Title Insurer off the Hook for Closing Agent Misconduct

The closing of a home loan often involves multiple parties, and even a sophisticated buyer can be confused as to who represents whom. The individuals present can include representatives from the bank, real estate agents, title insurance agents, etc.  However, each person in the room has a specifically defined role, and it is important for all parties to be aware of what these roles are.

In a recent Pennsylvania case involving the misappropriation of loan funds, the Superior Court ruled that the role of a closing company that issues a title policy is not one of complete agency as to the title insurer.  The bank here extended a loan to the borrowers as part of a refinance, and forwarded the loan proceeds to the closing company with instructions to pay off a prior lien.  This closing company was also acting as the title insurance company’s policy issuing agent at the time of the closing, and so when the closing company agent misappropriated the funds instead of paying off the prior lien, the bank sought recovery from the title insurance company.

In affirming the trial court’s ruling denying coverage, the Superior Court first noted that the title insurer entered an agreement with the closing company that specifically disallowed any receipt of funds on behalf of the insurer.  This agreement also limited the company’s role to one of merely countersigning and issuing the title insurance commitments.  The Court then concluded that it was the bank that opted to entrust its funds with the closing agent, and so any duty to protect those funds was owed only by the malfeasant closing agent.

All parties to a real estate transaction can therefore learn from this situation, as the bank may not have been aware of the specially defined relationship between the closing company and the title insurer.  In any professional relationship or negotiation, it is important to know the duties and loyalties of each party involved in order to truly understand the direction of the transaction.  As was learned by the bank here, knowing these relationships is also necessary in order to determine where liability may lie if the transaction ultimately ends up in litigation.