Bank Cannot Sue For Title Insurer's Negligence

A recent case clarifies the duties owed by title insurance companies to lenders on transactions that they insure. In this case, the Illinois Supreme Court ruled that the title insurance company could not be held liable for negligent misrepresentation.

The case involved the purchase of a piece of property that the buyers intended to use for an interior design business. The title insurance commitment did not show that the use of the property was restricted to residential use only, and thus the bank loaned the buyers $300,000. Later on, it came to light that the property could not be used for business purposes, and the buyers defaulted on the loan.

The bank then sued the title insurance company for negligent misrepresentation. The supreme court rejected the claim that the title insurer was liable. It did so by relying on the economic loss rule, which provides that an injured party usually cannot recover for another's negligence if the only loss is an economic loss.

In reaching this decision, the court rejected the bank's argument that the case fell within an exception to the economic loss rule that applies when a person makes a negligent misrepresentation in connection with his or her business. The bank argued that the title commitment was a representation that the property was not subject to a use restriction, and that the title insurer was negligent in making this representation because the property was restricted.

The court found that this was not the case. Although the title commitment listed liens, claims, and restrictions that the title insurer knew about, it did not claim to be an exhaustive list, and the title insurer never guaranteed its accuracy. The court further noted that the information provided by the title insurer was not the focus of the transaction. Instead, the focus of the transaction was the title insurance policy, and the information provided was ancillary to that focus. Accordingly, the only loss that the bank suffered was economic, and it could not recover.

This decision is a comfort to title insurers, as it reduces the number of cases where they may be made to pay on a title insurance policy. However, banks may argue that it will drive up the costs of loans. Since there is one less party who can be liable for mistakes made in connection with loans that banks make, they may have to charge more to protect themselves from similar mistakes in the future.

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