Norwest Corp. v. State, Dept. of Ins.

• Decision Date: 19 December 1997
• Docket Number: No. S-96-108,S-96-108
• Citation: 253 Neb. 574,571 N.W.2d 628
• Parties: NORWEST CORPORATION, a Delaware corporation, et al., Appellants, v. STATE of Nebraska, DEPARTMENT OF INSURANCE, Appellee, and Nebraska Land Title Association, Intervenor-Appellee.
• Court: Nebraska Supreme Court

Page 628

571 N.W.2d 628

253 Neb. 574

NORWEST CORPORATION, a Delaware corporation, et al., Appellants, v. STATE of Nebraska, DEPARTMENT OF INSURANCE, Appellee, and Nebraska Land Title Association, Intervenor-Appellee.

No. S-96-108.

Supreme Court of Nebraska.

Dec. 19, 1997.

Syllabus by the Court

1. Administrative Law: Final Orders: Appeal and Error. A final order rendered by a district court in a judicial review pursuant to the Administrative Procedure Act may be reversed, vacated, or modified by an appellate court for errors appearing on the record.

2. Administrative Law: Judgments: Appeal and Error. On an appeal under the Administrative Procedure Act, an appellate court reviews the judgment of the district court for errors appearing on the record and will not substitute its factual findings for those of the district court where competent evidence supports those findings.

3. Insurance. Under Neb.Rev.Stat. § 44-102 (Reissue 1993), the definition of insurance contains the following elements: (1) the existence of a contract whereby, (2) for a consideration, (3) one party (the insurer) promises to pay money or perform a valuable act for the benefit of the other party (the insured), (4) upon the happening of a stated hazard or peril that results in a loss to the insured.

4. Contracts: Time. Instruments made in reference to and as part of the same transaction are to be considered and construed together, and the fact that the instruments were made or dated at different times is not significant if they are related to and were part of the transaction.

Linda W. Rohman, of Erickson & Sederstrom, P.C., Lincoln, for appellants.

Don Stenberg, Attorney General, and Timothy J. Texel, Lincoln, for appellee.

William M. Lamson, Jr., Michael J. Dugan, and Michael S. Degan, of Kennedy, Holland, DeLacy & Svoboda, Omaha, for intervenor-appellee.

Robert J. Hallstrom, of Brandt, Horan, Hallstrom & Sedlacek, Nebraska City, for amicus curiae Nebraska Bankers Association, Inc.

WHITE, C.J., CAPORALE, WRIGHT, GERRARD, STEPHAN, and McCORMACK, JJ., and FAHRNBRUCH, J., Retired.

McCORMACK, Justice.

This case involves a determination of whether certain contractual undertakings by Norwest Mortgage, Inc. (NMI); American Land Title Company, Inc., doing business as ATI Title Company (ATI); and Norwest Corporation (Norwest) (collectively referred to as "appellants") relating to the status of

                mortgages securing residential mortgage loans originated by NMI and sold to secondary market purchasers such as the Federal Home Loan Mortgage Corporation ("Freddie Mac") are insurance contracts and therefore subject to regulation under Nebraska law.  The Nebraska Department of Insurance [253 Neb. 576]   (Department), upon a hearing, issued a cease and desist order, finding that appellants were engaged in the unauthorized business of insurance by marketing and selling a program called Title Option Plus (TOP) to mortgage loan applicants.  The Nebraska Land Title Association entered this matter before the Department as intervenor.  The district court for Lancaster County, Nebraska, concluded that TOP constitutes insurance as defined in Neb.Rev.Stat. § 44-102 (Reissue 1993) and title insurance as defined in Neb.Rev.Stat. § 44-201(15) (Reissue 1993) and that there was sufficient evidence in the record to support the Department's finding that TOP was designed to evade the insurance laws and was marketed in a misleading fashion.  The district court ordered appellants to replace, at no cost to the borrowers, all title condition reports for properties located in Nebraska issued subsequent to June 1, 1995, with lender's title policies, each policy to be effective the date of the title condition report it replaces.  Appellants timely appealed.  We granted the Department's and the Nebraska Land Title Association's petitions to bypass and transferred the case to our docket.  We now affirm
                

BACKGROUND

Appellants are three corporate entities. Norwest, a Delaware corporation, is a bank holding company with its principal place of business in Minneapolis, Minnesota. NMI is a wholly owned subsidiary of Norwest engaged in banking activities and is a California corporation with its principal place of business in Des Moines, Iowa. ATI is a wholly owned subsidiary of NMI engaged in the business of performing title searches on real property and is a Nebraska corporation with its principal place of business in Omaha, Nebraska. This dispute arises primarily from the sale of TOP by NMI to Nebraska mortgage borrowers.

The TOP program is embodied in three interrelated contractual agreements as described by the order of the Lancaster County District Court dated January 4, 1996:

The first contract, the Master Agreement, is a "warranty" by NMI to Freddie Mac that those mortgages NMI sells to Freddie Mac are secured by a first lien. NMI's contractual undertakings under the Master Agreement protect Freddie Mac against any title claims or problems, including non-record risks, that may affect Freddie Mac's interest in the loans it has purchased. If a defect appears and cannot be cured, NMI agrees to repurchase the loan, if the claim cannot be otherwise resolved. (It is noted that NMI only warrants the title and priority of a lien, when the title search and title report is performed by ATI.[) ]

The second contract is a title condition report prepared by ATI and furnished to NMI to verify that, as a matter of public record, NMI's mortgage is secured by a first lien. ATI remains liable to NMI for any on-record defects that are missed in the title search, while NMI assumes the risk of off-record defects.

The third contractual arrangement is the Guarantee Agreement from Norwest to Freddie Mac under which Norwest guarantees NMI's title-related obligations to Freddie Mac. Freddie Mac normally requires that the seller's warranty (in this case, NMI's) of the first-lien status be backed up by a third-party title insurance policy. Under the Guarantee Agreement between Norwest and Freddie Mac, however, Norwest takes the place of a third-party title insurance company and backs up the warranty agreement between NMI and Freddie Mac. NMI's warranty standing alone was not sufficient to relieve NMI of Freddie Mac's traditional requirement that the seller of the mortgage obtain a lender's title insurance. Thus, absent the guarantee from Norwest, NMI's warranty in regard to TOP would not satisfy Freddie Mac's requirement of a third-party title insurance policy.

Appellants did not attempt to obtain the approval of the Department for marketing In 1994, NMI began soliciting TOP as an alternative to title insurance. TOP was sold to borrowers by and through NMI loan officers. The TOP program works essentially as follows: When a prospective borrower comes to an NMI branch office to obtain a mortgage loan, the borrower is given the option of purchasing TOP to satisfy a lender's title insurance requirement, rather than purchasing the lender's title insurance policy. NMI sets aside a reserve for losses of 2 percent of the amount expected under the TOP program based on data compiled by title insurance companies. NMI pays ATI the entire fee paid by the borrower, and no part of the fee is applied to the reserve fund. NMI and ATI, however, held a contest among NMI loan officers to sell TOP, which awarded the winner of the contest a trip from a selection of various places. After the borrower pays the TOP premium, ATI completes a title search on the property for which the borrower is obtaining a mortgage and issues a preliminary title report indicating the search results. ATI then issues a final title condition certificate at closing reflecting that NMI has first-lien status. Norwest, through its subsidiary NMI, then packages and sells these mortgages with TOP protection to Freddie Mac.

TOP. One of appellants' goals was to implement TOP so that it would be "grandfathered" if in fact there was future adverse legislation.

Before it will purchase any mortgages from lenders, Freddie Mac requires either (1) a fully paid mortgage title insurance policy or (2) an attorney's title opinion or certificate. In February 1994, however, NMI reached an agreement with Freddie Mac (the master agreement) that Freddie Mac would purchase mortgages with TOP protection instead of the traditionally required lender's title insurance policy or attorney's title opinion. Pursuant to the terms of the master agreement, NMI agrees to defend any and all claims against a title securing a TOP-backed mortgage sold to Freddie Mac and further agrees to take all necessary steps to secure title. If the claim or defect cannot be remedied, NMI agrees to repurchase the loan. The master agreement between NMI and Freddie Mac requires NMI to hold Freddie Mac harmless from any and all claims against the title to underlying property. Under the guarantee agreement between Norwest and Freddie Mac, Norwest takes the place of a third-party title insurance company and backs the warranty agreement between NMI and Freddie Mac. Absent the guarantee from Norwest, NMI's warranty regarding TOP would not satisfy Freddie Mac's third-party title insurance requirement.

On August 26, 1994, the Department issued to appellants an order to cease and desist, along with an order to show cause and notice of hearing. The order was entered because of information the Department received indicating that appellants were engaged in the unauthorized business of insurance and in an unfair insurance trade practice regarding the solicitation of TOP. The Department concluded that TOP constituted the "substantive equivalent" of title insurance within the meaning of Neb.Rev.Stat. § 44-1942 (Reissue 1993). The Department also found that TOP was created to evade Nebraska insurance laws.

Appellants filed an application for stay with the Department pending judicial review. The Department denied this motion. Appellants then filed a petition for review in the district court for ...