Title Insurer Not Liable for Negligent Misrepresentation When It Fails to Note a Restrictive Covenant
April 7, 2006
Michael Weissman - Chicago
In First Midwest Bank, N.A. v. Stewart Title Guaranty Company, __________ Ill. ___________ (No. 100162, decided January 20, 2006), the Illinois Supreme Court rendered a decision that will give mortgage lenders pause when they consider the comfort level a mortgage guaranty policy provides.
John and Glenda Bergeron applied to First Midwest for a $300,000 loan so that they could purchase residential real estate they planned to use as both their home and the office for their architectural and interior design business. As part of the transaction, Stewart Title was asked to provide a title commitment. Stewart Title did so, agreeing to issue a $425,000 title insurance policy to the Bergerons and a $300,000 mortgage guaranty policy to First Midwest upon payment of the usual premium. At that point, the $300,000 loan was approved.
The transaction closed and Stewart Title issued the two policies. Neither the preliminary report on title nor the title policies made reference to a restrictive covenant.
Subsequently, the Bergerons obtained an additional $300,000 loan from First Midwest to construct a freestanding garage/office next to their residence. A different title insurer issued a $300,000 title policy and a $300,000 mortgage policy.
In 1997, the Bergerons obtained a building permit and commenced building the garage/office. Once again, the Bergerons sought funding from First Midwest. This time First Midwest granted a $752,000 wraparound loan and obtained a $752,000 title commitment from a title insurer other than Stewart Title. There was no mention of a restrictive covenant in the title commitment. As part of the $752,000 wraparound loan transaction, the initial $300,000 loan was paid in full and the mortgage securing it was released.
But when the title insurer issued its policy for the $752,000 loan it was noted, for the first time, that the property the Bergerons owned could not be used for business or commercial purposes. Thereupon, the Bergerons defaulted on their First Midwest loan. First Midwest foreclosed but did not recover the entire $752,000.
First Midwest sued Stewart Title on a claim of negligent misrepresentation but lost. The court noted that First Midwest was suing on a tort theory, i.e., negligent misrepresentation, for economic damages. In such a case recovery is permitted only if the party who is sued “is in the business of supplying information for the guidance of others in their business transactions.”
First Midwest argued that Stewart Title was an information provider akin to a real estate broker or appraiser. Stewart Title contended it was not.
The Court said it would determine the obligations of a title insurer by a review of the terms of the title commitment. Citing a brief submitted by the American Land Title Association, the Court said, “… it is not the purpose of a title commitment to provide a listing of all defects, liens and encumbrances affecting the property. A title commitment is simply a promise to insure a particular state of title.”
The Court said it had examined Schedule B to the policy and noted that it listed encumbrances that would not be covered if the policy were issued without further action. And the Court added: “Nowhere does the commitment contain any guarantee concerning the performance of a title search.”
From this the Court concluded that a title insurer is not in the business of supplying information when it issues a title commitment or a policy of title insurance.
What’s the Point?
Given the heavy reliance that mortgage lenders place on title insurers, this decision is certain to be a wake-up call. Notwithstanding the decision, one is tempted to ask how a title insurer can list the exceptions in Schedule B unless a detailed search is performed.
For more information, e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.