Wednesday, November 24, 2010

Title Company Should Have Issued Policy to Cover Forged Closing Documents

An insured's title policy required the title company to insure over forged closing documents according to the Georgia Supreme Court.  In Fidelity National Title Ins. Co. v. Keyingham Investments, LLC, Case No. S09G1783, Decided October 18, 2010, a borrower who executed a security deed was an imposter that absconded with the money after closing, leaving a mortgage on the property that nobody was prepared to pay.   The lender filed a claim with its title insurer, who denied the claim.  The lender then filed suit. 

The crux of the case was the language of the title commitment the title insurance company issued at the closing.  The way title insurance works is that the insured pays a one time premium at the closing on its interest in the property (here that was a mortgage securing a loan to the imposter) and at that time the insurance company issues a title "commitment," also known as a "binder," that commits the insurance company to issue a full policy after closing if certain conditions are met.  Whether those conditions were satisfied so that the policy had to issue is what the court decided in this case.  The reason this was an issue is that the insurance company issued a binder at closing but then found out the borrower was a fraud, so it refused to issue the insurance policy.

As an aside, it has always interested me that in the case of title insurance the party paying for the insurance does not know all of the terms of the contract at the time he or she pays for it.  The buyer of insurance only receives the binder, not the full policy, at the time of purchase.  Nevertheless, the purchaser of insurance is bound by the terms of the policy written after the fact, even though said purchaser has never seen the document before.  Therefore, in this instance, a contracting party is held to have agreed to terms it has never heard of before.  Of course, the purchaser could cancel the policy, but it would be at risk at that time of not having any coverage at all for a defect in the title.  There are forms that are generally used for the boiler plate in these policies that can be found if someone looks for it, but this is never offered to the purchaser.  Also, I have seen policies issued by closing attorneys with exclusions in them that were never disclosed at the closing.  That is malpractice but it has happened. 

At any rate, the insurance company here relied upon the following condition in the binder:  "Documents satisfactory to the Company creating the interest in the land and/or mortgage to be insured must be signed, delivered and recorded."   The insurance company argued that the language "creating the interest in the land and/or mortgage to be insured" meant that a fraud would not be covered because the forged documents would not actually create any interest in the land.   In other words, because the documents were fake, no real interest was created. 

The court brushed off this argument.  The whole purpose of title insurance, it stated, was to protect property interests against fraud and such abuses.  Here the documents were all prepared by Fidelity's agent and signed, delivered and recorded by said agent, thus satisfying the condition of the binder, notwithstanding the forged signatures.  The court noted that other commitments have stated that the document must be signed by a particular person, and that those commitments have been held to exclude forged documents from coverage, because in those cases the acutal named person did not sign.  Here, the commitment did not specify who had to sign, only that they be signed.  Once the agent accepted the signed documents and recorded them, the insurance company had to issue the policy.