- Synopsis of Title Insurance and Escrow Litigation in Georgia
- April 30, 2003 | Author: Lewis E. Hassett
- Law Firm: Morris, Manning & Martin, LLP - Atlanta Office
Like any other insurer, a title insurer may be subject to claims in contract or claims in tort. Contractual claims generally arise either from a title insurance policy or from an insured closing services letter. Tort claims, generally sounding in fraud or negligence, usually arise from the defalcation or negligence of the agent. These categories of cases will now be discussed separately.
1. Contractual Claims Against Title Insurers.
A title insurance policy provides an indemnity to the insured for any loss caused by a defect in title. U. S. Life Title Ins. Co. v. Hutsell, 164 Ga. App. 443, 444, 296 S.E.2d 760 (1982). Title claims generally are discovered either when the insured owner is sued by an adverse claimant or when the insured discovers an adverse claim that, although not yet the subject of litigation, adversely affects the insured's interest in the property.
If an adverse claimant already has filed suit, then the title insurer has three options. First, the insurer may acknowledge coverage and provide a defense. If the title claim is decided adversely to the insured, then the insurer and the insured may litigate regarding the value of the loss. See generally Canal Ins. Co. v. Savannah Bank and Trust Co., 181 Ga. App. 520, 352 S.E.2d 835 (1987). Second, the insurer may deny coverage and refuse to provide a defense. Under that option, the insurer assumes the risk of an adverse judgment or settlement by the insured, if a court later determines that the claim is covered by the policy. Jefferson Ins. Co. of NY v. Dunn, 224 Ga. App. 732, 482 S.E.2d 383 (1977). The insurer would then be liable for the loss and the insured's expenses in defending the claim. Additionally, if coverage was denied in bad faith, the insurer may be held subject to the statutory penalty of twenty five percent (25%) and assessed attorneys' fees with respect to the coverage dispute under O.C.G.A. § 33-4-6.
Third, the insurer may agree to defend the title with a reservation of the right ultimately to deny coverage and may seek a declaratory judgment regarding coverage. Morgan v. Guaranty Nat'l Cos., 268 Ga. 343, 344, 489 S.E.2d 803 (1997). In some states, an insurer exercising that option surrenders the power to choose counsel to defend the title. See, e.g., San Diego Navy Fed. Credit Union v. Cumis Ins. Soc'y, Inc., 162 Cal. App. 3d 358, 208 Cal. Rptr. 494 (1984). In those states, the insured chooses counsel, who then defends the title at the expense of the insurer. Id. Not surprisingly, this scenario has lent itself to abuse. Georgia appears not yet to have addressed the question of whether defending a claim under a reservation of right affects the insurer's prerogative to choose counsel.
As previously noted, the title policy obligates the title insurer to indemnify the insured for losses caused by a defect in title. Losses caused by attorney or agent malfeasance, non-feasance or defalcation not affecting title are not covered by the policy. To protect lenders from such losses, most title insurers will offer an insured closing services letter to the lender, essentially covering any loss resulting from the closing attorney's malfeasance or deviation from the lender's closing instructions. The forms currently used by most title insurers for closing services letters are remarkably broad in scope. Georgia has few reported decisions addressing insured closing services letters. Because insured closing letters are somewhat similar to surety bonds, a court may apply suretyship principles to such claims. See O.C.G.A. §§ 10-7-1 to 57.
2. Tort Claims Against Title Insurers.
A title agent is liable for his or her own torts, whether sounding in negligence or fraud. See O.C.G.A. § 10-6-85; Sharp-Boylston Co. v. Bostick, 90 Ga. App. 46, 81 S.E.2d 853 (1954). Because a negligence claim will succeed only where the agent represented the plaintiff, attorney/agents often require purchasers and sellers to acknowledge that the attorney/agent represents only the lender. These acknowledgments have yielded mixed results. See generally, Hodges-Ward Assoc. Inc. v. Ecclestone, 156 Ga. App. 59, 273 S.E.2d 872 (1980); Brown-Wright Hotel Supply Co. v. Bagen, 112 Ga. App. 300, 145 S.E.2d 294 (1965).
The attorney/agent cannot avoid liability for fraud by limiting the scope of his or her engagement. See, O.C.G.A. § 10-6-85; Sharp-Boylston. Accordingly, the attorney/agent will be liable to whomever is injured by a fraud or defalcation. Id.
The most problematic question is whether the title insurer is liable for the fraud or defalcation of an agent. Generally, the insurer is not liable for fraudulent conduct of which the insurer is unaware, which the insurer does not ratify, and which is outside the scope of the agent's engagement. Security Life Ins. Co. v. Clark, 229 Ga. App. 593, 494 S.E.2d 388 (1997).
3. Claims by Title Insurers.
A title insurer paying a claim under a policy or an insured closing services letter may bring an action against the attorney/agent for negligence or intentional misconduct. The insurer may base the action upon indemnification provisions of the agency agreement or upon common law principles.
Most title insurance policies also accord the insurer rights of subrogation to all claims of the insured against third persons. Although most policy forms allow the insurer to sue in the name of the insured, applicable rules regarding standing may require the insurer to sue in its own name. See O.C.G.A. § 9-11-17(a); General Ins. Co. of Am. v. Bowers, 139 Ga. App. 416, 228 S.E.2d 348 (1976).