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Title Insurance

First Midwest Bank v Stewart Title Guar Co, 218 Ill 2d 326 (Ill 2006).

Facts: In 1995, First Midwest Bank (First Midwest) ordered a title insurance commitment from Stewart Title Guaranty Company (Stewart Title) to insure a $300,000 loan. The borrowers needed the loan to purchase a property that they intended to use as a residence and as a home office. Upon receipt of the title commitment, First Midwest approved and closed the loan and Stewart Title issued the title insurance policy. Neither the commitment nor the policy showed any restrictive covenants on the property.

In 1996, First Midwest made another $300,000 loan to the borrowers. Intercounty National Title Insurance Company (Intercounty Title) provided the title commitment and title insurance policy for the transaction. Neither the commitment nor the policy showed any restrictive covenants on the property.

In 1997, First Midwest made a $752,000 wraparound loan to the borrowers. The borrowers used the funds from the wraparound loan to pay the first $300,000 loan, and First Midwest released the mortgage. Intercounty Title issued the title commitment for the wraparound loan transaction. The title commitment did not show any restrictive covenants. However, when Intercounty Title issued the title insurance policy, the policy showed a restrictive covenant, recorded in 1945, that prohibited use of the property for commercial or business purposes.

Prevented from using the property for their home business, the borrowers defaulted on their loans, and First Midwest received partial payment through a foreclosure sale. First Midwest sued the title insurers for coverage under the policies as well as for negligent and fraudulent misrepresentation.

The trial court dismissed the claims. The trial court dismissed the negligent and fraudulent misrepresentation claims for failure to state a claim. The trial court also determined that First Midwest could not sue for coverage under the policy because, according to its terms, the policy terminated when the wraparound funds repaid the first loan. Intercounty Title was no longer a party to the litigation. The appellate court affirmed, and First Midwest appealed the ruling on the negligent misrepresentation claim to the Illinois Supreme Court.

Holding: Affirmed. Stewart Title argued that the Moorman doctrine was a bar to recovery. In Moorman Mfg. Co. v Nat'l Tank Co, the court held that plaintiffs could not recover purely economic losses under a theory of negligence. 91 Ill 2d 69, 88, 435 NE2d 443, 61 Ill Dec 746 (Ill 1982). Contract law, rather than tort law, provides remedies for economic losses. An exception to the Moorman doctrine allows economic damages against entities that are in the business of providing information to guide others' business transactions. Stewart Title argued that this exception did not apply because it was not such an information provider.

First Midwest argued that Stewart Title was an information provider when it issued a title commitment. The information in the title commitment, which did not show any restrictive covenants, guided First Midwest to issue the loan to the borrowers. First Midwest cited Notaro Homes, Inc. v Chicago Title Ins. Co. as support for its position. 309 Ill App 3d 246, 257, 722 NE2d 208, 242 Ill Dec 719 (2d D 1999). In Notaro Homes, an appellate court held that Moorman doctrine did not apply when a purchaser ordered a title insurance commitment and entered into a transaction relying on the commitment. In that case, the title insurer failed to include a zoning ordinance on the title commitment, and thus, after purchasing the property and discovering the ordinance, the plaintiff was unable to develop the property as it intended. The appellate court said that a title insurer is in the business of providing information to guide others' business transactions when it issues title commitments. Accordingly, the court found the title insurer liable to the plaintiff for negligent misrepresentation.

Considering these two positions, the court noted that the economic loss doctrine had previously barred negligent misrepresentation claims against a third party electrical contractor, an architect, and an engineer. In Fireman's Fund Insurance Co. v SEC Donohue, Inc., the court explained that the exception to the Moorman doctrine required the provision of information rather than tangible goods or services. 176 Ill 2d 160, 679 NE2d 1197, 223 Ill Dec 424 (Ill 1997). The court said that the exception did not apply when the provision of information was ancillary to the defendant's sale of a product. Thus, the architect or engineer was not in the business of providing information as a product, but in the business of providing information as ancillary to sales of tangible products-buildings or building components, such as water supply systems.

For the court, the key factor in determining whether the exception applied against Stewart Title was the nature of a title commitment. The court agreed with Stewart Title that a title insurer is not in the business of supplying information when it issues a title commitment. The court relied, in part, on the brief of amicus curiae of the American Land Title Association, which distinguished a title commitment from an abstract of title. An abstract of title discloses all defects, liens, and encumbrances on the property, whereas a title commitment gives notice of the limitations of the title insurance without listing all defects, liens, and encumbrances.

The court also relied on a reading of the language of the title commitment, which describes defects, liens, and encumbrances that will appear as exceptions to coverage on the final policy or policies. The title commitment language does not promise that a search has been or will be conducted. Moreover, the court reasoned, it is "counterintuitive" to understand the title commitment language as including a guarantee of the results of the performance of a title search: the commitment's purpose is to set forth the terms for issuance of the title policy, and the purpose of the title policy is to insure against the risk of undiscovered defects, liens, and encumbrances. Therefore, defining that risk, the court concluded, is properly a matter of contract, not tort. The court explicitly overruled Notaro Homes.

EDITOR'S NOTE: A number of real estate attorneys and legal commentators have expressed surprise at the court's decision in First Midwest Bank, especially regarding the court's determination that a title insurer is not in the business of providing information when it issues a title commitment. However, for ATG's underwriting and claims staff, who have been working with the 1992 ALTA policy, the decision is well-reasoned and consistent with holdings in other states. Those decisions have similarly held that a title commitment is an offer to enter into an insurance contract, the terms of which are contained in the ALTA policy issued pursuant to the commitment. In First Midwest Bank, the Illinois Supreme Court clearly, and we think properly, rejects the notion of tort liability for errors in the commitment. The holding respects the notion that the parties entered into a contract of indemnity with all economic loss issues defined by the terms of that agreement under contract, not tort, law.

The Conditions and Stipulations of the policy states: "This policy is a contract of indemnity against actual monetary loss or damage sustained or incurred by the insured claimant who has suffered loss or damage by reason of matters insured against by this policy and only to the extent herein." The court found that a title company is in the business of selling insurance, not information. Therefore, the negligent misrepresentation exception to the Moorman doctrine applicable to those in the business of supplying information, such as an abstractor, does not apply to title insurers.

What makes this case unique is that the underwriter on the second policy for the construction mortgage, Intercounty Title, went bankrupt precluding the lender from being able to recover on that mortgage policy. Since the mortgage insured under the original policy issued by Stewart Title had been released, there was no contractual obligation still owing under that policy. That forced First Midwest Bank to try to recover on a negligence theory against Stewart for the omission of the restrictive covenant in its commitment and policy. The court rejected the action in tort.

But for the bankruptcy, the lender would have recovered under the Intercounty policy. However, First Midwest Bank would not have recovered the full amount of the defaulted loan. Instead, the measure of damages would be determined by paragraph 7(a) (iii) of the Conditions and Stipulations of the policy. That provision sets damages as: "the difference between the value of the insured estate or interest as insured (without the restrictive covenant) and the value of the insured estate or interest subject to the defect, lien, or encumbrance insured against by this policy (with the restrictive covenant)." Thus, if the restrictive covenant diminished the value of the property by $75,000, that would be the insured's damages.

First Midwest Bank highlights the necessity to fully understand all the terms and provisions of ALTA Owner and Mortgagee Policies. ATG is conducting a series of seminars in Illinois and Wisconsin that focus on these basic coverage issues. Check www.atgf.com for a full list of ATG seminars in your area.

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