In a real estate transaction, the relationship between the title insurance agent and the title insurance underwriter exists long after a closing. Despite careful title review and underwriting, claims still arise on title policies that need attention and resolution. There are numerous missteps, oversights and intricate undesirable actions that can occur throughout the life of a transaction that could result in a title claim. In this article, Doma has identified five big mistakes that can lead to claims. Some are noted as common occurrences, and all have the potential for high-dollar losses and agent liability to the underwriter.
No. 1 – Wire Fraud
Title agents are often reminded by underwriters and regulators to practice vigilance, stay educated and communicate with staff regarding wire fraud vulnerabilities in the real estate transaction. Business email compromise (BEC) scams continue to plague small, medium and large businesses worldwide, causing an estimated $26 billion in domestic and international losses since the FBI began tracking them in 2016. For the title industry, the rise in BEC scams and related wire fraud has resulted in a rise in associated claims that can lead to substantial losses.
A mistake occurs when the agent does not investigate sham wiring instructions sent via a fraudulent email, falling victim to the crime. There are numerous measures to prevent cyber fraud, but typically, a simple phone call by the agent to verify wiring instructions can prevent unwanted trouble from these scams.
In the last few years, various parties to the real estate transaction have filed lawsuits alleging their real estate, mortgage and settlement service providers should have detected and prevented cyber fraud scams that wiped out closing proceeds. At the center of many of these lawsuits are title and closing professionals, who serve as the conduit for wire instructions. One such case in Virginia involved a bank that filed a two-count complaint against a law firm, which, in turn filed a third-party complaint against the bank’s mortgage servicer. According to the court, the law firm followed fraudulent wiring instructions, thereby disbursing funds to the scammer instead of the intended bank, leading to the web of lawsuits.
Prior to closing, the mortgage servicer fell victim to a BEC scheme in which confidential emails containing customer financial information were compromised. From this breach, the scammer learned of the upcoming funds transfer, mimicked the mortgage servicer’s email address and provided the fraudulent wiring instructions to the law firm. The law firm denied any negligence, and in its complaint against the mortgage servicer, said the servicer should have known about the scheme and didn’t notify its customers of the breach until a month after the transaction closed.
Regardless of which party the court ultimately decides will bear responsibility in this case, the BEC incident is a sobering reminder that a closing agent can be held legally responsible for wiring funds to the wrong account. An agent’s liability may not just be limited by direct litigation with the parties involved in the transaction though. Costly claims can arise under the title insurance policy.
One can imagine a claim arising from a BEC scheme if the lender, whose payoff funds were stolen, commences foreclosure proceedings against the property. If the transaction was a sale and the new owner obtained title insurance, the title insurance underwriter would likely be faced with a claim in the amount owed to the unpaid lender, in addition to any costs incurred in defending the new owner against the foreclosure. In this scenario, the underwriter may look to the agent for recoupment of its losses. A phone call by the closing agent to confirm the wire instructions could prevent such a claim.
Eight Tips to Combat Wire Fraud
Fraudsters continue to find new ways to steal information and money through increasingly sophisticated BEC scams. When they succeed, this can lead to claims. Here are some tips to combat these threats:
- Establish wire instructions and money-transfer protocols with your settlement or real estate agent when the title order is opened.
- Note the parties’ phone numbers and email addresses in your file.
- If you receive an email requesting last-minute changes to wire instructions, call the parties to verify the email is legitimate using the phone number in your file.
- Do not reply directly to emails containing last-minute changes to wire instructions. Upon close scrutiny, you may find that the email address is slightly off. Start a fresh email to your customer using the email address you have on file.
- Never click on any links in such an email, as they may introduce malware that can harm your computer or company’s systems.
- Never email your customers’ sensitive, nonpublic personal information.
- Alert all parties and law enforcement authorities if you receive instructions containing alternate account information, and do not transfer funds.
- Review any errors and omissions insurance or cybersecurity policies for specified conditions and reporting requirements pertaining to cybersecurity breaches and criminal activity.
No. 2 – Elder Fraud
According to the U.S. Census Bureau, there were 40.3 million Americans age 65 and older in the 2010 Census. In 2018, that number was estimated at 52 million, representing 16 percent of the U.S. population. Today’s estimate is 73 million, a number driven by the aging of the Baby Boomers born between 1946 and 1964. The growth of this demographic, in part, explains why in the last few years, the title industry has seen a dramatic increase in elder financial abuse claims, with a large number of them coming from California.
Historically, allegations for elder abuse have targeted the primary wrongdoer, such as the financial advisor, caregiver or relative, who took advantage of the elderly’s mental vulnerabilities in order to obtain control over the victim’s assets. Even though the underwriter and title agent may have no direct contact with the borrower to know his or her age, the title professional is now often included as a collateral defendant by victims in what are typically last-ditch efforts to maximize recovery of a loss of life savings.
Due to these lawsuits, courts are now starting to grapple with the question: What duty of care do title professionals owe those individuals age 65 or older?
While this question lingers, the more frequent concern is claims created by elder abuse victims who file litigation to invalidate a lender’s security interest or quiet title against a new owner. Keep in mind these parties may have had nothing to do with the scam against the victim. Under their title insurance policies, the lender and new owner in this scenario can file claims with the title insurance underwriter, tendering their defense. As this type of litigation can frequently involve intra-family disputes and voluminous discovery, the costs associated with defending the insureds are high as are the potential losses resulting from its resolution.
The mistake is made when the title agent fails to investigate a red flag that could potentially lead to a discovery of elder abuse and prevention of a claim. If a red flag is ignored or otherwise missed, a title insurance underwriter may seek recoupment for their losses from the agent.
Elder Abuse Red Flags
The American Land Title Association identified these common warning signals that title agents should investigate when evaluating whether a party to the transaction may be suffering from reduced mental capabilities:
- Never get to speak directly with the elder person involved in the transaction
- Appearance of disorientation or lack of understanding
- Person seems unaware of dates and times
- Person seems to lack understanding of what the transaction is about
- Recent, uninsured deeds in the chain of title
- Change in the contact person or other unauthorized user
- Elder borrower is not allowed to speak for himself/herself
- No documentation to support third party’s authority
- Use of power of attorney (POA) or change in grant of POA
- Free and clear property
- Documents signed outside of escrow
- Sales or loan proceeds paid to someone other than the borrower or seller
- Holder of POA wants funds disbursed to himself/herself
No. 3 – Search Errors
One of the more common claims in title insurance transpires because of errors made during the title search, in which varied items can be missed due to narrow search parameters or simple oversight. In periods when mortgage rates are low and real estate transaction volume is favorably higher, moving transactions quickly through to close can exacerbate the risk of missing items in the search that later result in claims. The misunderstanding or misinterpretation of documents can also be troublesome and lead to claims.
Examples of search errors include missed judgments; missed or ignored judgment liens, such as federal tax liens or restitution liens that attach to the property; minor name misspellings; and missed second mortgages, unpaid taxes, heirs, easements and partial owners.
In a case filed in the U.S. District Court, Northern District of Illinois, Eastern Division, the court held that the federal tax lien in question was valid despite the misspelling of the first name (Carrol rather than Carroll). Carroll owned property with his wife in a village north of Chicago. The IRS assessed federal income taxes against the couple from 2000 to 2004 and demanded payment on the full balance in 2007. They never paid, and, shortly after Carroll’s wife died, Carroll died in 2009. A year later, the IRS filed a notice of federal tax lien for $115,000 with the Lake County recorder, in which it listed the taxpayer’s name as Carrol instead of Carroll. A few months later, Carroll’s son recorded an affidavit of heirship, stating that his father died intestate (without a will), leaving six heirs. All six heirs conveyed their interest to an Illinois land trust, with an investment property firm ultimately acquiring title and taking out a new loan.
In 2017, the IRS sued the investment firm to enforce the tax lien, and by this time, the tax assessment costs had increased to $170,000. In determining the validity of the tax lien, the court cited In re Crystal Cascades Civil LLC (U.S. Bankruptcy Court, D. Nevada, Case No. 19-10480), which held that a minor misspelling in a taxpayer’s name did not undermine the validity of notice, but the failure to use any form of the debtor’s legal name did.
A prudent title professional knows to investigate all possible name variations for individuals listed on recorded mortgages and property deeds before insuring clear title, as misspelled names, nicknames and aliases are common occurrences. Failure to take these critical steps can result in expensive claims later if a court deems such recorded instruments to be valid and enforceable against the property.
Search errors are frequently labeled as straight-forward negligence, and depending on the situation, underwriters can hold the agent or abstractor liable for recoupment for related claims. Making Doma’s “big mistake” list, search errors such as missed judgments or federal liens can sometimes lead to claims totaling $500,000 or more.
No. 4 – Bankruptcy
Bankruptcies can create landmines for title professionals that can result in large claims. These claims usually happen one of two ways – an easily avoidable error by the agent allows the trustee for the bankruptcy estate to use their strong arm powers to wipe out an insured lender’s secured interest in the property; or, a recorded discharge from bankruptcy in the chain of title is not properly reviewed and considered for attached liens or other troublesome items.
In the first type of bankruptcy claim, an error that can typically be easily resolved becomes a large claim if not corrected prior to a borrower filing for bankruptcy. For example, if a title agent inadvertently records an insured mortgage in the wrong county, usually simple steps can be taken to correct the recording error. Though this may result in a minor claim, a larger claim scenario can result if the borrower has filed for bankruptcy between the time the borrower originally executed the mortgage and when it gets recorded in the correct county. This is because the filing of a bankruptcy by the borrower results in an automatic stay, and the corrective action may violate the stay. More importantly, in this case, the bankruptcy trustee can use their “strong arm” powers to avoid liens not perfected at the time the bankruptcy was filed. Therefore, the lender with a mortgage insured by a loan policy is at risk of having its lien, which is secured by the title, completely wiped out. In other words, a title professional’s attempt to fix what could result in a minor claim becomes a major claim.
A bankruptcy claim can also arise when a property has a bankruptcy in its chain of title, and the agent ignores or does not properly review and investigate it. There could be an underlying error in the bankruptcy itself, or agents may mistakenly equate a bankruptcy discharge obtained by the borrower as tantamount to a release of the property from the mortgage. A home equity line of credit or second mortgage, for example, may still be attached to a property after a discharge even if the borrow is no longer personally liable. If this is missed, a future claim could be filed. If confronted with a bankruptcy in the chain of title, agents should reach out to their underwriting counsel for direction; otherwise, the title agent runs the risk of the underwriter looking to them when the hidden sleeping giant wakes up and results in a large claim.
No. 5 – Probate
Rounding out our big five, a common mistake occurs when an agent doesn’t properly identify all of the correct heirs with an interest in the property when there’s been a recent probate in the chain of title. A thorough search should be done, even if an heir states that he or she is the sole heir to the parent’s estate. In addition, to complicate an already difficult search task, every state has different rules for how property passes intestate. Because of this, it’s best to contact title insurance underwriting counsel early. Claims arising from probate are common and can result in high-dollar losses.
With second marriages, for example, children from the first marriage may assert an interest in their parent’s property, even if the second spouse is still living there. In this scenario, if a husband of a deceased wife sells the property as if he owned it in fee simple, the children from the wife’s first marriage may challenge the conveyance. Depending on the state’s laws and how the property was held prior to the wife’s death, the children may or may not have a valid claim to the property. If the agent doesn’t diligently seek information related to the estate, including surviving children, the new owner may end up with a title claim when the children file suit to get what they deem is their share of the property.
In a 2008 California court case, a husband and wife each had two daughters from a previous marriage. Following the husband’s death, the surviving wife lived for many years in the home they jointly owned. When the wife passed away, she left everything to her natural children and specifically disinherited her two stepdaughters. One of the stepdaughters filed a lawsuit, claiming that the stepmother had an agreement with her husband that after the parents’ death, all property would be split equally among the four daughters. According to court records, the stepdaughter who filed the lawsuit did not want her sister, the second stepdaughter, to benefit from the lawsuit and the family’s estate, and therefore took steps to keep her from being included. In due course, the stepdaughter and the two natural daughters settled, and their agreement did not involve the second stepdaughter. The stipulated judgment provided that three of the four sisters would divide the property among themselves and that the fourth was excluded from any share.
In a twist, the second stepdaughter knew of her sister’s lawsuit and hired counsel to file her own lawsuit. After learning of the judgement regarding the division of property, and the default entered against her for not appearing in her sister’s lawsuit, her lawyer filed a claim, seeking her share of the inheritance. The trial court denied the second stepdaughter’s petition.
On appeal, however, the court found that the second stepdaughter deserved to participate and that the default judgment was meaningless. The appellate court found that the trial court judge overlooked the fact that while the second stepdaughter defaulted by not appearing in her sister’s lawsuit, no “default judgement” had ever been entered against her.
Had a title agent issued a policy based solely on the stipulated judgment between the first stepdaughter and the two natural daughters, without abstracting the court file regarding the second stepdaughter, the underwriter would surely have been brought into this litigation on behalf of the insured and potentially exposed to significant loss. Upon close examination, a title professional should question why the second stepdaughter was not a party to the stipulated judgment and seek guidance from their underwriting counsel.
Avoid This E&O Coverage Misstep
The continuity of the contractual relationship between the title insurance agent and title insurance underwriter is evident when the underwriter seeks reimbursement from the agent for a loss that traces back to a transaction that closed years ago. When this occurs, the agent can seek coverage from its errors and omissions (E&O) insurer. However, if the agent failed to alert the E&O carrier about the mistake at the time it became known, the agent could be at risk of not being covered.
“There is a ‘Prior Knowledge’ exclusion in E&O policies which allows carriers to deny claims if there is a major delay in reporting a potential claim,” said Kaitlin Kelly, of Fran Kelly Professional Liability LLC. “It’s one of the most common policy exclusions we see utilized.”
Oftentimes, agents are reluctant to alert their carriers of known mistakes for fear of an increase in premium or getting dropped as a customer. “While I understand the hesitation to report, we are currently in a largely competitive market for E&O. This competitive space does not allow carriers to unsubstantially raise rates for simply adhering to policy requirements for reporting potential claims,” Kelly said.
While I understand the hesitation to report, we are currently in a largely competitive market for E&O. This competitive space does not allow carriers to unsubstantially raise rates for simply adhering to policy requirements for reporting potential claims.
Informing the carrier, immediately, of any circumstances that may potentially lead to a claim puts the carrier on alert, triggering coverage under the E&O liability policy in the future.
Fran Kelly Professional Liability LLC is a member of Doma’s AgentMarketplace. For more, Doma agents can visit AgentLink and click on AgentMarketplace under Tools & Resources.
Members of Doma’s Education and Claims Departments contributed to this article.