A recent decision by the Maryland Court of Appeals makes it clear that title companies and underwriters may now be susceptible to tort liability for negligence under Maryland common law.
On January 29, 2013, the Maryland Court of Appeals issued an opinion holding a title company liable to a third party who later relied upon its title search for negligence in performing the search on an encumbered property. This decision opens title companies up to burdens beyond contractual liability. However, the Court refused to find the underwriter in the case vicariously liable for the title company's negligence, and the rationale used by the Court may assist both underwriters and title companies in avoiding future tort liability.
The case, 100 Investment Limited Partnership v. Columbia Town Center Title Company 1, involved a tract of land in Howard County originally owned by an elderly couple. The couple sold the land to an investor, and this sale was reported in the county records office. Several years later, the couple sold a larger tract of land to developers that erroneously included the portion of land previously sold to the investor. The title company hired by the developers failed to report the previous sale in its title commitment. The title was underwritten by a title insurance company, and was subsequently sold and developed. When the oversight was discovered, the developer incurred over $190,000 in costs in order to obtain free title from the original buyer. The developer brought suit against the title company and the title insurance company, claiming the title company was negligent in conducting its title search, and that the title insurance company was vicariously liable for the title company's error. On appeal, Maryland's highest court found that title companies may be found liable to their clients not just for contract violations, but also in tort for negligent performance of their obligations under the contract.
The rule in Maryland has long been that, where the risk of loss contemplated in a contract is solely economic in nature, no tort liability will be imposed without an intimate nexus linking the parties involved. This case makes clear that if such a connection is established, tort damages may be pursued. The court stressed that providing a thorough title search "went to the core" of the relationship between the title company and its clients, and it was foreseeable to the title company in this case that the developer would rely on the accuracy of the search to facilitate the land contract. Additionally, because title companies provide a professional service requiring specialized skills, these "professional 'suppliers of information'" may incur tort liability for negligence in performing their services. Therefore, the title company had a duty to provide reasonable care in providing its service, and this duty was breached when the title company failed to perform a thorough title search.
However, the Court of Appeals declined to find the underwriter in this case vicariously liable to the developer as a result of the title company's negligent title search. The court found that an exculpatory provision in the underwriter's title insurance policy shielded the insurer from liability. The provision expressly exempted the underwriter from liability for "any claim of loss or damage, whether or not based on negligence, and which arises out of the status of the title to the estate." Though the court noted that such provisions may sometimes be found invalid, no invalidating circumstances were present in this case. Because the clause was found to preclude liability, the court did not address whether an underwriter could be found vicariously liable for a title company's negligence due to an agency relationship where such a provision was not present in the title insurance policy.
The Court's decision raises several matters for Maryland title companies and underwriters to consider. First, without action by the Maryland legislature to reverse the Court's decision, title companies are now clearly susceptible to tort liability for negligence under Maryland common law. The Court did not reach the issue of whether, absent an exculpatory clause, title insurance companies may also be held liable, either vicariously or directly in instances where the title insurance company is the party who performed the title search. Therefore, underwriters may also face the risk of tort liability in Maryland courts.
However, the Court's opinion provides a clear solution for underwriters to avoid vicarious tort liability. Underwriters should be sure to include in their policies a well-drafted exculpatory clause. Additionally, the Court's upholding of the underwriter's contractual provision may also provide title companies with a solution for limiting liability for negligence in performing title searches. Although the court did not address whether such clauses may be utilized by title companies to shield themselves from liability, it stated that "[i]t is well settled in Maryland that exculpatory clauses are generally valid" because of "the public policy rationale of freedom to contract."
Challenges to such provisions may be successful where a company engages in intentional conduct or extreme forms of negligence, utilizes grossly unequal bargaining power, or violates a public policy consideration. Therefore it is important for such provisions to be carefully drafted. In light of this recent decision, both underwriters and title companies should consider reviewing their policies to ensure that effective exculpatory clauses are included in client agreements.
Please contact the authors or anyone from Saul Ewing's Consumer Financial Services Practice to assist with this process.
1. No. 29, 2013 WL 322663 (Md., Jan. 29, 2012).