The United States District Court for the Western District of Virginia recently denied a title agent’s motion to dismiss a claim brought by Stewart Title Guaranty Company (“Stewart”) for the breach of an agency agreement and, in doing so, did not accept the agent’s argument that the underlying claims should have been excluded under Exclusion 3(a).  See Stewart Title Guar. Co. v. Closure Title & Settlement Co., LLC, 2019 WL 97045 (W.D. Va. Jan. 3, 2019).  In the case, the agent issued two title insurance policies for the same lender to secure first priority deeds of trusts on two properties.  Stewart underwrote both policies.  However, the lender made a mistake in preparing the deeds of trusts and the deeds named the incorrect grantor.  When a subsequent lender commenced a foreclosure proceeding on one of the properties, Stewart was forced to pay almost $200,000 in attorneys’ fees and settlement funds in litigating the insured lender’s interest in the properties.  Stewart then brought this action against the agent alleging a breach of the parties’ agency agreement.  The agent filed a motion to dismiss, arguing:  (i) the Court does not have diversity jurisdiction because Stewart’s damages do not exceed $75,000 under the terms of the agency agreement and the voluntary payment doctrine; and (ii) Stewart failed to state a claim.

The Court denied the agent’s motion to dismiss.  Under the terms of the agency agreement, the agent’s liability is capped at $2,500 unless the loss is caused by the agent’s “negligence or fraud.”  The agent argued that this cap applied to defeat diversity jurisdiction because the complaint does not allege negligence or fraud.  The Court disagreed, holding that “[w]hile the complaint does not explicitly allege ‘negligence’ by name, it plainly alleges nonconformity with industry standards.”  Additionally, the Court noted that there is some uncertainty in the Fourth Circuit as to whether a limitation of liability clause can be considered at a Rule 12(b)(1) stage, and for these reasons the agency agreement could not be read to divest the Court of jurisdiction.

More importantly, the Court rejected the agent’s claim that Stewart’s damages could not have exceeded $75,000 because, according to the agent, Stewart’s payment of attorneys’ fees and settlement funds was voluntary.  The agent argued that because the insured lender had prepared the defective deeds of trust, the claims were barred under Exclusion 3(a) of the policy which excludes title issues “created, suffered, allowed or agreed to” by the insured.  The Court did not agree and stated, “[n]either the Fourth Circuit nor the Supreme Court of Virginia has squarely addressed how courts should interpret ‘Exclusion 3(a)’ provisions. But the Fourth Circuit has intimated in an unpublished opinion that it would join the majority view that defects caused by the insured’s mere negligence are not sufficient to trigger an Exclusion 3(a) provision.”  Based on this, the Court found that the agent had not met its burden of establishing the payments were voluntary or that Stewart’s damages were less than $75,000.  Finally, the Court held that Stewart sufficiently alleged the elements of a breach of contract claim in that it alleged that the agent failed to conform with “recognized underwriting practices” by not realizing the obvious errors in the deeds of trust.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan Goetsch at dgoetsch@riker.com.