Two key questions the Illinois Second District appeals court asked and answered in Warczak v. Attorneys’ Title Guaranty Fund, Inc., 2015 IL App (2d) 140677-U are (1) whether a land trust beneficiary can sue under a title insurance policy naming the trustee as the covered entity (answer: yes) and (2) if a title insurer that issues a title commitment to a property buyer is in the business of providing information under the negligent misrepresentation exception to the Illinois economic loss rule (answer: no).
The plaintiff bought vacant land in September 2005 (titling it in a land trust; plaintiff was the beneficiary) and the defendant issued a title insurance policy against the property at the same time. A month earlier (August 2005), the title insurer issued a title commitment that failed to list 2003 taxes as unpaid. A tax buyer eventually recorded a tax deed against the property in 2008. When the plaintiff found out, he sued to recover under the title policy.
The plaintiff’s three-count complaint sought a declaratory judgment that he was entitled to title policy coverage and added claims for negligence and breach of contract (alleging breach of the defendant’s sale closing services) against the insurer. The trial court granted the insurer’s motion to dismiss the declaratory action and later entered summary judgment for the insurer on the breach of contract and negligence complaint counts. Plaintiff appealed.
Partially reversing the trial court, the appeals court addressed legal standing to sue on behalf of a land trust and whether a title commitment provides “information” for the guidance of others sufficient to arm the recipient with a negligent misrepresentation claim against the insurer.
The court reversed dismissal of plaintiff’s declaratory judgment suit and found the plaintiff had standing to sue under the policy as trust beneficiary. The operative rules relied on by the court included:
– in a land trust (“L-T”), the beneficiary wields broad management power over the property;
– an L-T beneficiary can possess, manage and control the property and also receive income generated from the property;
– the L-T beneficiary maintains all incidents of property ownership except for title to the property (which is held in the name of the Trustee);
– the hallmarks of L-T ownership are (1) secrecy of ownership and (2) ease of property transfer ;
– because of his intimate involvement with the property, the L-T beneficiary has property tax obligations and can pursue litigation affecting the property.
Here, while the trustee was the named title policy insured, it was clear that the parties viewed the plaintiff as the property owner based on their conduct. In addition, while the plaintiff wasn’t a named insured under the policy, his involvement in the property was so extensive that he was effectively the real party in interest under the title policy. As a result, the court reversed dismissal of the declaratory judgment suit. (¶¶ 37-42).
The court did affirm summary judgment for the insurer on the plaintiff’s negligence claim. The economic loss rule, which prevents a plaintiff from recovering purely economic losses (costs of repair, replacement, lost profits, etc.) in tort (negligence, e.g.) when a contract defines the relationship, defeated the claim. The governing contract here was the written agent/escrow agreement between the parties.
An exception to the economic loss rule exists where a defendant makes a negligent misrepresentation and is in the business of providing information for the guidance of others in their business dealings. Following Illinois Supreme Court guidance, the court found that a title insurer who issues a title commitment – as opposed to a title abstract (which does furnish information) – is not in the business of providing information. This is because a title commitment only specifies what title defects an insurer will not cover; it (the title commitment) limits the risks (of defective title) that an insurer will cover. (¶¶ 54, 58-59).
In the end, the court found that any information provided by the insurer in the title commitment was ancillary to the sale of title insurance – the main purpose of the parties’ dealings. Otherwise, the court said, the title insurer would be cast in the role of guarantor of the property’s title condition – something the insurer never signed up for. ¶ 59.
1/ L-T beneficiary can sue on title policy naming the trust as insured where beneficiary has hands-on relationship with the property;
2/ The economic loss rule bars negligent misrepresentation claim against title insurer based on title commitment. This is because title commitment doesn’t provide information. Instead, it serves to notify an insured (like the plaintiff here) of what defects the insurer is excluding. Any information is tangential to the main thrust of the contract – to provide insurance over certain title defects.