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First American Still Haunted by No-Search Title Policies
Slade Smith

Despite settling a $500 million lawsuit with Bank of America over claims disputes involving "lien protection" insurance policies, First American is not in the clear on these policies, as the title insurer is still defending other litigation over the "streamlined" title insurance policies for which no title searches were performed.

Key Bank, a large regional bank with over a thousand branch offices in 14 states, also sued First American in 2010 over claims on lien protection insurance policies which Key says have been improperly denied. 

Key, which has a large home equity lending business, says that it began using First American's lien protection product, called "the FACT program", in 2004.  Key alleges that the program was marketed to it as a way to get nearly instantaneous title information about properties so that Key could make quicker lending decisions.

According to Key, the program worked like this:  When Key was interested in making a mortgage loan to a borrower, it was responsible for reviewing the borrower's credit report and for obtaining an executed agreement from the borrower.  It would also obtain and review a FACT Title Report from First American.  If Key found any discrepancies in its review of these documents that would indicate a possible title issue, it was to notify First American.  Otherwise, it could issue the loan and obtain an executed mortgage from the borrower, which was to be forwarded to First American for recording, and First American would provide title insurance for the loan under the FACT program.

Since the title information in the instant FACT Title Reports was not as complete or reliable as a traditional title search, First American allegedly represented to Key that the insurance product would cover the increased risk incurred due to the absence of a title search that an unknown lien or other title problem would impair Key's interest in the property.

Specifically, Key says it was told by First American that their insurance under the FACT program would reimburse Key Bank for losses resulting from unknown liens, bad property descriptions, incorrect vesting information, and other title defects, if the error could not be discovered by Key Bank from the information provided to it by First American or from information such as the borrower's application or credit report.

Key says that First American reviewed Key's underwriting practices with regard to the loans insured by the FACT program, and was satisfied, even telling Key that it did a better underwriting job than most other banks.

There was no problems for several years, as Key Bank had no claims on the policies.  But by late 2007, as the housing market fell apart, Key Bank says it began to experience losses on the claims due to title issues that it believed were covered by the policy. 

Unfortunately for Key, First American had a far different opinion than Key about what constituted a covered loss.  Of 160 claims submitted by Key to First American, First American paid or offered to pay on only 16 of them.  At least 103 claims were denied, and 32 claims were denoted as "pending" by First American, and remained in that status for years, according to Key.

According to Key, on most of the denied claims, First American has represented to Key that it has denied the claim because Key has not experienced a loss.  For example, in many cases where unknown intervening liens exist, First American claims that Key's lien would be valueless even if the intervening liens didn't exist, given the valuation of the property and other known liens.  In these instances, Key's position is that it would not have made the loan in the first place if it had known of the intervening liens, and therefore it has suffered a loss that it would not have suffered if it had used a traditional title insurance product. 

Based on statements made to it by First American's representatives, Key believed that these were precisely the types of losses which the FACT program covered.  In fact, Key says that First American touted the fact that no title search was needed as a primary benefit of the FACT program.

One such representative, Michael Hall, a sales representative and vice president of the First American subsidiary which sold the FACT program to Key Bank, agreed with Key Bank in its positions after disputes arose between Key Bank and First American's claims handling operation, according to Key.  But this information was withheld from Key, and Hall was allegedly "muzzled" by First American-- for example, he was excluded from meetings in which First American told Key that their understanding of their coverage under the policies was mistaken, according to Key.

In its lawsuit, Key lists over 100 claims that it says that First American has denied or not paid, after the borrower has defaulted on Key's loan.  Most of the claims involve instances of undiscovered intervening liens that existed at the time Key issued its loan, putting Key in an inferior lien position to what it had bargained for.  In one case, a property was burdened with seven liens which were not known to Key at the time it made its loan.

In many other instances, Key claims that the information it had available, including the information provided to it by First American, did not show all the parties vested in the property, or even showed vesting information that was altogether incorrect.  As a result, Key failed to get signatures of all the required parties on mortgage documents, making their liens invalid. 

In other cases, the legal description provided to Key was wrong.  The erroneous legal description was then included in the mortgage document, rendering the lien unenforceable.

Key Bank and First American are currently attempting to settle this dispute in court-supervised mediation sessions. In talks that occurred this September, the parties failed to reach a settlement but said that they made progress such that they thought that further mediation would be productive.  Additional mediation talks are currently scheduled for January, 2013, according to court documents.

The similar Bank of America lawsuit, filed in 2010, was settled after similar mediation talks.  In that suit, Bank of America claimed that First American improperly denied or withheld payment on over $500 million in claims stemming from similar title defects such as vesting problems, undisclosed intervening liens, and legal description errors.  After mediation, the lawsuit was settled in late 2011 for an undisclosed amount.  First American reported $32.2 million in losses in connection with the settlement.


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