Home-Buyers Beware: Your Title Insurance Protects You Only So Far

As any good consumer knows, a contract covers only what is says it does. This is true even when instinct tells you otherwise. Title insurance is no different. Before any house closing, a title insurance company will run a “thorough” title search and issue a commitment and policy based on that search. Yet, what home-buyers may not realize is that they cannot rely on this search. Because the title commitment does not contain a guaranty regarding the performance of the title search, the home-buyer cannot complain to his title insurance company if title turns out worse than expected. In First Midwest Bank v. Stewart Title Guaranty, the Illinois Supreme Court just confirmed this principle, holding that the economic loss doctrine bars negligent misrepresentation claims against title insurers based on their title search performance. 843 N.E.2d 327, 336 (Ill. 2006).

In First Midwest Bank, the home-buyers made an offer to purchase property in Green Oaks, Illinois. 843 N.E.2d at 329. They planned to use this property both as their residence and as an office for their architectural firm. Id. at 329. Before the house closing, the home-buyers applied for a loan with the Plaintiff, First Midwest Bank. Id. Also, they obtained a title commitment from the Defendant, Stewart Title Guaranty. Id. This commitment guaranteed that Defendant would provide a title insurance policy to the home-buyers and to Plaintiff, after receiving certain fees. Id. While specifically providing that Defendant would issue a policy with its “comprehensive endorsement number 1,” the commitment made no mention of any defects in title. Id.   Subsequently, Defendant issued its title insurance policy. Id. Again, this policy contained no warning of title defects. Id.

Instead, Plaintiff and the home-buyers first learned of a defect in title some two years later, after Plaintiff loaned the home-buyers more money to fund the construction of an office and garage on the property. Id. at 329-30. In conjunction with this loan, a different title insurer issued a title insurance policy, and only through this policy did Plaintiff and the home-buyers learn that a restrictive covenant had encumbered the property since 1945. Id. at 330. This restrictive covenant expressly prohibited commercial use of the property. Id. With this prohibition, the home-buyers could not use the property as both home and office, as they had planned. Id. And, as to be expected, the home-buyers’ interest in the property dwindled. Shortly thereafter, the home-buyers defaulted on their loans and Plaintiff foreclosed. Id.

Unfortunately, the loans were just too large for Plaintiff to recoup the full amount in the foreclosure. Id. So, Plaintiff sought funds and remedy elsewhere. Id. This search led directly to Defendant – the title insurance company that supposedly ran a title search, found no title defects, and then issued a defect-free title commitment and policy. See id. Plaintiff asserted a claim of negligent misrepresentation against Defendant, alleging that it never would have loaned the money to the home-buyers had it known of the restrictive covenant. Id. Defendant, in opposition, argued that the economic loss doctrine barred the negligent misrepresentation claim, regardless of any errors it made when searching the chain of title. Id. The trial court agreed with Defendant, and the appellate court affirmed, laying the foundation for the Illinois Supreme Court to reexamine the economic loss doctrine in First Midwest Bank v. Stewart Title Guaranty. Id. at 331.

The economic loss doctrine, which originates from common law, precludes plaintiffs from recovering damages in tort actions for pure economic loss. Id. at 333. Economic loss is exactly what it sounds like – damages based on a monetary loss alone, without any other basis for the claim. Am. L. Prod. Liab. 3D § 60:38 (2006). In Moorman Manufacturing Co. v. National Tank Co., the seminal Illinois case on the subject, the Supreme Court explained the reason for the economic loss doctrine, stating that “contract law, which protects expectation interests, provides the proper standard when a qualitative defect is involved.” 435 N.E.2d 443, 449 (1982). To hold otherwise would expose businessman to unlimited liability for all economic consequences of their actions. 1 Modern Tort Law: Liability And Litigation § 2:5 (2d ed. 2005). As a result, for suits based on strict liability, negligence, and innocent misrepresentation, plaintiffs cannot recover for pure economic loss. Moorman, 435 N.E.2d at 453. There are three exceptions to this rule: (1) where the plaintiff sustained personal injury or property damage due to a sudden or dangerous occurrence; (2) where the plaintiff’s damages are proximately caused by the defendant’s intentional misrepresentation; and (3) where the plaintiff’s damages are proximately caused by the defendant’s negligent misrepresentation and the defendant is in the “business of supplying information for the guidance of others in their business transactions.” Id. at 450-52.

In First Midwest, Plaintiff recognized that it was seeking remedy for pure economic loss. 843 N.E.2d at 333. But Plaintiff argued that its claim for negligent misrepresentation qualified for the third exception to the economic loss doctrine because Defendant, as a title insurer, is in the “business of supplying information for the guidance of others in their business transactions.” Id. at 333. Plaintiff contended that by issuing a title commitment and policy, Defendant undertook the duty to perform a title search and provide accurate results of that search to Plaintiff. Id. at 335.

Defendant, with the help of the American Land Title Association’s amicus brief, argued otherwise. Id. Defendant explained that a “title commitment is simply a promise to insure a particular state of title.” Id. It does not contain or profess to contain a listing of all defects in title and in no way guarantees clear title or an accurate title search. Id.

The Illinois Supreme Court agreed. Id. Because the purpose of the title commitment is to guarantee insurance coverage and not to guarantee clear title, the Court held that Defendant was not in the “business of supplying information for the guidance of others in their business transactions.” Id. at 335-36; see also 1 Am. Jur. 2D Abstracts of Title § 16 (2006); 1 C.J.S. Abstracts of Title § 21 (2006). The Court explained that for the negligent misrepresentation exception to apply, the defendant must be “in the business of supplying information as opposed to providing something tangible.” Id. at 334 (emphasis in original). As a result, if the misrepresentation appears within information that is “incidental to the tangible product,” the exception to the economic loss doctrine does not apply. Id. at 334-35. The Court then noted that any information regarding title in the title commitment was merely to define the extent of the insurance coverage. Id. at 335. The title search performed and any statements about title were, in essence, incidental to the insurer’s tangible product – the insurance. Id. As such, Defendant was not in the business of supplying information, rendering Plaintiff’s negligent misrepresentation claim barred by the economic loss doctrine. Id. at 336. Accordingly, the Court affirmed and held that Plaintiff had no remedy against the title insurer. Id.

With this opinion, the Court overruled Notaro Homes, Inc. v. Chicago Title Insurance Co., No. 2-98-1196, 309 Ill.App.3d 246, 722 N.E.2d 208, 242 Ill.Dec. 719 (1999), which had indicated that a title insurer was in the business of supplying information for the guidance of others. First Midwest, 843 N.E.2d at 336. Moreover, the Court sent a warning to all home-buyers to beware. A title insurer is not a guarantor of clear title. And the title commitment and policy merely guarantees insurance coverage.