In my last blog post, I explained the job of underwriting attorneys and our role in evaluating title insurance risk and working with agents and customers to help them get the deal done, while taking risk into account.
Specifically, how do we evaluate whether a title insurance risk is acceptable? The primary way is by understanding the law and how the facts of the transaction fit within the law. Underwriters are sometimes challenged by the attorneys for other parties and accused of not knowing what the law is or how it operates. Counsel for a party may try to convince the underwriter that a particular law does or does not apply in a given set of circumstances. Having been in private practice for two decades before going into title insurance, I’m sure that I was sometimes guilty of thinking that the underwriter needed an education in the law.
Knowing and applying the law, however, is different from deciding whether a particular title risk is acceptable or not. Let’s go back to Title Insurance 101: under a policy of title insurance, the insurer undertakes to defend the insured in a dispute in which the plaintiff asserts a claim that is covered by the policy.
The “duty to defend” is in addition to the “duty to indemnify” against a covered loss under the policy. If the insurer successfully defends a claim, then it will not have any indemnity obligation, but the insurer will have incurred costs – potentially substantial – in defending and defeating the asserted third-party claim.
When discussing an underwriting question with a party’s counsel, the underwriting attorney may be told that the law in this area is clear, and that under the facts no claim against title could be asserted. Typically, neither the law nor the facts are black and white; our job is to look for the gray.
Even if we agree with counsel that the law and facts seem to be squarely in favor of no title claim, we still may not be willing to insure against the particular matter. We have to consider whether we put the insurer in the position where it might have to spend money defending a claim and proving that both we and the party’s counsel are smart enough to know the law.
For many good reasons, we may not want to put the insurer in that position, even if we “know” that we would prevail on the title claim. Even if you are “right” and win the lawsuit, you still can lose a substantial amount of money in the litigation process.
So the next time I’m presented with this situation, I will have to decide whether to insure or whether to try to convince the party’s counsel that, if in fact the risk is so minimal, why isn’t his or her client willing to accept that risk. Often, good lawyers really do understand the nature of risk and will advise their clients that in fact the risk is minimal, and the deal gets done.
We all have to be smart about the law.