The Superior Court of Pennsylvania recently affirmed a lower court’s denial of a lender’s claim for coverage from a title insurance company after a settlement agent misappropriated the closing funds and failed to pay off the prior mortgages on the insured property. See Northwest Sav. Bank v. Fid. Nat’l Title Ins. Co., 2017 WL 253080 (Pa. Super. Ct. 2017). In the case, plaintiff lender entered into an agreement with the borrowers to refinance two mortgages encumbering their property. Before the closing, the settlement agent issued a title commitment which required plaintiff to discharge the two prior mortgages in order for the title insurance policy to be effective. The settlement agent had a contract with defendant title insurance company that limited the settlement agent’s role to issuing title insurance commitments and policies, and the contract expressly prohibited the agent from receiving escrow funds in defendant’s name. At the closing, plaintiff disbursed its funds to the agent and instructed it to satisfy the prior loans. The agent then issued the title insurance policy that did not name the prior mortgages as exceptions. Four years later, plaintiff discovered that the agent misappropriated the funds and never discharged the prior mortgages. When the prior mortgagees commenced their foreclosure actions, plaintiff sought coverage from defendant, which defendant denied. Plaintiff then instituted this action against defendant. The trial court granted defendant’s motion for summary judgment and plaintiff appealed.
On appeal, the Court affirmed. First, it agreed with defendant that defendant had only engaged the agent to issue the title commitment and policy, and that the agent’s misappropriation of escrow funds occurred while it was acting as plaintiff’s agent. Second, it held that plaintiff’s claim was barred under Exclusion 3(a) of the title insurance policy, which excludes coverage for defects “created, suffered, assumed or agreed to by the insured claimant.” Although the Court acknowledged that plaintiff had not intended to cause this title defect, it found that, between two innocent parties, plaintiff had more responsibility for creating the defect because it was the one who selected the agent to handle its funds. Finally, the Court also held that the claim was barred under Exclusion 3(e), which excludes any loss that would not have been sustained if the insured claimant had paid value for the insured mortgage. Here, because the funds were not properly paid to the prior mortgagees, the Court found that the plaintiff had not paid value.