Washington Title Insurers' Duty to Search and Disclose

JurisdictionWashington,United States
CitationVol. 4 No. 01
Publication year1980

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 4, No.1FALL 1980

Washington Title Insurers' Duty To Search And Disclose

Susan M. Stanley

Formal land conveyancing methods have replaced those of simpler days when sellers handed clumps of dirt or twigs to their buyers while orally pronouncing the property transfer in their neighbors' presence.(fn1) Increasing complexities(fn2) of modern real estate transactions necessitated a system of title assurance to reduce the possibility of title loss. Title insurance emerged when modern society demanded not only a method to assure full ownership in real property, but also a solvent assurer to answer in damages if the assurance was incorrect.(fn3) Thus, state legislatures initially required title insurers to demonstrate their solvency by depositing substantial amounts of money in guaranty funds as a condition of doing business.(fn4) Some states have imposed duties on title insurers in addition to demonstrated solvency by requiring that insurers conduct reasonable searches(fn5) for title defects(fn6) and disclose the results to those relying on title insurance in purchasing property. The Washington Supreme Court, in contrast, has yet to impose this duty on Washington title insurers.(fn7) This comment proposes that Washington courts impose on title insurers a duty, enforceable in tort, to conduct reasonable searches and to disclose results to their insureds.

This comment, accordingly, explores possible non-statutory sources of a title insurer's duty to search and disclose. After reviewing the historical background of title insurance and comparing it with other title assurance methods, this comment examines Washington case law, where the supreme court has failed to impose the duty. It then considers the need to impose and examines the theoretical bases of such a duty to search and disclose: whether it should lie in tort or in contract. Finally, this comment concludes that Washington courts should allow home buyers to sue title insurers for negligence in failing to reasonably search and disclose.

Historically, five title assurance methods' exist in the United States.(fn8) The oldest system is the lawyer's search of the public records accompanied by an opinion or certificate indicating the lawyer's conclusions as to the title's condition. This "lawyer's opinion" method is now common only in New England and some parts of southeastern states.(fn9) A second system, the abstract method, evolved from the lawyer's opinion method.(fn10) When lawyers realized their time and talents were not well utilized in conducting laborious title searches, they hired lay employees to perform title searches and issued opinions or certificates based on the information the employees obtained. The lay employees soon envisioned a more lucrative business if they worked for more than one lawyer, and with this realization came the formation of commercial abstract companies using the abstract method. In this method, currently used in several midwestern states, an abstract company makes the search and issues an abstract of title,(fn11) which the lawyer examines before rendering an opinion. A third method incorporates with title insurance either the abstract system or the lawyer's opinion method. While the "commercial abstract plus title insurance" variety predominates in midwestern states, the "lawyer's search plus title insurance" is common in the Atlantic seaboard and southeastern states.(fn12) This latter variety of title assurance is called the "approved attorney" system because the title insurer relies on independent lawyers rather than maintaining its own staff.(fn13) A fourth method, prevalent in Washington and other western states,(fn14) is the title plant system: the issuance of title insurance after the insurer conducts its own search and examination of records the insurer itself privately owns and maintains. Finally, the Torrens system assures proper title through a public official who, following a judicial hearing upon the purchaser's application, certifies the title and indemnifies losses resulting from errors.(fn15)

Of these five systems, those that more adequately(fn16) protect the public against lapses of the lawyer and abstracter are the methods that incorporate title insurance.(fn17) Thus, to understand the genesis of title insurance, it is necessary to examine the weaknesses of the abstract and lawyer's opinion methods which title insurance sought to remedy. Both the lawyer's opinion and abstract methods fail to provide adequate public protection. First, when lawyers and abstracters rely on inefficient public records(fn18) and grantor-grantee indices,(fn19) their search takes an inordinate amount of time compared to a title plant company search using superior recordkeeping and indexing systems.(fn20) Second, if lawyers and abstracters fail to discover title defects falling outside the scope of a reasonable search, the client recovers nothing.(fn21) Title insurance emerged to remedy these problems; if the defect was not excepted from coverage and not disclosed by the title search, the insured could recover.(fn22) Third, the lawyer's opinion method could prove too costly for clients, particularly when nonlawyers could be trained to conduct the searches.(fn23) Fourth, even if a client could prove negligence on the part of the lawyer or abstracter, the lawyer or abstracter might be insolvent. The Torrens system also has many shortcomings. Because it involves title registration with a court and a judicial hearing, after which a public official issues a certificate of title, the cost is greater than with other forms of title assurance.(fn24) Additionally, in some instances, a land buyer using the Torrens system must defend suits against the property and, in other circumstances, must file a claim for indemnification in case a loss is suffered.(fn25) Inadequacy of guaranty funds is also a major problem with the Torrens system.(fn26) Because this title assurance method is based upon a public official's certificate of title, a corrupt or incompetent public official can deplete the indemnification fund and destroy the stability of titles the Torrens system is intended to foster.(fn27) Title insurance companies, abstracters, and title examining lawyers opposed the Torrens system during the 1920's and 1930's, fearing that its general acceptance would put them out of business.(fn28) As a result, although legislatures could remedy many of the Torrens system's shortcomings,(fn29) this method of title assurance is rarely used.

Title insurance developed to provide benefits lacking in the other title assurance systems. Insolvency may be a major defect of the lawyer's opinion, the abstract, and the Torrens methods of title assurance, and title insurance usually answers this problem by offering a solvent insurer to answer in damages for title losses.(fn30) Further, unlike other providers of title assurance, most title insurers provide legal defense for their insureds in suits based upon a title defect within policy coverage.(fn31) Additionally, title insurance coverage is unique because it extends to remote or latent risks(fn32) actuarially unlikely to result in losses.(fn33) Finally, the majority of title insurers, including Washington insurers, operate as title plant companies and accordingly do not rely on inefficient public records and indices in performing title searches.(fn34)

Title insurance has drawbacks as well as benefits. An examination of a title insurance policy reveals one salient feature: title insurers are not liable for most title defects disclosed by the search.(fn35) Although title defects disclosed by the search as a general rule are excepted specifically from policy coverage, title insurance policies also contain general exceptions that relieve the insurer of the necessity of searching for matters contained therein.(fn36) In the latter instance, the parties are not given notice that potential defects exist and, consequently, executory buyers prior to closing are unable to negotiate the risk of loss with their sellers or demand that sellers cure the defect.(fn37) In contrast, risks contained in the specific exceptions, although likewise not insured against, do provide the contracting parties with knowledge of specific title flaws. This knowledge, in turn, enables the executory purchaser to negotiate with the seller the risk of loss and demand cure or rescission if the seller fails to cure a major defect.

It is true, however, that title insurance policies cover hidden defects not discoverable by a reasonable search-those that previous assurance systems failed to address.(fn38) Yet, only certain risks are covered.(fn39) Title policies exclude many off-record risks such as labor liens and survey matters.(fn40) Because these exclusions obviate the title company's need to search for such matters, they may leave both the buyer and seller unprotected. The weaknesses of title insurance led one commentator to describe it as a "snare and a delusion[,] for many policies written today exclude from coverage the very risks that a vendee desires insured."(fn41)

To understand how a duty upon title insurers to search and disclose title defects can alleviate these infirmities,(fn42) a brief examination of the case law in Washington is instructive. The Washington Supreme Court declined to impose such a duty on Washington title insurers in Shotwell v. Transamerica Title Insurance Company(fn43) In Shotwell, ...

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