from the August, 2001 issue of The Title Insurance Law Newsletter
A title insurer that was forced to pay a large estate tax after removing its exception based on a letter from the law firm handling the estate had no right to rely on that letter, according to a Washington court, and therefore cannot sue the firm for misrepresentation. The insurer's own underwriting manual was the primary evidence that the reliance was not justified.
Facts
Jae-Kon Baik died, leaving substantial real estate holdings. His wife Soon Baik asked the Anderson, Burrows & Galbraith law firm to handle the estate. The assignment was given to a law clerk, Sang Chae, who hired an accountant to determine if estate tax was owed. The accountant relied, in turn, on Mrs. Baik in concluding that her husband had been a U.S. resident, and that the real estate was community property.
Mr. Baik's brother sued to claim some of the property. The lawsuit was settled by deeding him some residential real estate. The brother deeded it to his children, who asked for title insurance from Lawyers Title.
Lawyers Title hired an independent company to examine the probate file, which reported that no inheritance tax releases were in the file. The Lawyers Title preliminary report showed an exception for estate taxes. Lawyers Title then contacted the law clerk, Ms. Chae, to get a letter about estate taxes. She issued a letter that read:
By this letter I am informing you that, based on our tax preparation, no estate taxes are due and owing to the state or federal government. Likewise, to my knowledge, no other taxes are outstanding against the estate ... Please bill Mr. Baik $50.00 for my time.
The law firm also prepared a Declaration of Completion of Probate which Mrs. Baik filed in the probate file. Lawyers Title removed the exception based on these documents.
A short time later, Ms. Chae ordered title insurance from Lawyers Title for commercial property still owned by the Baik estate. The preliminary report did not make exception for estate taxes.
A different examiner prepared the new commitment, and a copy of Chae's estate tax letter was not found in the new file. The old file was not cross-referenced either. Senior title officer Roberta Robbins, who handled both transactions, honestly testified that she did not know if the second title examiner knew about the letter, but she would not expect that he would. On the other hand, Robbins "remembered thinking that the opinion letter must have been conclusive as to all property in the Baik estate."
The IRS determined three years later that the Baik estate owed over $600,000 in estate tax, primarily because the property was Mr. Baik's separate property, not community property. Lawyers Title paid this tax on behalf of its various insureds.
Lawyers Title then sued Anderson, Burrows & Galbraith, Ms. Chae and another attorney for negligent misrepresentation and fraud. It also sued the estate and Mrs. Baik. The trial court threw out the case against the lawyers, and the appeals court affirmed the dismissal.
No Right to Rely
The lawyers admitted that Lawyers Title relied on Ms. Chae's letter, but argued that it had no right to do so. The court agreed with the law firm, emphasizing the title insurer's duty to make an independent investigation of title and the fact that the company's own underwriting manual told examiners to get a bond.
In order to explain why Lawyers Title unjustifiably relied, we turn first to the purpose of title insurance:
Examination of record title or an abstract of the record title of real property is both an esoteric and a painstaking process. Evaluation of the status of title requires considerable expertise. It was for these reasons that the concept of title insurance was developed and similar reasoning has made the furnishing of title insurance a successful business ... A policy issues based upon the informed opinion of title examining experts employed by the company that title is in the condition expressed in the policy. As a matter of public policy a duty is imposed upon the title company to make a thorough and competent search of the record title.
Lawyers Title Ins. Co. v. D.S.C. of Newark Enters., Inc., 544 So.2d 1070, 1072 (Fla.Dist.Ct.App.1989) (internal citations omitted).
Thus, Lawyers Title had an independent duty to investigate. In other words, Lawyers Title's right to rely on a representation is inseparably linked to its duty to use diligence in interpreting representations made to it. [citation omitted] Here, Chae's letter stated that 'based on our tax preparation, no estate taxes are due and owing(.)' … Lawyers Title argues that these constituted a representation upon which it could justifiably rely. We disagree.
Lawyers Title's own guidelines require that if a decedent dies intestate, the company must obtain an 'indemnity bond signed by an approved surety company ... protecting (the) Company against any debts or estate or inheritance taxes(.)' …Furthermore, in order to protect it against potential liability for federal estate taxes, Lawyer's Title requires that a title policy issued before complete administration of an estate must contain an exception for estate taxes unless the estate procures a bond that indemnifies the company against loss due to the omission of the exception. Neither Chae's letter nor Soon Baik's declaration stated that there had been a complete administration of the estate. … Lawyers Title failed to comply with its own guidelines by either excepting liability for estate taxes or procuring an indemnification bond, and failed to fulfill its independent duty to investigate. Thus, it unjustifiably relied upon the Law Firm's representations.
Lawyers Title Ins. Corp. v. Baik, 2001 WL 704374 (Wash.App.Div. 2) (unpublished).
