Title Insurer Not Entitled To Reimbursement Under E&O Policy For Payments It Made Under A Cpl To Agent’s Customers That Were Defrauded By The Agent Because The Title Insurer Was Not Legally Responsible For The Agent’s Actions

In EnTitle Ins. Co. v. Darwin Select Ins. Co., 13-3269 (6th Cir. Jan. 29, 2014) the Sixth Circuit Court of Appeals affirmed summary judgment for a professional liability (E&O) insurer sued by a title insurer which had reimbursed its agents customers that were victimized by the agent’s fraud. The title insurer underwrote title insurance through agents with which it had agency agreements. As a means of attracting business, the title insurer offered a closing protection letter (CPL) to the agent’s customers which obligated the title insurer to reimburse the mortgagor or mortgagee if the title agent engaged in fraud or dishonesty with respect to the handling of escrow funds. The title insurer offered these letters for a fee at the request of a party involved in the closing, and the customer was free to accept or reject the offer of a CPL. When the title insurer’s agent misappropriated $3.9 million in client escrow funds, the title insurer reimbursed the clients to whom it had issued a CPL. It did not pay anything to those customers who did not purchase a CPL. The title insurer then sued E&O carrier for those payments. In affirming summary judgment for the E&O carrier, the Sixth Circuit agreed there was no coverage under the E&O policy. The policy defined wrongful act to mean any actual or alleged act, error, omission or misstatement . . . by any insured, or by any individual or entity for whom the [the insured] is responsible. The title insurer argued that it was the agents wrongful acts – not the issuance of the CPLs – which resulted in its liability. Its obligations under the CPLs rendered it legally responsible for the agent’s wrongful acts and legally responsible includes both contractual liability and tort liability. The court was not persuaded. It looked at the language of the agency agreement which said that the agent was the title insurer’s agent for the limited purpose of issuing title insurance. Because the agency relationship was solely for the purpose of issuing title insurance, absent the contractual tie of the CPL the title insurer had no obligation to those customers for the agent’s fraud and dishonesty. Thus, the agent’s wrongful acts were not committed by an entity for whom [the title insurer] is legally responsible, and thus did not fall within the scope of the E&O policy. If, in fact, the title insurer was responsible for the agent’s escrow-related activities, it should have reimbursed all of the customers who were victims of the misappropriation, not just those who had CPLs.

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