Pitkin County Title, a Colorado title agency, issued an owner's policy to Preston and Betty Henn. The Policy was underwritten by Fidelity National Title Insurance Co. Pitkin deleted standard exceptions from the policy for things that were ordinarily excluded from coverage. As a result, the Henn's owner's policy committed Fidelity to extended coverage for unrecorded easements. Unfortunately, the Henns soon became involved in a dispute over a neighbor's use of a footpath across their property. When the neighbor filed a quiet title action, the Henns filed a claim on their policy.
The Henns requested that Fidelity defend and indemnify them in the lawsuit, but Fidelity denied coverage. Later, Fidelity acknowledged that some of the neighbor's claims were covered, but the Henns rejected Fidelity's offer of partial coverage. Instead, the Henns sued Fidelity in federal court asserting claims for breach of contract and bad faith for failure to provide a defense.
Fidelity sued Pitkin County Title for allegedly breaching its agency agreement and for negligence in issuing the title policy with four deleted exceptions, including the exception for unrecorded easements, without first obtaining written approval. Eventually, Fidelity settled with the Henns and the case proceeded on Fidelity's claims against Pitkin.
The agency agreement contained a provision stating that Pitkin "shall not without prior written approval of Fidelity's corporate underwriting department... commit Fidelity to insure any Extra Hazardous Risk" as defined in the agreement. According to the agreement, Extra Hazardous Risk included "all risks which result in a liability not normally assumed by Fidelity." Fidelity had provided forms to Pitkin that contained certain standard policy exceptions - including one that expressly excluded coverage for "easements, or claims of easements, not shown by the public records."
The court found that Pitkin breached its agency agreement and that it was liable to Fidelity for the full amount of the claim. Ordinarily, Pitkin's liability was capped at the first $5,000 of any loss, but the agency agreement required Pitkin to reimburse Fidelity for the entire amount of any loss arising from its "negligent, willful or reckless conduct."
The policy specifically provided:
In the event that a Loss sustained or incurred for a matter arising under this Agreement resulted or arose from the negligent, willful or reckless conduct of [Pitkin], [Pitkin]'s employees or any independent contractor relied upon by [Pitkin], then [Pitkin] shall reimburse [Fidelity] for the Loss. The instances where [Pitkin] shall be liable to [Fidelity] under this subparagraph shall include, without limitation, the following:
1. Failure of [Pitkin] to comply with the terms and conditions of this Agreement or with the manuals, underwriting bulletins and/or instructions given to [Pitkin] by [Fidelity].
The "loss" was defined as sums paid or to be paid by Fidelity to settle or compromise claims under any policy issued by Pitkin. It specifically included "expenses, costs, attorney's fees actually paid or incurred in connection with investigation, negotiation, litigation, or settlement of such claim which ultimately requires payment of any sum by Fidelity."
The Tenth Circuit Court of Appeals did not discuss the reason that Pitkin decided to remove the standard exceptions from the policy, but Pitkin did not deny that it was a breach of the agency agreement. It merely attempted to argue that its liability should have been capped at the agreed $5,000. What the case makes clear is that it is important for agents to follow the terms of the agency agreement. Any deviation from standard underwriting practices must be approved in writing by the underwriter.