What Litigating Real Property Title Disputes Tell Me About Attorney Opinion Letters (“AOLs”) in Lieu of a Title Insurance Policy: AOLs Pose Unwarranted Risks

Contributed to Growth & Scale Report by Francis "Trip" Riley, Chair of Saul Ewing’s Consumer Financial Services Litigation Group 

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I have litigated hundreds of conflicting claims of interest in real property, as well as policy coverage disputes between insurers and policy holders. I have also managed the satisfactory resolution of title defects before any dispute or formal litigation is even a twinkle in anyone’s eye. These include anything from conveyance fraud and forgery to the theft of funds through false disbursement instructions and Ponzi schemes.

This experience leads me to conclude that the argued reduced cost¹ of both traditional and new “enhanced” insured AOLs does not warrant property purchasers, lenders and/or mortgage servicers assuming the substantial risks associated with the inherent limitations of AOLs and, more importantly, the underwriting/insurance that is purported to stand behind AOLs.²

WHAT AN AOL IS AND IS NOT.

An AOL is a written legal opinion by an attorney or law firm addressing the current (at the time it was issued) status of the legally enforceable ownership of or in the subject property that can be determined by a reasonable search of the public land records. That is it.

AOLs do not address interest (actual or alleged) arising from facts not noted in the public land records, such as but not limited to, , forgery, enforceable easements, boundary-line disputes, violations of community schemes, unrecorded but enforceable reversionary interests, assessments, mechanics’ liens, assessed but not yet recorded federal tax liens and heirs’ interests. Likewise, they do not address title issues arising from title or disbursement fraud, or defalcation. AOLs are not a guaranty that the ownership status is as opined. So, other than some peace of mind, what good are they? Nothing without some related insurance policy underwriting loss caused by a mistake in what the AOL does address.

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THE LOSS CAUSED BY AN AOL ERROR HAS LIMITED INDEMNIFICATION

A traditional AOL “underwriting” or loss indemnity backing is limited to the issuer’s errors and omission (malpractice) policy. In effect the AOL recipient must allege that the lawyer/law firm issuing the AOL committed legal malpractice because it missed what was “reasonably” discoverable in the public record. Malpractice policies do not provide a defense to the AOL recipient whose unencumbered title or interest is being challenged.

Equally as important, the errors and omission policy does not cover any more than losses arising within the scope of the AOL, which as noted above is severely limited in scope. Moreover, the coverage is limited in time by the applicable tort statute of limitations, typically two? years – well before a majority of title claims arise.

Newer underwriting offerings for AOLs do not fare much better, even if it is suggested they cover losses caused by title challenges arising out of non-recorded, enforceable interests, such as fraud, forgery, incapacity, impersonation, improper execution of documents, improper conveyances based on statutory proscriptions, improper use based on statutory proscriptions or improper recording, even if the AOL does not specifically address those issues specifically.

This is because the insured AOL polices require that those items have been discovered by a “reasonable” title examination or preventable by action that could have reasonably been take by the issuer of the AOL – requiring the litigation of whether the issuer acted or did not act reasonably.³ Even assuming, as those advocating for these newer offerings argue, that the foregoing risks are considerably less probable then the risk of a missed recorded lien or interest so “don’t sweat it,” a loss is a loss. Avoiding altogether an argument over whether a “reasonable” search or intervention would have “caught” this issue⁴ in order to obtain coverage and loss indemnity is well worth the price of a title insurance policy, which is usually wrapped upon in the purchase financing.

Moreover, these newer insured AOL products are not title insurance policies issues pursuant to state statutes, regulations, and insurance department supervision. Whether I am an owner (making the biggest investment of my entire life), a creditor or servicer, I want insurance that is actually “title insurance,” not some lawyer’s partial, look-a-like, errors and omission policy.

About Francis “Trip” Riley:  Francis "Trip" Riley is the Chair of Saul Ewing’s Consumer Financial Services Litigation Group. He has a national complex civil litigation practice defending clients against single plaintiff, putative class, and government enforcement actions. In the consumer finance space he represents lead generators, brokers, lenders and loan servicers and their vendors in civil litigation.

In the real estate settlement services space he represents real estate brokerages; title underwriters and agencies; mortgage loan brokers, lenders and servicers; property and casualty insurance underwriters and brokers; and their technology vendors. Trip also provides operations and transaction related regulatory compliance counseling to members of the consumer financial services industry.

Citations
1 Standard AOLs are typically less expensive at closing than a standard ALTA title insurance policy.

2 Currently, an AOL can be described as a “traditional, standard AOL” whose failure/inaccuracy is underwritten by the attorney-issuer’s malpractice policy, or a “new AOL” whose failure/inaccuracy is underwritten by a per AOL malpractice-wrapper that may or may not be associated with a separate closing protection letter, and/or the issuance of mortgage servicer errors and omissions policy, all by a different company that the attorney’s malpractice carrier. In either case, neither are actual title insurance because only a licensed title insurance company can issue a policy or have one issued on its behalf.

3 Attorneys issuing AOLs underwritten by these new “policies” have every incentive to argue to those underwriters that none of these are reasonably discoverable or prevented as they do not want to be dropped as an insured or participant in the program.

4 Although those advocating the newer offered insured AOLs profess that “policy” is linked to an identified error so that the insured party filing the claim does not need to prove the elements of malpractice or negligence to trigger coverage, the issue of “reasonably” able to be identified or prevented, will always need to be answers in the affirmative.