Title insurer successfully dismisses negligence claim

Where a policyholder sued its title insurer for negligently performing title searches and producing inaccurate legal descriptions of the property, the negligence claim was dismissed. The source of duty rule and/or the economic loss rule provided that the policyholder’s remedy was only in contract.

Background

In 2018, Landfall Trust LLC purchased lots nine and 10 on Henry’s Island, a parcel of property in Lancaster County, Virginia. Fidelity National Title Insurance Company issued an owner’s policy of title insurance to plaintiff regarding those lots.

In this lawsuit, plaintiff asserts that defendant failed to either compensate Landfall for its losses related to the muddied state of its title to lots nine and 10, or to cure the relevant title questions “in a reasonably diligent manner.” Plaintiff also claims negligence, asserting that defendant negligently performed title searches and produced inaccurate legal descriptions of the property owned by plaintiff. Fidelity has filed a motion to dismiss.

Breach of contract

Defendant argues that plaintiff fails to state a claim for breach of contract because plaintiff’s claim only concerns property (the drain fields) located outside the scope of the 2018 policy. Additionally, defendant contends that the policy “excepts from coverage any condition created by the [] Declaration, which includes the drainfield areas and any easements related to them.”

Defendant’s first argument fails because the absence of any reference in the 2018 policy to drainfields, encumbrances or other land interests is the very root of plaintiff’s grievance. Beyond plaintiff’s factual allegations to that point, the court declines to engage in a substantive analysis of the 2018 policy at this stage.

As to defendant’s second argument, the court is not persuaded that a motion to dismiss is the appropriate time to engage in an interpretation of the 2018 policy. Thus, the only question remaining is whether plaintiff has presented sufficient factual allegations to state a claim for breach of contract under Virginia law. The court finds that it has and thus denies the motion to dismiss Count One.

Negligence

Defendant contends that the source of duty rule or the economic loss rule provides that plaintiff’s remedy is only in contract, therefore plaintiff cannot recover in tort, and this claim should be dismissed. The court agrees.

The source-of-duty rule precludes such a claim because defendant’s duty to plaintiff to perform the title search and produce the legal description of lots nine and 10 arose solely out of the insurance policy. Plaintiff fails to identify any independent duty in tort that defendant owes to plaintiff regarding these tasks. Absent the existence of the insurance policy, defendant would have no obligation to produce the title searches and the property descriptions. In short, plaintiff’s negligence claim merely involves “allegations of negligent performance” of the policy’s obligations.

While admitting that “there is no clear binding authority in Virginia” on the “question of other duties owed to Landfall,” plaintiff conclusively and unpersuasively states that “the obligation to search the title does not appear in the insurance policy,” and that there is “another source of duty” that allows the negligence claim to exist independently of the breach of contract claim. Plaintiff, however, does not inform the court, nor cite any authority in support, of what that other source of duty is.

Even if the source-of-duty rule did not apply in this case, the economic loss rule independently precludes plaintiff’s negligence claim because plaintiff has only incurred economic loss from defendant’s alleged misconduct. Plaintiff’s only argument in response to this conclusion is that other jurisdictions do not follow the economic loss rule or Virginia’s interpretation of it. However, plaintiff is attempting to bring a negligence claim in a Virginia federal court for events occurring exclusively in Virginia. Therefore, Virginia law, and its formulation of the economic loss rule, applies.

Defendant’s motion to dismiss granted in part, denied in part.

Landfall Trust LLC v. Fidelity National Title Insurance Company, Case No. 3:22-cv-194, Dec. 21, 2022. EDVA at Richmond (Young). VLW 022-3-557. 16 pp.