A policyholder’s claim against its title insurer for negligently performing title searches and producing inaccurate legal descriptions of the property was dismissed because the source of duty rule and the economic loss rule provide that the policyholder’s remedy was only in contract.
U.S. District Judge Roderick Young said the plaintiff sufficiently alleged a breach of contract claim.
“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,” the judge wrote. “All of these stated damages merely represent Plaintiff’s economic loss from Defendant’s alleged misconduct. None of these damages — and none of the allegations — demonstrate any injury to the ‘safety of person and property.’”
The decision from the Eastern District of Virginia is Landfall Trust LLC v. Fidelity National Title Insurance Company (VLW 022-3-557).
In 2002, developers recorded a “Declaration of Covenants, Conditions and Restrictions for Henry’s Island,” which included plats of 10 subdivided lots on Henry’s Island in Lancaster County.
The declaration granted perpetual easements and rights of way to use septic drainfields located on nearby lots and restricted development on those lots. It also created a homeowners association to enforce the declaration.
Landfall Trust LLC purchased lots 9 and 10 on Henry’s Island in 2018. Fidelity National Title Insurance Company issued a title insurance policy that covered risks including “[t]itle being vested other than as stated in Schedule A”; “[a]ny defect in or lien or encumbrance on the Title”; and “[u]nmarketable title.”
Fidelity wouldn’t be liable if it were able to cure a defective or unmarketable title “in a reasonably diligent manner by any method” under the policy. Further, if litigation ensued for any reason, Fidelity couldn’t be liable until the case and all appeals were finished.
However, Fidelity’s land description didn’t include any mention of the septic and drainage provisions from the declaration. Elsewhere in the policy, Fidelity exempted coverage for loss or damage arising from the terms of the declaration.
In 2021, Landfall contracted to sell both lots to Jesse Crotty for $1,380,050. Before closing on the contract, though, Crotty sought a title insurance policy from Fidelity.
The insurer withdrew its first binder and issued a second. In particular, this second binder added “an entire new paragraph describing the easement that was included in neither the First Binder nor the Insurance Policy,” per the opinion.
Fidelity’s language didn’t satisfy Landfall or Crotty, who eventually pulled out of the deal.
When pressed by Landfall to either provide coverage or correct the land description, Fidelity “provided a blanket determination that ‘coverage is afforded, in part, and denied, in part,’” but didn’t offer any specificity regarding which aspects of Landfall’s claim were approved or denied.
After mediation, Landfall was forced to acknowledge that it voluntarily released Crotty from the contract after he identified the title problems.
The parties couldn’t resolve the coverage dispute, so Landfall filed suit for breach of contract and negligence, claiming Fidelity failed to either compensate it for losses related to the muddied title or to cure the relevant title questions in a reasonably diligent manner.
Landfall also argued that Fidelity negligently performed title searches and produced inaccurate legal descriptions of the property.
Fidelity moved to dismiss.
Breach of contract
Landfall said Fidelity’s description in the second binder incorrectly stated that the homeowners association also held a vested interest in the land. Further, it asserted that Fidelity omitted mention of the septic and drainage rights from the original policy’s land description.
When these defects created an unmarketable title — as evidenced by the failed sale to Crotty — Landfall said it was damaged by Fidelity’s failure to resolve the issues in time to save the sale.
Fidelity said Landfall’s contract claim must fail; it only concerned property that was outside the scope of the policy, which itself “excepts from coverage any condition created by the  Declaration, which includes the drainfield areas and any easements related to them.”
But Landfall pointed out that the declaration defined “Lot” to include rights to the septic drainfields, and that Fidelity should bear the risk of erroneous and conflicting property descriptions. Fidelity’s exception to loss arising from the drainage rights didn’t apply, it said, because its damages pertained only to the ambiguous legal description.
Young agreed with Landfall.
“The Court finds that 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,” he explained.
The judge declined to address Fidelity’s second argument and substantively analyze the insurance policy at the motion to dismiss phase. Instead, the judge found that Landfall’s pleadings were sufficient to state a claim for breach of contract.
“Here, the Court finds that Plaintiff has plausibly alleged a legally enforceable obligation, to wit: Defendant owed Plaintiff an obligation to pay out insurance proceeds if the events enumerated in the Covered Risks section of the Insurance Policy transpired,” Young wrote, adding that Fidelity had plausibly breached that obligation by issuing unmarketable title.
The judge also found — and Fidelity did not contest — that Landfall “has plausibly alleged that Defendant failed to either remedy the title problem or pay out to cover Plaintiff’s losses in accordance with the Insurance Policy.”
Finally, the judge said Landfall credibly claimed that it “suffered harm and injury in the form of monetary losses as it was not compensated for the losses of the Crotty Contract, nor did it receive the insurance payouts from Defendant.”
Young efficiently dispatched the negligence claim.
“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,” he wrote. “Plaintiff, however, does not inform the Court, nor cite any authority in support, of what that other source of duty is.”
Richmond attorney C. Jay Robbins IV, who represented Landfall, said his client’s problems began when two different title agents wrote three different property descriptions.
“If Fidelity had given us an off ramp, if it had devised a solution for fixing the title problem that’s developing, my client would have been satisfied,” he told Virginia Lawyers Weekly.
Depending on the outcome at trial, Robbins says his client hasn’t foreclosed on appealing.
Meredith Yoder and Trevor Reid represent title insurance companies and underwriters with Parker, Pollard, Wilton & Peaden in Richmond.
“There’s not a professional relationship that is created between Fidelity and the insured,” they noted. “In other words, Fidelity doesn’t undertake to do title research.”
That’s the job of the title agents, they said: to do the research so the underwriter can ensure an accurate legal description. While some states have statutory duties for underwriters, Virginia does not.
“Fidelity is undertaking to provide a professional service,” they said. “They are taking somebody else’s work from their agent and they are saying we will insure based on that description and if it turns out to be wrong we’ll do what the policy obliges, pay the premium amount, try to correct it, etc. Landfall is eventually going to have to establish that those drain fields were part of what was insured in 2018, because if the drain fields are not part of what was in that 2018 policy, it doesn’t matter.”