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

• Citation: 1998 SD 61,581 N.W.2d 158
• Decision Date: 27 April 1998
• Docket Number: No. 20239,20239
• Parties: STATE of South Dakota, DIVISION OF INSURANCE, Plaintiff and Appellee, and The South Dakota Land Title Association, Inc., Intervenor and Appellee, v. NORWEST CORPORATION, Norwest Mortgage, Inc., and American Land Title Company d/b/a ATI Title Company, Defendants and Appellants. . Considered on Briefs
• Court: Supreme Court of South Dakota

Page 158

581 N.W.2d 158

1998 SD 61

STATE of South Dakota, DIVISION OF INSURANCE, Plaintiff and Appellee, and The South Dakota Land Title Association, Inc., Intervenor and Appellee, v. NORWEST CORPORATION, Norwest Mortgage, Inc., and American

Land Title Company d/b/a ATI Title Company,

Defendants and Appellants.

No. 20239.

Supreme Court of South Dakota.

Considered on Briefs April 27, 1998.

Decided June 24, 1998.

Mark Barnett, Atty. Gen., Timothy E. Reilly, Asst. Atty. Gen., Division Counsel, South Dakota Division of Insurance, Jeffrey P. Hallem, Asst. Atty. Gen., Pierre, for plaintiff and appellee State Division of Insurance.

Mark A. Moreno of Schmidt, Schroyer & Moreno, Pierre, for intervenor and appellee South Dakota Land Title.

Timothy M. Engel of May, Adam, Gerdes & Thompson, Pierre, for defendants and appellants.

MILLER, Chief Justice.

¶1 In this appeal, we hold that appellants are engaged in the title insurance business and are subject to regulation by the South Dakota Division of Insurance (Division).

¶2 Norwest Mortgage, Inc. (NMI), American Land Title Company, Inc., d/b/a ATI Title Company (ATI), and Norwest Corporation (Norwest), ¹ through a series of related contracts, market and sell a program called Title Option Plus (TOP) to residential mortgage loan applicants. TOP is an alternative to title insurance, and enables the loans to be sold to secondary market purchasers. The South Dakota Division of Insurance (Division) requested that the parties refrain from marketing and selling TOP in South Dakota and, when they refused, it brought suit. The trial court held that TOP was insurance, and Norwest Parties were engaged in the "insurance business" and subject to regulation by Division. We affirm.

FACTS

¶3 NMI is engaged in the business of making and selling loans secured by first and second mortgages on real estate. It is a wholly owned subsidiary of Norwest Nova, Inc., which is a wholly owned subsidiary of Norwest. ATI is a wholly owned subsidiary of NMI, and is engaged in the business of performing title searches for real property and is a title insurance agency.

¶4 The Federal Reserve Board denied Norwest Parties permission to form a non-bank subsidiary that would issue title insurance policies on mortgage loans made by NMI and other Norwest lenders because the Federal Bank Holding Act of 1956 prohibited such arrangements. Norwest Parties then developed TOP as an "alternative" to title insurance.

¶5 Prior to the implementation of TOP, NMI required borrowers to obtain title insurance as a condition of a loan. In 1995, it began offering TOP to South Dakota borrowers seeking to refinance their mortgage loans.

¶6 It is important to understand how TOP works. When borrowers apply to NMI for a loan to refinance an existing first-mortgage loan, they are told that the purchase of either TOP or a lender's title insurance policy is necessary. If the borrower chooses TOP, ² NMI has ATI examine the public records relating to the real estate to be mortgaged. ATI issues a "preliminary title condition report" indicating the results of the search and what, if anything, must be done to assure that NMI has a first-priority mortgage lien. If NMI decides to issue a loan, and the loan is closed, ATI issues a "Final Title Condition Certificate" to NMI, which "certifies unto [NMI]" that its mortgage "evidences a valid, first, senior and paramount lien" in NMI's favor, and that the borrower has a fee simple title.

¶7 Most of NMI's loans are subsequently sold within a secondary market. They are sold to entities such as the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae"). ³ Freddie Mac generally requires the mortgage loans it purchases to be covered by a policy of title insurance and the protection and benefits of such a policy to run directly to it. Freddie Mac also purchases loans from NMI that are covered by TOP rather than traditional title insurance.

¶8 NMI enters into a "Master Agreement" with Freddie Mac when selling it a loan. This agreement provides for NMI's contractual undertaking and generally states: (1) that the loan constitutes a valid first lien, and (2) in the event a claim or lawsuit arises involving title issues that could impair Freddie Mac's first-lien position or the value of the underlying property, NMI will act to protect Freddie Mac's interest, including retaining counsel and paying for all defense costs or repurchasing the loan. Finally, a "Guarantee Agreement" is entered into between Norwest and Freddie Mac, whereby Norwest guarantees the performance of NMI to Freddie Mac.

¶9 Division requested that Norwest Parties voluntarily refrain from marketing and selling TOP to borrowers in South Dakota. When that request was refused, Division brought suit to determine if TOP was the equivalent of title insurance, thus making Norwest Parties subject to regulation by Division. South Dakota Land Title Association (SDTLA) was granted leave to intervene, and filed a separate complaint seeking declaratory relief. The trial court determined that TOP was insurance and Norwest Parties were engaged in the insurance business and subject to regulation by Division.

¶10 Norwest Parties appeal the following issues:

1. Whether TOP is title insurance.

2. Whether Norwest Parties are engaged in the business of title insurance in South Dakota.

STANDARD OF REVIEW

¶11 In this case, the evidence before the trial court was in the form of stipulated facts, exhibits, and depositions. Thus, "we are free to determine the facts as if presented here for the first time unaided by any deference to the trial court." Muhlenkort v. Union County Land Trust, 530 N.W.2d 658, 660 (S.D.1995) (citing State Auto. Cas. Underwriters v. Ruotsalainen, 81 S.D. 472, 478-79, 136 N.W.2d 884, 888 (1965); State v. Abourezk, 359 N.W.2d 137, 142 (S.D.1984); Zacher v. Homestake Mining Co., 514 N.W.2d 394, 395 (S.D.1994)). We review a trial court's conclusions of law under a de novo standard of review. Id.

DECISION

¶12 1. Whether TOP is title insurance.

¶13 Norwest Parties argue that TOP is not title insurance. Rather, they assert it is either a warranty or self-insurance neither of which are subject to regulation. We do not agree.

¶14 Before addressing Norwest Parties' claims that TOP is either a warranty or self-insurance, we must initially address their argument that it would be incorrect to consider all the separate agreements together. They claim the agreement between NMI and ATI is separate from the agreement between NMI and Freddie Mac, and that between Norwest and Freddie Mac. Norwest Parties claim that to lump all the agreements together would impermissibly ignore their separate legal identities. However, under our holdings, separate writings which are executed as part of a single transaction should be interpreted together. Baker v. Wilburn, 456 N.W.2d 304, 306 (S.D.1990). This is true even if the parties to all of the writings are not the same, and the writings are executed on different dates. Id.

¶15 Under the TOP program, ATI issues a title certificate to NMI. NMI enters into a master agreement with Freddie Mac and is allowed to do so because of the title certificate. Then, Norwest enters into a guarantee agreement with Freddie Mac to provide protection in case NMI cannot comply with its contractual obligations in the master agreement. It is obvious that these three separate writings all involve one single transaction and must be read together as one contract. See Norwest Corp. v. State, Dep't of Ins., 253 Neb. 574, 571 N.W.2d 628, 634 (1997) (holding that these three contractual undertakings must be read together).

¶16 We now turn to the remaining arguments of Norwest Parties.

a. Risk Shifting

¶17 Norwest Parties' primary claim is that TOP is not insurance because there is no "shifting of the risk." They argue that under our statutory definitions of "insurance" and "title insurance" there must be a risk shift and also a contract of indemnity, and that these elements do not exist with TOP.

¶18 SDCL 58-1-2(10) defines insurance as: "[A] contract whereby one undertakes to indemnify another or to pay or provide a specified or determinable amount or benefit upon determinable contingencies[.]" SDCL 56-3-1 defines indemnity as "a contract by which one engages to save another from a legal consequence of the conduct of one of the parties or of some other person." SDCL 58-9-33 defines "title insurance" as "the insurance of owners of property or others having an interest therein or liens or encumbrances thereon, against loss by encumbrance, or defective titles, or invalidity, or adverse claim to title."

¶19 " 'The essence of an insurance contract is the shifting of the risk of loss from the insured to the insurer.' " In re Request for Opinion of the Supreme Court, 379 N.W.2d 822, 827 (S.D.1985) (quoting American Nurses Ass'n v. Passaic General Hosp., 192 N.J.Super. 486, 471 A.2d 66, 69 (1984)). "Shifting the risk" can be defined as "the transfer of the impact of a potential loss from the insured to the insurer." Clougherty Packing Co. v. Comm'r of Internal Revenue, 811 F.2d 1297, 1300 (9th Cir.1987).

¶20 Norwest Parties rely on the decision of the Virginia Supreme Court in Lawyers Title Ins. Corp. v. Norwest Corp., --- Va. ----, 493 S.E.2d 114 (1997). We are not bound by the Virginia decision and do not find it persuasive for a number of reasons. First, unlike South Dakota, Virginia does not have a statutory definition of "insurance." Also, that court did not review this issue under a de novo standard. Finally, the Virginia decision was a sharply divided 4-3 decision, and we are more persuaded by the dissent. See Id. 493 S.E.2d at 117-20 (Whiting, J., dissenting).

¶21 We first must determine if there is a shifting of the risk between a borrower and NMI. Norwest Parties, pointing to the mortgage documents as proof, claim there is no such risk shifting. The...