The Docket: Pennsylvania Court Denies Title Coverage After Settlement Agent’s Misappropriation of Funds
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Michael O’Donnell reviews a recent decision by the Superior Court of Pennsylvania that affirmed a decision denying 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. O’Donnell, partner at the law firm Riker Danzig Scherer Hyland Perretti, can be reached at firstname.lastname@example.org.
Citation: Northwest Sav. Bank v. Fid. Nat’l Title Ins. Co., 2017 WL 253080 (Pa. Super. Ct. Jan. 20, 2017).
Facts: In this Pennsylvania case, plaintiff Northwest Savings Bank entered into an agreement with two borrowers to refinance two mortgages encumbering their property. Before the closing, the settlement agent, The Closing Company of Pennsylvania (TCCPA), issued a title commitment that required Northwest to discharge the two prior mortgages in order for the title insurance policy to be effective. TCCPA had a contract with Fidelity National Title Insurance Company (FNTIC) that limited TCCPA’s role to issuing title insurance commitments and policies, and did not authorize TCCPA to receive or disburse escrow funds in FNTIC’s name. At the closing, Northwest disbursed its funds to TCCPA and instructed it to satisfy the prior loans. TCCPA then issued the title insurance policy, which did not name the prior mortgages as exceptions. Northwest eventually discovered that TCCPA’s principal had misappropriated the funds and never discharged the prior mortgages. When the prior mortgagees commenced their foreclosure actions, Northwest sought coverage from FNTIC, which FNTIC denied. Northwest then instituted the action against FNTIC. The parties filed cross-motions for summary judgment, and the court granted FNTIC’s motion.
Holding: On appeal, the Superior Court of Pennsylvania affirmed the trial court’s decision. First, it agreed with FNTIC that FNTIC had only engaged TCCPA to issue the title commitment and policy, and that TCCPA’s misappropriation of escrow funds occurred while it was acting as Northwest’s agent. Second, it held that Northwest’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 Northwest had not intended to cause this title defect, it found that, between two innocent parties, Northwest had more responsibility for creating the defect because it was the one who selected TCCPA to handle the disbursement.
Relevance to the title industry: This decision is consistent with a recent decision in New York, Plaza Home Mortg., Inc. v. Fid. Nat. Title Ins. Co., 145 A.D.3d 1048 (N.Y. App. Div. 2016), which held that a lender who wired money to the borrowers’ counsel was barred from bringing a claim under Exclusion 3(a) after the attorney absconded with the funds and failed to pay off a prior lien. However, title insurance companies must be aware that this analysis will differ in states that do not draw a hard distinction between title agents and settlement agents and are more attune to impose liability on the underwriter on an agency basis. Further, although the court in this case did not address the closing service letter, in states where underwriters issue closing service letters or closing protection letters and the claim was properly and timely made, the loss would be covered as the loss was due to the fraud and failure to comply with written closing instructions on the part of the settlement agent. Simply put, this decision emphasizes the importance of understanding the law of local jurisdiction in doing any coverage analysis.