Bank of California, N.A. v. First American Title Ins. Co.

• Decision Date: 06 March 1992
• Docket Number: No. S-4106,S-4106
• Citation: 826 P.2d 1126
• Parties: The BANK OF CALIFORNIA, N.A., Appellant, v. FIRST AMERICAN TITLE INSURANCE COMPANY, a California corporation, and Security Title & Trust Agent of Alaska, Inc., an Alaskan corporation, Appellees.
• Court: Alaska Supreme Court

Page 1126

826 P.2d 1126

The BANK OF CALIFORNIA, N.A., Appellant, v. FIRST AMERICAN TITLE INSURANCE COMPANY, a California corporation, and Security Title & Trust Agent of Alaska, Inc., an Alaskan corporation, Appellees.

No. S-4106.

Supreme Court of Alaska.

March 6, 1992.

Heidi A. Irvin, Bogle & Gates, Seattle, Jan Samuel Ostrovsky, S. Jay Seymour, Bogle & Gates, Anchorage, for appellant.

James M. Gorski, Paul S. Wilcox, Hughes, Thorsness, Gantz, Powell & Brundin, Anchorage, for appellees.

Before RABINOWITZ, C.J., and BURKE, MATTHEWS, COMPTON and MOORE, JJ.

OPINION

MATTHEWS, Justice.

I.

Appellant, the Bank of California, sued appellees, Security Title and Trust Agency of Alaska (Security Title) and First American Title Insurance Company (First American), for misrepresentation and breach of contract. The superior court granted appellees' summary judgment motion. The Bank appeals. We affirm in part and reverse in part.

In June of 1984, Peter Zamarello owned a piece of real estate in Anchorage on Boniface Parkway (the Boniface property). On July 18, 1984, Zamarello quitclaimed fifty percent of his interest in the Boniface property to his daughter, Carol Johnson. The deed was recorded in the records of the Anchorage Recording District in August of 1984.

Zamarello and Johnson wished to develop a strip mall on the Boniface property through Olympic, Inc. ¹ In September of 1984, Olympic began negotiating with the Bank of California for the Bank to provide six million dollars in long-term financing to Olympic. The loan was to be secured by a first lien priority deed of trust on the Boniface property. Over a year later, in order to determine the state of the title to the Boniface property, the Bank requested a commitment for title insurance from Security Title. Security Title issued a preliminary commitment for title insurance in December of 1985 which incorrectly stated that Zamarello exclusively owned a fee simple estate in the Boniface property as of November 27, 1985. No mention was made of Johnson's interest in the property.

The loan to Olympic was closed on December 24, 1985. Zamarello, but not Johnson, deeded the Boniface property to Olympic. The loan was secured by a deed of trust on the property; Olympic was the trustor, the Bank was the beneficiary. In connection with the loan, First American issued a policy of title insurance on the Boniface property. ² The policy insured the Bank against damage or loss as a result of title to the Boniface property being vested otherwise than as stated in the policy, namely, in Olympic in fee simple. The premium for the policy amounted to $10,952.75.

Olympic eventually defaulted on the note and, in August 1986, filed for reorganization under Chapter 11 of the Bankruptcy Code. In February 1987, the Bank learned of Johnson's fifty percent interest in the Boniface property. The Bank brought this action against Security Title and First American, claiming breach of contract and negligent misrepresentation.

Instead of filing an answer, First American brought suit against Johnson on behalf of the Bank. The complaint asked the court to declare that Johnson's interest in the Boniface property was subject to the terms and conditions of the deed of trust. First American and Security Title then filed a motion to dismiss the Bank's action, arguing that the Bank had not suffered the harm necessary to state a claim for relief. Opposing this motion, the Bank submitted the affidavit of its vice president, Kathleen Brown, attesting to the Bank's damages. ³

After hearing oral argument, the superior court found that the Bank's negligence action failed to state a claim upon which relief could be granted, and that the Bank's contract claim was premature. The court issued an order granting the motion to dismiss. A final judgment was entered from which the Bank now appeals.

II.

All parties agree that appellees' motion to dismiss must be treated as a motion for summary judgment because it included matters outside the pleadings. In reviewing the trial court's grant of a motion for summary judgment, we must "determine whether there are any genuine issues of material fact, and whether the moving party is entitled to judgment as a matter of law." Diedrich v. City of Ketchikan, 805 P.2d 362, 365 n. 3 (Alaska 1991) (quoting Drake v. Hosley, 713 P.2d 1203, 1205 (Alaska 1986)). All reasonable factual inferences must be drawn in favor of the non-moving party. Jensen v. Ramras, 792 P.2d 668, 669 (Alaska 1990).

The Bank sued on two separate theories: negligent misrepresentation and breach of contract. We address the trial court's dismissal of both theories in turn.

A. Negligent Misrepresentation.

The Bank claims that Security Title is liable for negligently misrepresenting in its preliminary commitment that Zamarello exclusively owned the Boniface property. The Bank claims that First American is vicariously liable for Security Title's misrepresentation because Security Title was acting as First American's agent.

The question whether a title company should be liable in tort for a misrepresentation made in a preliminary commitment of title insurance has not been decided in Alaska. ⁴ The majority of other jurisdictions have accepted this theory of liability. See, e.g., Moore v. Title Ins. Co. of Minn., 148 Ariz. 408, 714 P.2d 1303, 1306 (App.1985); White v. Western Title Ins. Co., 221 Cal.Rptr. 509, 710 P.2d 309, 315 (1985); Shada v. Title & Trust Co. of Fla., 457 So.2d 553, 557 (Fla.App.1984); Ford v. Guarantee Abstract & Title Co., 220 Kan. 244, 553 P.2d 254, 266 (1976); Malinak v. Safeco Title Ins. Co. of Idaho, 203 Mont. 69, 661 P.2d 12, 15 (1983); Heyd v. Chicago Title Ins. Co., 218 Neb. 296, 354 N.W.2d 154, 158 (1984); But see, e.g., Brown's Tie & Lumber Co. v. Chicago Title Co. of Idaho, 115 Idaho 56, 764 P.2d 423, 425-26 (Idaho 1988) and Walker Rogge, Inc. v. Chelsea Title and Guaranty Co., 116 N.J. 517, 562 A.2d 208, 218 (1989) (title company owes no duty beyond that which is assumed in its title policy).

The cases which find tort liability generally stress that one function of the preliminary commitment is similar to that of the report of an abstracter of title, namely, to give interested persons knowledge concerning the state of the title so that they may plan and structure transactions concerning the property. Ford v. Guarantee Abstract & Title Co., 553 P.2d at 266. This is a function distinct from that of insurance, for a title policy may be issued without a preliminary commitment and without reporting what the state of the title is.

The cases which hold that there can be no tort action for misrepresentation tend to stress solely the insurance function of title insurance:

The end result of the relationship between the title company and the insured is the issuance of the policy. To this extent, the relationship differs from other relationships conceivably sounding in both tort and contract, such as the relationship between physician and patient, to which plaintiff alludes. Although the relationship between physician and patient is contractual in its origins, the purpose of the relationship is to obtain the services of the physician in treating the patient. The patient reasonably expects the physician to follow the appropriate standard of care when providing those services. By contrast, the title company is providing not services, but a policy of insurance. That policy appropriately limits the rights and duties of the parties.

Walker Rogge, 562 A.2d at 220.

We agree with the authorities which hold that there may be tort liability for misrepresentations made in preliminary commitments for title insurance. In our view, such commitments provide an essential service to prospective buyers and lenders. They are told what transactions must take place before they can receive clear title or an effective security.

Despite disclaimers, preliminary title reports are normally relied on by insureds, escrow agents, and lenders with full knowledge, and sometimes with the encouragement, of the insurance company. If the insurer actually intended the list of title defects in the preliminary report to be used just to inform the potential insured of the proposed contract terms, the list could be presented in the policy at the time it is offered to the insured, as is the case with most other types of insurance policies. Instead, the title insurance company's preliminary report is issued prior to closing of the land contract--at the same stage in the transaction as is the abstract or attorney's opinion--and the company should know that it will likely be used in the same manner.

J. Palomar, Title Insurance Companies' Liability for Failure to Search Title and Disclose Record Title, 20 Creighton L.Rev. 455, 480-81 (1987) (footnotes omitted). We therefore conclude that title insurance companies have a duty of care concerning the preliminary title information which they transmit to their customers. ⁵

We reach the same conclusion utilizing the multi-factor analysis employed in Howarth v. Pfeifer, 443 P.2d 39 (Alaska 1968). We held in Howarth that there could be liability in tort for negligent misrepresentation "where there is a duty, if one speaks at all, to give correct information." Id. at 42. In considering whether such a duty should exist, we noted various factors which were summarized as follows in a later case:

(a) whether the defendant had knowledge, or its equivalent, that the information was desired for a serious purpose and that the plaintiff intended to rely upon it;

(b) the foreseeability of harm;

(c) the degree of certainty that plaintiff would suffer harm;

(d) the directness of causation; and

(e) the policy of preventing future harm.

Bevins v. Ballard, 655 P.2d 757, 760-61 (Alaska 1982) (citing Howarth, 443 P.2d at 42). Applying these factors, we also conclude that a title insurance company has a duty to accurately communicate the state of a title when issuing a preliminary commitment...