Eastern District Of Pennsylvania: Closing Protection Letter Does Not Constitute “Insurance” For Purpose Of Statutory Bad Faith Claim In Pennsylvania

by Saul Ewing LLP
Contact

Bancorp Bank v. Lawyers Title Insurance Corp. , No. 13–6103 , 2014 WL 3325861 (E.D. Pa. Jul. 8, 2014).

Eastern District of Pennsylvania explains that while Closing Protection Letter may be an indemnity contract, it is not an insurance policy.

In February 2006, a borrower requested a loan in the amount of $1,750,000 from plaintiff Bancorp to finance the purchase of a commercial building located in Florida.  The loan application submitted to Bancorp listed the purchase price of the property as $2,100,000.  Based upon this purchase price, Bancorp agreed to lend the Borrower $1,750,000, approximately 83 percent of the purchase price. 

The next month, PA/NJ Abstract, Inc., the authorized Issuing Agent for Defendant Lawyers Title Insurance Corporation (“Lawyers Title”), delivered to Bancorp a commitment for title insurance for the principal loan amount of $1,750,000.  This title insurance policy covered Bancorp in the event of a loss.  The Issuing Agent also gave Bancorp a copy of a separate commitment for title insurance that was issued to the borrower insuring $2,100,000, the purported purchase price of the property.

Lawyers Title then issued a Closing Protection Letter (the “CPL”) to Bancorp in connection with the title insurance policy.  The CPL stated that Lawyers Title would reimburse Bancorp for losses incurred in connection with the closing of the real estate transaction under either of the following two circumstances: (1) “Failure of said Issuing Agent or Approved Attorney to comply with your written closing instructions to the extent that they relate to (a) the status of title to said interest in land or the validity, enforceability and priority of the lien of said mortgage on said interest in land, or (b) the obtaining of any other document, specifically required by you, but not to the extent that said instructions require a determination of the validity, enforceability or effectiveness of such other document, or the collection and payment of funds due you”; or (2) “Fraud dishonesty [sic] of said Issuing Agent or Approved Attorney in handling your funds or documents in connection with such closing.” 

Two years after Bancorp’s title insurance policy took effect, the borrower defaulted on the loan on the property.  However, upon investigation, Bancorp learned that Lawyer’s Title’s Issuing Agent prepared closing documents that falsely listed $2,100,000 as the purchase price of the property, while the borrower only paid $1,750,000.  Bancorp sent a claim (the “CPL Claim”) to Lawyers Title based on the Issuing Agent’s alleged fraud, a triggering event in the CPL that would require indemnification to Bancorp.  Pursuant to the CPL, Bancorp sought recovery on the grounds that it incurred a loss on the loan transaction as a result of the Issuing Agent’s fraud and dishonesty. 

Defendant Fidelity National Title Insurance Company (“Fidelity National”) handled Bancorp’s CPL Claim exclusively.  After the property was sold at auction for an amount less than the balance owed on the loan, Bancorp contacted Fidelity National and demanded compensation on the CPL Claim.  Bancorp alleged that it was entitled to recoup $1,511,083.19 from Lawyers Title based on the Issuing Agent’s alleged fraud in connection with the closing and loan transaction. Fidelity National refused to compensate Bancorp for the losses it allegedly suffered due to the fraud.

Bancorp then filed suit against Defendants in the Philadelphia Court of Common Pleas.  Defendants removed the case to the Eastern District of Pennsylvania, which in turn granted Defendants’ Motion to Dismiss on the claims of negligence and bad faith.  With regard to the bad faith claim, the question before the court was whether the CPL constituted an “insurance policy” under Pennsylvania law – a requirement for a bad faith claim.  The court agreed with the Defendants’ argument that the CPL was not an “insurance policy” and therefore the bad faith claim could not succeed.

The court first looked to Pennsylvania’s statutory definition of “insurance.”  While the term “insurance policy” is not defined in Pennsylvania’s bad faith statute, “title insurance” is described elsewhere as, in part, “insuring, guaranteeing or indemnifying against loss or damage suffered by owners of real property or by others interested therein by reason of liens, encumbrances upon, defects in or the unmarketability of the title to said real property; guaranteeing, warranting or otherwise insuring the correctness of searches relating to the title to real property; and doing any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this article.”  40 Pa. Stat. Ann. § 910–1(1).   In contrast, the court cited one treatise’s definition of a “closing protection letter” as “an agreement by a title insurance company to indemnify a lender, or  in some cases a purchaser, for loss caused by a settlement agent’s fraud or dishonesty or by the agent’s failure to follow the lender’s written closing instructions.” 

The district court further noted that courts appear to be divided over whether CPLs are entirely distinct instruments from title insurance policies. Looking to the law of other jurisdictions, the court acknowledged that one line of cases holds that CPLs, while related, are not the same as title insurance policies; nevertheless, other courts have held that because CPLs are so closely related to title insurance policies, both instruments may sometimes be treated as one and the same.

The district court ultimately relied upon a case decided by the Supreme Court of Alabama, Metmor Fin., Inc. v. Commonwealth Land Title Ins. Co., which addressed a similar factual scenario and found that a letter similar to the CPL did not constitute insurance.  The district court reasoned that first, while there was an insured/insurer relationship between the parties, that relationship arose from the title insurance policy (not the CPL).  Similar to the Alabama statute quoted in Metmor, Pennsylvania defines title insurance as protecting against losses which arise from liens, encumbrances, or defects which render title unmarketable.  In contrast, the CPL only protects against losses caused by: 1) the Issuing Agent’s failure to comply with Bancorp’s written closing instructions; and 2) the Issuing Agent’s fraud or dishonesty in handling Bancorp’s funds or documents in connection with the closing. As the court found in Metmor, the District Court found that the CPL was not a title insurance policy.  And, while acknowledging that the CPL may be an indemnity contract, the court held that since it was not an insurance policy, Bancorp could not maintain its bad faith claim.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Saul Ewing LLP | Attorney Advertising

Written by:

Saul Ewing LLP
Contact
more
less

Saul Ewing LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!