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Do Mandatory Title Search Laws Protect Consumers from No-Search Title Insurance?
Slade Smith
   

A number of states have statute that state a requirement that a title search and examination be performed before a title insurance policy is issued. But do these statutes really have any real-world effect in deterring title insurers from issuing no-search title insurance? And are consumers protected from a title insurer that issues them no-search title insurance?

An example of such a statute is New Jersey’s title insurance statute, which states that “[n]o policy or contract of title insurance shall be written unless and until the title insurance company has caused to be conducted a reasonable examination of the title and has caused to be made a determination of insurability of title in accordance with sound underwriting practices for title insurance companies.” This statute, which has similar language to the statutes in a number of other states would seem to be pretty clear cut: before title insurance is written, the insurer must conduct a reasonable examination of the title.

But the problem is, how is such language enforced? Who gets to sue a title insurer who does not conduct a title search under this statute? If the statute is not enforceable, it might as well not exist, and insurers are free to ignore its requirements.

And that’s a legitimate concern in New Jersey and some other states. In these states, courts have ruled that title insurance policyholders cannot sue their title insurers under their state statute that requires a title search, even if the title insurer unquestionably issued their title insurance policy without a title search.

At first blush, this might seem to make some sense. After all, a person who has been damaged due to the fact that their title insurer did not do a title search will, in all likelihood, have a claim under the policy, right?

But it has to be remembered that title insurance policies only provide coverage up to the limits of the policy. It’s often the case that a title insurance policy does not cover the full amount of a policyholder’s loss. So, unless a policyholder can sue a title insurer for negligence, the insured often would have to suffer a loss caused by the title insurer’s failure to do a search as required by law. This may seem unfair: if a title insurer hasn’t conducted a title search as required under the statute, shouldn’t the policy holder be able to sue the title insurer to recover her whole loss, on the theory that the title insurer’s negligence in not doing a search has caused the whole loss?

For example, a man buys a house in New Jersey for $500,000, and a title insurer issues him a no-search title insurance policy—in violation of New Jersey’s title insurance statute— with a policy limit of $500,000. Over a period of years, the value of the house increases to $1,000,000. It then turns out that title to the house is completely defective… someone else holds title. The title insurer would have discovered the title flaw if it had followed the law and done a title search. The man has lost a million dollar house, and his title insurer only pays him $500,000 under the policy. Shouldn’t the title insurer also have to pay him the other $500,000 too? When you break a traffic law and crash into somebody, and cause a million dollars of damage and your insurance policy only covers $500,000, the person you crashed into can sue you for negligence for the other half-million that the insurance policy didn’t pay; why should this situation be any different?

The New Jersey courts, and some other state courts, have said no—the title insurer is not liable for negligence to a policyholder to whom it has issued a policy without a title search in violation of state law. The theory is that these mandatory title search provisions are not for the protection of title insurance policyholders from losses caused by title insurers not doing a title search. Rather, the theory is that the mandatory search statutes are designed to protect the financial stability of title insurers from the unsound underwriting practice of writing title insurance policies without doing title searches.

But really, what could be the primary purpose of protecting the financial stability of a title insurer, except to protect the policyholders by increasing the likelihood that the title insurer will have money to pay a claim if one arises?

Without policyholders having recourse to sue their insurers under such statutory provisions, policyholders are impotent to protect themselves from losses caused by no-search title insurance. The remaining enforcement option—enforcement by the state—is seldom undertaken. It would seem that statutory requirements to examine title before issuing title insurance are rather toothless, at least in some states.



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Louisiana has a mandatory title search requirement in the insurance code which sets a minimum limit for the search period for sales and refinances before a policy of insurance can be issued.  There is also a statute in the insurance code requiring a statement in, or an addendum to, the act of sale and/or act of mortgage which discloses the name of the title insurance underwriter and the Louisiana licensed attorney who performed the title search forming the basis for the issuance of the policy.  The law also provides for the minimum content of the title opinion. There is a caveat in the insurance code statute that there no attorney-client relationship is created between the insured and the attorney who performed the title exam.  However, courts usually find that the attorney, who is in most cases is also the notary before whom the act is executed and who performed the title exam, is liable for title claims of the buyer unless there is an express disclaimer contained in the act reciting that the notary was not requested by the parties to examine title, and further stating that in fact he/she did not perform an examination of title.  The attorney's liability is limited to one year from the date of discovery of the title defect but no more than three years from the date of the act giving rise to the claim (ie the execution of the act of sale). 

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I am quite sure in this case the attorneys would also be suing the individual agents as well to take a bit of their E&O coverages for their negligence in not following state law.

There is no doubt that there are folks out there now promising real estate agents 7 days-to-closing mortgages.  The only way that happens is to short circuit both title and loan underwriting, with the plan being to absorb the losses, in order to maximize volume.  If this takes hold, it will be 2008 all over again in no time.  History has a way of repeating itself over and over. And the CFPB is too busy trying to make TRID happen, they don't even notice trends like this.

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