Stockton Mortgage, Inc. v. Tope
Facts: A homeowner obtains a mortgage secured by a trust deed on the property. A title insurance company issues a preliminary title report (prelim) offering a title insurance policy. The prelim excludes coverage for a notice of abatement action recorded against the property for code violations and requires a full release be obtained prior to closing escrow. The title insurance company is unable to obtain a release of abatement action due to ongoing violations. The title insurance company issues an insurance policy but does not make reference to the exclusion of the abatement action as the prelim did. The owner later defaults on the mortgage and the mortgage holder forecloses. The mortgage holder submits a claim to the title insurance company for the costs of obtaining a release of notice of abatement action and the title insurance company rejects the claim.
Claim: The mortgage holder seeks money losses from the title insurance company to obtain a release of notice of abatement action, claiming the title insurance company breached the insurance policy by not providing coverage for the notice of abatement action, as it is a lien on title that was referenced in the prelim.
Counter claim: The title insurance company claims the notice of abatement action is not covered by the insurance policy since it is not a lien or encumbrance on title and does not affect the marketability of title.
Holding: A California court of appeals holds the mortgage holder is not entitled to payment from the title insurance company since the notice of abatement action is not a lien on title, but a notice of substandard property conditions which does not relate to title conditions, whether or not referenced in the prelim. [Stockton Mortgage, Inc. v. Tope (December 23, 2014)_CA4th_]
Editor’s note — The mortgage holder also claims the title insurance company breached the contract by not obtaining full release of the notice of abatement action as stated in the prelim.
However, a prelim is not an agreement or a representation of title conditions. It is merely an offer to issue a title insurance policy based on the contents of the prelim and any listed title encumbrances that may be reflected on the public record. Thus, the prelim does not impose liability on the title insurance company. In this case, the court ruled the contents of the prelim did not impose a duty on the title insurance company to obtain a release of notice of abatement action.