LAWYERS TITLE INSURANCE
NORWEST CORPORATION, ET
October 31, 1997
Record No. 970385
LAWYERS TITLE INSURANCE CORPORATION
NORWEST CORPORATION, ET AL.
OPINION BY JUSTICE A. CHRISTIAN COMPTON
FROM THE STATE CORPORATION COMMISSION
Present: Carrico, C.J., Compton, Lacy, Hassell, Keenan, and
Kinser, JJ., and Whiting, Senior Justice
In this appeal of right, we focus upon the meaning of
"insurance" in the context of the regulatory
jurisdiction of the State Corporation Commission and its Bureau
of Insurance. The term is not defined in the Code of Virginia,
but we have said that a "shifting of the risk is the essence
of insurance." Hilb, Rogal and Hamilton Co. v. DePew,
247 Va. 240, 248, 440 S.E.2d 918, 923 (1994).
Here, we consider whether the Commission erred in ruling that
it had no authority to regulate a product that is being offered
to consumers in the title insurance market. Specifically, the
dispositive question is whether the product, called "Title
Option Plus" (TOP), involves a shifting of the risk of title
defects, thus constituting insurance subject to Commission
In 1995, the Commission issued a rule to show cause against
appellees Norwest Corporation, Norwest Mortgage, Inc., and
American Land Title Company, Inc. The Commission alleged
defendants were violating Code ? 38.2-1024 by offering TOP
and thereby transacting the business of title insurance in the
Commonwealth without first obtaining a license from the
Commission. The rule was issued after a Bureau of Insurance
investigation was undertaken in response to a complaint made by
appellant Lawyers Title Insurance Corporation. Lawyers Title was
permitted to participate in the proceeding as a party
Subsequently, a Commission examiner conducted a hearing and
issued a report. He found against the defendants and recommended
that the Commission take punitive action against them.
Later, the Commission considered the hearing examiner’s
report, the evidence of record, and argument of counsel. In a
1996 Final Order and Opinion, the Commission unanimously
determined "that TOP is not insurance under the current
state of the law in Virginia." Consequently, the Commission
dismissed the rule to show cause. This appeal ensued.
Upon review of a Commission’s final order, we do not consider
the matter de novo. On appeal, the Commission’s
findings "are presumed to be just, reasonable, and
correct." Swiss Re Life Co. Am. v. Gross, 253
Va. 139, 144, 479 S.E.2d 857, 860 (1997). The Commission’s order
is entitled to the respect due judgments of a tribunal informed
by experience, and its decision will not be disturbed when
"based upon the application of correct principles of
The facts are virtually undisputed. Norwest Corporation is a
bank holding company and the parent of the other two defendants.
Norwest Mortgage originates first mortgage loans and sells most
of them in the "secondary market" to entities such as
the Federal National Mortgage Association (Fannie Mae), the
Federal Home Loan Mortgage Association (Freddie Mac), and the
Government National Mortgage Association (Ginnie Mae). American
Land Title, operating under the trade name "ATI Title
Company," is a title insurance agency licensed in Virginia
and performs searches of titles to real property in this state.
In 1992, Norwest Mortgage and American Land Title began to
develop TOP. TOP is a "process" by which Norwest
Mortgage determines the record status of title to real property
in order to decide whether to make a mortgage loan. The concept
grew out of precedent in the second mortgage loan industry in
which certain mortgage lenders relied on a record title search
and report, not title insurance, to determine whether to make a
mortgage loan. Norwest Mortgage began offering the product to
Virginia borrowers in March 1994.
TOP is available only on Norwest Mortgage loans secured by
first deeds of trust on existing residential property. TOP is not
available on loans for new construction, commercial property, or
leaseholds because "the risks are higher on that type of
property," according to the testimony.
Under the process, if a borrower elects to have TOP apply,
American Land Title prepares a "Title Condition
Report." This Report is not a guarantee of title. It is
American Land Title’s representation to Norwest Mortgage that the
information provided, including a list of liens and other
encumbrances, is based upon a search of the public land records.
The Report states it "does not insure or commit to insure
title or the validity, priority or enforceability of the Lender’s
lien, and is not intended to be relied upon as a legal opinion as
to the lien status."
Norwest Mortgage charges the borrower a fee for obtaining such
a report. Generally, the TOP fee is 10% less than the premium on
a traditional lender’s title insurance policy. If the Report
reveals no title defects in the property offered to secure the
loan, and the borrower meets other requirements to qualify for a
loan, Norwest Mortgage will approve the loan without requiring
the borrower to purchase a lender’s title insurance policy.
In Virginia, Norwest Mortgage’s loan is secured by a deed of
trust, which conveys legal title to the property to a trustee who
holds such title in favor of Norwest Mortgage as security for the
loan. Under the terms of the deed of trust, the borrower
represents to Norwest Mortgage that the borrower "is
lawfully seised" of the property and has the right to convey
it, that the property is unencumbered, except for encumbrances of
record, and that the borrower "will defend generally the
title to the Property against all claims and demands, subject to
any encumbrances of record." These deed of trust
representations are made by the borrower whether or not the
borrower has elected to have TOP apply to the transaction.
As we have said, Norwest Mortgage sells its first mortgage
loans, including TOP loans, on the "secondary market,"
primarily to Freddie Mac, Fannie Mae, and Ginnie Mae. Freddie Mac
and Fannie Mae will accept TOP in lieu of lender’s title
insurance or an attorney’s title opinion. In return, Norwest
Mortgage agrees to cure any title defect in the loan secured by
the deed of trust or to repurchase the loan from these secondary
purchasers. Norwest Corporation further guarantees Norwest
Mortgage’s performance. Ginnie Mae accepts TOP on Norwest
Mortgage loans, but does not require the additional guarantee
from the parent corporation.
In its Final Order and Opinion, the Commission focused on the
time "when the TOP transaction occurs" between the
borrower and the lender, and not on the time when Norwest
Mortgage sells the loan. It found that "TOP does not involve
the shifting of risk that is essential to the creation of
insurance." It stated that Norwest Mortgage, "like any
lender, incurs a risk that the priority of its lien is not what
it believed it to be when the loan was made. [Norwest Mortgage] creates and bears that risk itself by virtue of its decision to
make the loan. When lender’s title insurance is purchased,
. . . (the lender) transfers its risk to the title
insurance company. But where TOP is involved, [Norwest Mortgage] retains the title risk." We agree with the Commission’s
When Norwest Mortgage makes a loan, it is a mortgage loan
secured by a lien interest in the realty. At that point in time,
Norwest Mortgage incurs a title risk that the loan is not
properly secured or that its lien is not first in priority. Then,
Norwest Mortgage sells that mortgage loan into the secondary
market. At that point, Norwest Mortgage makes a warranty and
representation to the secondary market purchaser that the loan is
a first mortgage loan.
From the time of making the loan to the selling of the loan,
and thereafter for the life of the loan, the risk always is upon
Norwest Mortgage. It bears the risk that the borrower’s
representations, made in the covenants of the deed of trust, are
not correct. Parenthetically, if any of the borrower’s covenants
are false, then the lender’s lien interest in the realty securing
the loan may be in jeopardy, and the borrower is at risk of a
claim by the lender. TOP does not remove this risk from the
borrower. Finally, when the loan is sold on the secondary market,
Norwest Mortgage bears the risk that its representations and
warranties are not correct. Accordingly, throughout the entire
transaction, there is a retention of the risk by Norwest
Mortgage, and not a shift of the risk.
The Commission referred to its own administrative precedents
and found them "both persuasive and consistent with"
the view of this Court that a shifting of the risk is the essence
of insurance. For example, the Commission noted Administrative
Letter 1982-10 issued by the Bureau of Insurance drawing a
distinction between risk retention and risk transfer with regard
to extended warranty service plans offered by automobile
manufacturers or dealers, on the one hand, and those offered by
third parties, on the other. The Bureau had opined that such
contracts "are policies of mechanical breakdown insurance if
offered by [an entity] other than the manufacturer or seller of
the covered motor vehicle," but such contracts offered by
the manufacturer or seller are "more in the nature of
warranties than of insurance." The Bureau said: "The
primary risk of loss under such contracts must remain with and be
borne by the manufacturer or seller, or the contract will be
deemed to be an insurance policy."
Finally, the Commission addressed the "warranty"
issue in depth. The defendants argued to the examiner that
Norwest Mortgage’s contractual obligations under TOP are in the
nature of warranties, not insurance. Thus, defendants argued,
because the Commission does not regulate warranties, a license to
provide TOP in Virginia is not required.
Agreeing with defendants, the Commission rejected the hearing
examiner’s analysis, embraced on appeal by Lawyers Title, based
on the nature of warranties for manufactured products. The
hearing examiner said that if a so-called warranty "protects
the purchaser from losses caused by perils unrelated to the
manufacture of the product and outside the seller’s control, the
promise to indemnify is more in the nature of insurance" and
is not a warranty. The examiner noted that Norwest Mortgage
"assumes the risk of both on- and off-record title defects
by guaranteeing [a Norwest] mortgage has first lien status."
However, according to the examiner, "any losses resulting
from a title defect, particularly off-record defects, are
unrelated to any defect or failure in the loan, . . .
the so-called `product,’ sold by [Norwest Mortgage]. Rather, the
title defects relate to the collateral securing the loan"
and not "the loan itself." The examiner decided that
because these off-record defects, such as recording errors and
forgeries, could not be under the defendants’ control, TOP cannot
be a warranty and must instead be insurance. We agree with the
Commission that this analysis is flawed.
In the context of this discussion, a warranty relates to the
character or efficiency of the product sold, and would not cover
a hazard wholly unrelated to the quality of the product. See
Ollendorff Watch Co. v. Pink, 17 N.E.2d 676, 677
(N.Y. 1938). As the defendants argue, the representation and
warranty by Norwest Mortgage that its loan is secured by a first
lien is a representation relating to the character and quality of
the loan, the "product." The status of the lien
securing the loan is being warranted. This lien status is as
integral to the character and quality of the loan as the rate of
interest and duration of the loan. For example, a loan secured by
a second or third lien lacks the character and quality of a loan
secured by a first lien.
And, the fact that Norwest Mortgage’s warranties require
indemnification for off-record title defects that are beyond its
control does not mean they are not true warranties. Any
after-discovered defect affecting the status or priority of the
lien necessarily affects the character and quality of the loan,
whether the defect results from a negligent title search by
American Land Title or from an off-record problem not
discoverable by a diligent title examiner. The fact that Norwest
Mortgage has no "control" over these off-record defects
does not mean that Norwest Mortgage has warranted a condition
unrelated to the quality of the loan product sold on the
secondary market. A deficient lien is a defect in the product
sold by Norwest Mortgage, whatever its cause, and its contractual
undertaking with regard to such a defect is a warranty, and not
In sum, we agree with the Commission’s rejection of the notion
"that if a product looks like insurance, and is sold like
insurance, it must be insurance." Hence, we hold that
Lawyers Title has failed to overcome the presumption of
correctness of the Commission’s final order, and it will be
SENIOR JUSTICE WHITING, with whom JUSTICE HASSELL and JUSTICE
KINSER join, dissenting.
I respectfully dissent for the following reasons.
In concluding that the TOP program is not insurance because
the respective risks of defective title remain with the borrower
under the deed of trust and with Norwest Mortgage as the lender,
the majority merely looks at the facade of Norwest Mortgage’s TOP
program without considering its substance. Except for a statement
of how the charge for the TOP contract is computed as to each
borrower and a description of the "Title Condition
Report" (noting the disavowal of an intent to insure the
title or to express a legal opinion of the status of the title),
the majority makes no further mention of the terms of Norwest
Mortgage’s so-called TOP "process." 
Apparently, there are no written contracts between
TOP-purchasing borrowers and Norwest Mortgage which describe what
the buyer receives in return for payment of the TOP fee.
According to the majority, it is simply a "Title Condition
Report" which American Land Title furnishes its parent
corporation Norwest Mortgage for which "Norwest Mortgage
charges the borrower a fee . . . . [g]enerally
. . . 10% less than the premium on a traditional
lender’s title insurance policy." 
I do not think that the contractual relations between the TOP
borrowers and Norwest Mortgage can be so confined. In my opinion,
the oral representations by Norwest Mortgage’s employees to
induce borrowers to purchase TOP contracts are sufficient to
provide the terms of the oral contract Norwest Mortgage makes
with its borrowers in return for their payment of the TOP
Since these oral contracts are collateral contracts to the
borrowers’ deeds of trust, they may be considered in examining
the scope of Norwest Mortgage’s liability. Price v. Taylor,
251 Va. 82, 86-87; 466 S.E.2d 87, 89 (1996); High Knob, Inc.
v. Allen, 205 Va. 503, 506-07; 138 S.E.2d 49, 52 (1964).
Further, if the inducements are sufficient to indicate Norwest
Mortgage has orally agreed to the shifting of some of the risks
assumed by the borrowers in their execution of the deeds of
trust, I think those oral agreements are contracts of insurance
under the facts in this record. See Yates v. Whitten
Valley Rental Corp., 226 Va. 436, 438-39, 309 S.E.2d 330,
331-32 (1983); Dickerson v. Conklin, 218 Va. 59, 65, 235
S.E.2d 450, 454 (1977); Fred C. Walker Agency, Inc. v. Lucas,
215 Va. 535, 536, 211 S.E.2d 88, 89 (1975).
The record demonstrates that borrowers who participate in the
TOP program buy more than a "Title Condition Report" in
exchange for the TOP fee. Indeed, to induce the execution of a
contract collateral to the loan, Norwest Mortgage’s informational
instructions to its employees promoting the TOP program provide
in part that:
Title Option Plus (TOP) is not lender’s title
insurance; rather it is title coverage that costs
borrowers at least 10% less than standard lender’s title
insurance, [and] provides the same (or better)
protection against loss.
In Norwest Mortgage’s "easy script suggestions for
responding to borrower or Realtor questions about TOP"
appear the following pertinent questions and answers:
17. Is there a higher risk to Norwest by issuing this
protection versus title insurance?
Yes, however, ATI [Norwest Mortgage's subsidiary
company doing the title search] has a good track record
compared to the industry in managing the risk of agent
error, negligence, and errors incurred in closing the
loan. We can manage these risks more effectively than an
independent agency structure through Quality Assurance
Program and established accounting controls that most
independent agencies lack.
. . . .
21. How much risk is there in other situations where a
title insurance underwriter would have borne the risk,
such as claims resulting from liens that are not
detectable on the record?
Norwest will establish an allowance for losses to
cover these and other "agent error" losses. We
estimate that these losses will be less than .25%.
. . . .
23. What protection does TOP afford the borrower?
TOP affords protection to the lender only:
. . . .
When a purchase money borrower chooses TOP the
protection is provided to the Lender. TOP indirectly
protects the borrower to the extent that: a) ATI
[Norwest's title subsidiary] will not issue TOP unless
the title is clean, and b) If a title defect shows up
after closing, ATI will usually have to cure on behalf of
the Lender which would cure for the Buyer as well.
Although these and other statements made to TOP purchasers
expressly disavow an intention to provide any kind of insurance
protection to the borrower, I do not think Norwest Mortgage can
conceal the essential nature of its contract by such disclaimers.
Rather, I suggest that whether a particular contract is one of
insurance does not depend on what it is called, but what it does.
Associated Hosp. Serv. v. Mahoney, 213 A.2d 712, 721 (Me.
1965); People v. Roschli, 9 N.E.2d 763, 764 (N.Y. 1937); cf.
Parker v. Inge, 157 Va. 592, 599, 161 S.E. 884, 886 (1932)
(principal-agent relationship determined by substance rather than
form of contract).
Here, as the majority notes, the borrower covenants in the
deed of trust to "defend generally the title." However,
as the above inducement literature demonstrates, that obligation
is shifted from TOP borrowers to Norwest Mortgage in the TOP
program in which Norwest Mortgage obligates itself to defend
against any claim adverse to the borrower’s title.
In my opinion, this shift of obligation is a shift of the risk
of having to defend a claim adverse to the borrower’s title. In
support, I note that a contract to provide legal services in the
event of a contingency in return for an up-front fee is one of
insurance. See Allin v. Motorist’s Alliance, 29
S.W.2d 19, 22 (Ky. 1930); Continental Auto Club, Inc. v.
Commissioner of Ins., 60 N.W.2d 180, 181-82 (Mich. 1953); State
v. Blue Crest Plans, Inc., 421 N.Y.S.2d 579, 580-81 (N.Y.
App. Div. 1979); Texas Ass’n of Qualified Drivers, Inc. v.
State, 361 S.W.2d 580, 582 (Tex. Civ. App. 1962); Wayne F.
Foster, Annotation, Prepaid Legal Services Plans, 93
A.L.R.3d 199, 199 n.2 (1979); see also Physicians’
Defense Co. v. Cooper, 199 F. 576, 580-81 (9th Cir. 1912)
(applying California statutory definition of
"insurance"); Arkansas Motor Club v. Arkansas
Employment Sec. Div., 373 S.W.2d 404, 407 (Ark. 1963)
(Arkansas statutory definition); Physicians’ Defense Co. v.
O’Brian, 111 N.W. 396, 397-98 (Minn. 1907) (Minnesota
statutory definition). But see Vredenburgh v.
Physicians Defense Co., 126 Ill. App. 509, 513 (1906); State
v. Laylin, 76 N.E. 567, 569 (Ohio 1905).
Norwest Mortgage has minimized its risks in issuing TOP
contracts by (1) confining them to existing residential housing,
(2) spreading the risks among a large group of TOP purchasers,
and (3) establishing a reserve against any such losses,
apparently from the fees paid by all TOP borrowers. These indicia
of insurance cannot be obscured by Norwest Mortgage’s
representation that TOP is not insurance. See Mahoney,
213 A.2d at 721; O’Brian, 111 N.W. at 397-398; Roschli,
9 N.E.2d at 764; Blue Crest Plans, Inc., 421 N.Y.S.2d at
Even though the ultimate risk of a title defect remains with
the borrower under the deed of trust, considering the substance
of Norwest Mortgage’s undertaking, I conclude that its obligation
to defend any title claim shifts a part of the TOP borrowers’
risk to Norwest Mortgage in return for the borrowers’ payment of
the TOP fee.
The majority reasons that since TOP is nothing more than
Norwest Mortgage’s warranty to the secondary purchaser of the
character and quality of the lien securing the loan (the product
sold), it cannot be insurance. However, these warranties do not
relate to the borrower whose rights against Norwest Mortgage are
created in the TOP contract.
For these reasons, I would hold that Norwest Mortgage’s TOP
plan is one providing insurance protection to its borrowers and,
therefore, a violation of Code ? 38.2-1024. Accordingly, I
would remand this case to the State Corporation Commission for
further action consistent with that conclusion.
 The majority states that
"[i]n return [for Freddie Mac's and Fannie Mae's acceptance
of TOP], Norwest Mortgage agrees to cure any title defect in the
loan secured by the deed of trust or to repurchase the loan from
these secondary purchasers." However, Michael J. Keller, one
of the self-styled "co-authors" of TOP, testified that
his employer Norwest Mortgage makes that agreement on all
loans it sells to secondary purchasers.
 Norwest Mortgage’s TOP fee,
which the majority indicates is simply for obtaining the title
condition report, is several times as large as the amount Norwest
Mortgage pays its subsidiary American Land Title for this report.
This made me wonder whether something else is furnished the TOP
purchaser by Norwest Mortgage in return for payment of this
larger fee. As I later discovered, a substantial part of the TOP
contract is Norwest Mortgage’s acceptance of a transfer of a part
of the borrower’s risk of bad title.