on them. 

It also declined to impose that obligation because a "reasonably foreseeable" rule of title litigation "would quickly become a work-around to our conclusion that 'in for one, in for all' does not apply to title insurance."  (Perhaps; but so what?) 

In what reads to me as doublespeak, the court wrote, "we disagree with GMAC that it is the litigation initiated by a title insurance company that exposes the risk of third party claims.  Instead the exposure to risk comes from the title defect itself, not its method of cure." 

The court softens its position somewhat when it notes that in this case the counterclaims were a result of the fact that GMAC continued to pursue foreclosure when it knew of the title defect.  "Moore may very well have sued GMAC for such intentional conduct even if First American had attempted to cure the title defect through negotiation s opposed to litigation.  For this reason, we are unwilling to go so far as to say that First American invited the liability of Moore's action."  That's a fine statement -- but it contradicts the court's holding that a title insurer has no duty to defend counterclaims that are a reasonably foreseeable response to litigation the insurer chose to litigate.  The court is now saying that in this case the counterclaims were not a reasonably foreseeable result of the insurer's litigation -- they were a result of the insured's, not the insurer's, actions.

The court further softened its position by stating that a title insurer may have a duty to defend an insured against compulsory counterclaims. 

Thanks to Mike Tracy at Rudolph Friedmann for bringing this case to my attention when it was first issued.    

Title insurance

Here's an informative article about title insurance.

When my husband and I bought our house, on the advice of our real estate attorney we opted against title insurance. He told us that since the property is registered land, there could be no claim against the title. Not long thereafter I was involved in a case involving title to land and added our lack of title insurance to my list of things to wake up in the middle of the night worrying about. When we refinanced we purchased the insurance. I still don't know whether it's really necessary for registered land, but it sure makes me feel better.

Creditors' rights endorsements removed from title insurance

Here's an article in REBA News by Joel Stein about changes to title insurance. (REBA News is the trade journal for the Real Estate Bar Association for Massachusetts.)

According to the article the American Land Title Association, or ALTA, has withdrawn Endorsements 21 and 21/06 as official forms, effective March 8, 2010. Those endorsements provided "creditors' rights coverage," providing coverage to mortgage lenders who lose their interest in a property due to the bankruptcy of someone in the chain of title.

Superior Court declines to interpret against insurer policy language that was not part of preprinted form

In Dulac v. Chicago Title Ins. Co., 2009 WL 3838999 (Mass. Super.), the owner of a two-family home sued his title insurer for declining coverage when a prospective buyer backed out of the sale because of a perceived defect in the title.

The policy included an exclusion with an exception that stated:

Exception for Notice of Land Court Petition recorded with the Worcester Registry of Deeds at Book 13029, Page 124. Note: This policy affirmatively insures against loss or damage as a result of the attempted assertion of paramount title due to any matter set forth in said petition.

The insured attached to the complaint an opinion by a land court examiner which identified a likely defect in the title. At issue was whether that opinion came within the exception.

Judge Kaplan held that the exclusion was ambiguous. However, he declined to interpret it against the insurer and held that a question of fact existed as to what the parties understood the exclusion to mean at the time the policy issued. He wrote:

Although an ambiguity is generally construed against an insurer, this exclusion is not part of a preprinted form and it is possible that Dulac [the insured] understood the exclusion in the manner that Chicago Title now explains it