Court Rejects Claims that Title Insurer Had a Duty to Prevent Seller Impersonation Fraud

A federal court dismissed a lawsuit claiming that a title insurance company had a duty to prevent a fraudulent property sales transaction even though there were potential red flags that the purported seller was not in fact the true owner of the property.

The plaintiff company entered into a contract to purchase a plot of land it found in a real estate listing.  The seller claimed to be living in Vietnam at the time and the parties never met in person.  As part of the transaction, the plaintiff sought to purchase title insurance and the title agent provided a title insurance commitment on behalf of the title insurer.  In advance of the closing, the title agent had difficulty obtaining various properly executed documents and other information from the purported seller.  Further, the title agent requested a copy of the seller’s driver’s license and passport, but the seller never responded to the request, and the title agent did not follow up.

One condition for final issuance of the title insurance policy was that title to the property had to be properly filed and recorded with the county recorder.  In the days before closing, the title agent informed the parties that he could not transfer the purchase funds to the seller until the deed for the property was recorded.  Nevertheless, the title agent later wired the funds to the purported seller before the deed was recorded.  It was later discovered that the purported seller was an imposter who did not own the property, and the funds could not be recovered.  Further, at some point after the wire transfer was sent, the buyer learned that the county recorder had declined to record the deed because it was a forgery.

After the buyer sought coverage under the policy, the title insurer filed a declaratory judgment action in the U.S. District Court for the Southern District of Ohio seeking a declaration that it had no coverage obligation.  Specifically, the insurer asserted that the policy had never gone into effect because recording of title for the property was a precondition for issuance of the policy, but the deed at issue here had been rejected and was thus never recorded by the county.  The buyer filed counterclaims alleging negligence, breach of fiduciary duty, and breach of contract by the title insurer, and the title insurer moved to dismiss the counterclaims.

The court granted the title insurer’s motion to dismiss the counterclaims (without formally ruling on the insurer’s underlying declaratory judgment claims).  With respect to the breach of contract claims, the court found that the policy’s precondition that title be properly recorded was not met, such that the title insurer had not breached any commitment by refusing to provide coverage.  The court also refused to find any implied escrow contract between the title insurer and the buyer whereby the title insurer would have been obligated to accept and disburse the payment funds according to the parties’ applicable agreements and in accordance with industry standards.  At most, any such implied escrow agreement might exist between the buyer and title agent who handled the closing.  The title agent, however, who was not a party to the suit, was a separate entity from the insurer.

The court also rejected the buyer’s tort claims for negligence and breach of fiduciary duty, finding that the insurer did not have any legal duty to warn the buyer of the possibility of seller impersonation fraud or to take steps to ensure the buyer did not engage in a fraudulent transaction.  To the extent such a duty might arise from contract, Ohio law generally prohibits a party from pursuing a breach of that duty using tort claims.  Further, even if the commitment to issue title insurance was deemed an enforceable contract, the express terms of the agreement did not contain any such duty.  Title insurers do not have a fiduciary duty to property buyers under Ohio law, and the fact that a title insurer may have superior knowledge about the risks of seller impersonation fraud compared to the buyer does not establish a special relationship of trust.  The court also could not find any caselaw suggesting the existence of a standalone legal duty under Ohio law for title insurers to warn their prospective customers about dangers inherent in that transaction.  Finally, the court found that the title insurer was not responsible for the conduct of the title agent beyond the title agent’s issuance of the title insurance commitment and policy, such as with respect to the title agent’s handling and transferring of the buyer’s money.