After my problem with A Missed Judgment Lien, I started thinking about the liability disclaimers that some abstractors use on their search forms. I have always had mixed feeling about them and have never tried to limit our liability is this way. I thought this would be a good time to revisit the issue.
When I began abstracting 14 years ago, this was a profitable business. It certainly wasn't a career where I expected to become a millionaire, but I was able to make a comfortable living and put a little money away for a rainy day. I considered it to be a fair and reasonable profit. Now there are abstractors out there charging less than I was charging 14 years ago; not one or two, but several of them.
In addition to the increased competition, we are seeing the volume of work decreasing. This decrease was caused not only by the normal cyclical market effected by interest rates, but also more damaging long term trends that no longer require an abstractor's search. Refinances, second mortgages, and equity lines are all being handled with an automated title search, or worse yet, a deed copy and credit report. This could mean that the market will not rebound as it has in the past.
Yet, despite downward pressure on abstracting fees, the costs of producing a thorough title search are still increasing. Errors and omissions insurance, health care, utilities, gas, copy fees, and the like, have all gone up since I have been in the business. While that is to be expected, the decline in abstracting fees was not something I had anticipated. I had always assumed that I would be able to keep my prices in line with those business costs.
Now, we have more clients requiring their abstractors to carry E&O and they utilize the abstractor as a means of outsourcing the liability of issuing their policies. Even the minor claims that I would have willingly paid just to keep a client happy can be devastating to our bottom line.
Still there are two problems I have with using a disclaimer to limit liability for our work: (1) I have some doubt as to their enforceability; and, (2) What message does it send to our clients?
There are two cases, both in Pennsylvania, that squarely addressed the issue of whether or not an abstractor could effectively limit his liability in this manner. While one upheld the limitation, the other did not.
In Express Financial Services Inc. v. Gateway Abstract Inc., Gateway had missed a $292,000 mortgage and Express had to pay $220,000 to their underwriter to reimburse them for the claim. The search that Gateway had completed contained the following statement:
"This title search is based upon the examination of recorded evidence from courthouse records. This is not a title policy nor is it a commitment for title insurance. Upon payment, liability is assumed by Gateway Abstract Inc., for any negligence, mistakes or omissions as an abstractor and only for the time period searched. This search excepts any defects, liens, encumbrances, adverse claims or other matters, as a result of or caused by computer error, program error, programmer error, or programming limitations, including but not limited to any misspellings or derivations of the surname when searching any courthouse automated system liability hereunder is assumed by the company for its negligence, mistakes or omissions in a sum not exceeding the cost of the search." (emphasis added)
The Court found that an oral contract existed between the parties based on their course of dealing, the delivery and acceptance of the order, its completion and the $40 payment for the search. The remaining question was whether the disclaimer effectively limited the liability of Gateway to $40. Because Express did not object the use of Gateway's forms containing the statement and the language of the disclaimer was clear and unambiguous, the Court held that Gateway's liability was limited to $40.
In Fidelity National Title Insurance Company of New York v. Suburban West Abstractors, Suburban missed a $318,750 judgment. Fidelity defended that claim and was able to recover part of the loss through a settlement agreement. Fidelity then sued Suburban for their remaining loss and attorney's fees and received a jury verdict for $176,000. Suburban appealed.
In the first trial, Suburban introduced their search report, which contained a statement purporting to limit the company's liability to $25, and a price list, which indicated the existence of a $10,000 errors and omissions insurance policy. On appeal Suburban claimed that Fidelity should not have been permitted to refer to the insurance policy and that the disclaimer limited Suburban's liability to $25.
Pennsylvania Rule of Evidence 441 states:
Evidence that a person was or was not insured against liability is not admissible upon the issue whether the person acted negligently or otherwise wrongfully. This rule does not require the exclusion of evidence of insurance against liability when offered for another purpose...
The Court found that Rule 411 applied and that "the evidence was offered for the sole purpose of determining whether the parties had agreed to restrict liability." Furthermore, the court stated that Suburban "cannot now object to the inclusion of evidence which it voluntarily introduced."
The Court upheld the judgment against Suburban, finding no error in the jury verdict. The disclaimer, limiting liability to $25, and the $10,000 errors and omissions insurance indicated a sufficient discrepancy allowing the jury to find that there was no agreement between the parties to limit the liability of Suburban.
Thus, it would appear that by furnishing a copy of an E&O insurance policy to the client, it would be difficult to later establish that a disclaimer was a part of an agreement with the client to limit liability for searching errors. This is especially difficult now that most clients require a copy of the policy. It seems clear that by requiring the abstractors to carry E&O insurance that they expect the abstractor to remain liable for losses they cause and they are not assenting to be bound by any disclaimer on the search forms.
Given the doubt about the enforceability of such a disclaimer, it would be foolish of an abstractor to provide services without E&O insurance. But, it doesn't seem possible to carry the coverage for your own protection, and effectively limit liability through a disclaimer; unless, perhaps, you do not mention to, nor provide, the client with information regarding the policy.
My other thought, regarding the message it sends the client, presents another complex issue. Would clients still be willing to work with an abstractor that claims no liability for their mistakes? Carrying E&O and taking responsibility for errors presents a much more professional image. And all else being equal, they would certainly choose one who did over one who did not.
Perhaps if all of the abstractors could effectively limit their liability to the amount paid for the search, which still remains doubtful, it would force a change in the industry. Clients would be forced to use the best abstractors to limit their exposure to liability, rather than any inexperienced abstractor who obtains an E&O policy.
The clients could still request the abstractor to pay for their mistakes by threatening to pull their work if the abstractor does not take responsibility for their errors, and the abstractors may comply rather than lose a good client. Yet, it would make them think twice about jeopardizing a good relationship with a skilled abstractor over an honest mistake.
What would make the most sense is for abstractors and their clients to share the liability. The clients charge much more for their services and are compensated for the risk they incur. While that does not exculpate the abstractor from liability, those who charge for the potential risk should bear some of the burden of mistakes. After all, a client with employee abstractors would still have a risk and no one to share in the liability. The proper way to manage that risk is to choose their abstractors carefully, based on skill and experience, rather than price and turn-around time. Just as they would fire an employee who is careless and makes too many mistakes, they should drop an independent abstractor who is similarly unqualified.
I have not yet decided to adopt a disclaimer for liability. But if I do, I will make it clear that it is not because we do not take pride in our work, nor strive to be well educated and informed of our duties. Rather, it will be because, no matter what we do, we cannot guarantee that we will never make a mistake and our compensation is simply insufficient to bear the full risk. I would also require an agreement in writing to the effect of our liability limitation. I would not solely rely on a disclaimer on our search forms.
At this point, I do not know what the answer is. But, something has got to change. Abstractors are not sufficiently compensated for the risk they assume. As the trend continues the better abstractors will realize that they can no longer justify remaining in the business and the industry will be left with a glut of inexperienced abstractors. The price will be cheap, but the cost will be enormous - to the abstractors, the title industry, and the consumers.
Robert A. Franco
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