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Vincent Gallo, Esq., "For Informational Purposes Only" - Are You Kidding Me?

posted Jun 16, 2015, 5:48 AM by Pete Weinman   [ updated Jun 16, 2015, 5:49 AM ]

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June 14, 2015

Most top rated sommeliers and connaisseurs de vin will readily tell you that you should drink no wine before its time. With this being duly noted, I thought back to a decision from 2007 that I had read which I found interesting, but I somehow felt that it just wasn’t time to “put it out there”. With all der sturm und drang currently emanating from the New York State Department of Financial Service’s Regulation 208, as it relates to title insurance, I am confident that now is the time to “pop the cork”, so to speak.

The case is entitled Paloubis v United General Title Insurance Company, 2007 NY Slip Op, 31278(U) May 4, 2007, Supreme Court, Queens County, Docket Number: 0016910/2006. In this case, the Insured was the successful bidder on a property at public auction known as 166-66 21st Avenue, Whitestone, NY (Block 5760 Lot 37) for $531,000. The Defendants, a Title Insurance Company and Title Agent, issued a Title Report resulting in a Title Insurance Policy for the Insured. The Insured alleged that the Defendants negligently misrepresented that the Certificate of Occupancy for the premises permitted residential use of the dwelling by two families, when, in fact, the Certificate of Occupancy for the premises authorized residential use of the dwelling by one family only. The Insured alleges that he relied upon this misrepresentation and on the Title Report and Title Policy when proceeding with the purchase and his then making renovations to convert the dwelling on the premises into a two-family dwelling. The Insured further alleges that he subsequently "discovered" that the property was not a "two-family dwelling, but a one-family dwelling," and was assessed fines for having renovated and used the premises as a two-family dwelling in violation of the zoning law. The Insured asserts causes of action for breach of contract, negligence and negligent misrepresentation, claiming that the Defendants wrongfully refused to pay them the amount of $424,800, pursuant to the Title Policy. The Defendants moved to dismiss the Complaint. The Defendant, Title Agent ordered the "Certificate of Occupancy" search from AIS (a Municipal Search Company), who failed to appear in this action.

The Court held that with respect to the claim by the Insured for breach of contract, "[a] policy of title insurance protects a property owner against loss by reason of defective titles and encumbrances and insur[es] the correctness of searches for all instruments, liens or charges affecting the title to such property' and that the liability of the title insurer to its insured is essentially based on contract law [and] is governed and limited by agreements, terms, conditions and provisions contained in the title insurance policy".

The Court held that the Owner’s Policy affords the Insured coverage for loss occasioned by a defect in title, including liens or encumbrances on the title, or unmarketability of the title. Contrary to the Insured’s argument, that the Certificate of Occupancy for the property restricts its use to one-family residential use does not render the title defective or unmarketable, or constitute an encumbrance on the title. "[M]arketability of title is concerned with impairments on title to a property, i.e., the right to unencumbered ownership and possession, not with legal public regulation of the use of the property". Because a Certificate of Occupancy and zoning laws regulate the manner in which the property can be used and does not impair title, the damages claimed by the Insured do not fall within the scope of the title insurance policy.

The Court went on to say that insofar as the Insured based his claims against the Defendants for negligence and negligent misrepresentation regarding the authorized use of the premises, he relied upon a copy of the "CERTIFICATE OF OCCUPANCY" report annexed to the Title Report which states that a Certificate of Occupancy had been issued on February 5, 1958 for a three-story, "TWO FAMILY DWELLING" and garage for the premises known as "166-66 21 AVENUE COUNTY: QUEENS BLOCK: 05760 LOT: 00037." In addition, he alleges that he relied upon the copy of the Certificate of Occupancy provided to him. The misrepresentation regarding the property's authorized use in the Certificate of Occupancy report was not made until after the Insured already had entered into the Contract of Sale. Thus, the Insured could not have relied upon the misrepresentation to his detriment in contracting to purchase the property. To the extent the Insured asserts that he relied upon the same misrepresentation when closing the transaction, the Contract of Sale itself made no representation regarding the existence of a Certificate of Occupancy for any dwelling. Thus, a reasonable and prudent person should have carefully read the copy of the Certificate of Occupancy supplied by the Title Agency if the type of authorized use was relevant to the decision to close the transaction. If the Insured had done so, he would have seen that on its face, the property address listed thereon, including the Block and Lot numbers, failed to match the one set forth in the Certificate of Occupancy report, or in the offer or Contract of Sale. Hence, he should have realized it may not have been the correct Certificate of Occupancy for the property he contracted to purchase. In view of the address discrepancy, and because the cover sheet to the annexed copy of the Certificate of Occupancy, (denominated "Municipal Department Searches and Street Report") specifically warned that any search reported was furnished "FOR INFORMATION PURPOSES ONLY," and would not be insured and that the company would not assume "any liability for the accuracy thereof," the Insured should have made an additional inquiry as to whether the representation in the Certificate of Occupancy report was, in fact, correct. Additionally, the Insured himself acknowledged in the offer and in the Contract of Sale that he had inspected the property, and, thus, should have been aware that the physical layout of the dwelling was inconsistent with a residential use by two families. At a minimum, the Insured should have double-checked to confirm the accuracy of the representation in the Certificate of Occupancy report, prior to commencing the renovation work. As the Insured concedes, the status of the Certificate of Occupancy issued for the correct premises was readily available as a matter of public record. The Certificate of Occupancy provided to the Insured stated it was for a property with the address "160-66 21st Ave.," "Block 5755 Lot 20" (as opposed to 166-66 21stAve., Block 5760, Lot 37). Under such circumstances, the Insured cannot be said to have justifiably relied upon the misrepresentation regarding the authorized use of the premises pursuant to the Certificate of Occupancy at the time he closed the transaction.

Lastly, the title insurance policy further provides: "EXCLUSIONS FROM COVERAGE The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damage, costs, attorneys' fees or expenses which arise by reason of: 1. (a) Any law, ordinance or governmental regulation (including but not limited to building and zoning laws, ordinances, or regulations) restricting, regulating, prohibiting or relating to (I) the occupancy, use, or enjoyment of the land . . . or the effect of any violation of these laws, ordinances or governmental regulations, except to the extent that a notice of the enforcement thereof or a notice of a defect, lien or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy." Thus, the terms of the Contract sued upon specifically and unambiguously disclaim responsibility for the mistake related to the Certificate of Occupancy that forms the basis for this action. Hence, the Court dismissed the Complaint for failure to state a cause of action.

My comments: It appears, by all accounts, that the Court was pre-disposed in finding no liability against the Defendants for breach of contract, negligence or negligent misrepresentation. The Court held that the Owner’s Policy was a Contract as between the Insured and the Title Company, and it clearly detailed therein the terms of coverage which clearly excluded all matters relating to the Certificate of Occupancy. However, and in most instances, Municipal Department Searches, which include a Certificate of Occupancy Search and a copy of the Certificate of Occupancy, when available, are searches that a prospective Insured pays for, and while they may be ancillary to a Title Report and are not insured under the Owner’s Policy, they are, without question relied upon by a prospective Purchaser as being accurate when a proposed Insured is considering purchasing a property. Therefore, while the Title Company may contractually rely upon the “For Information Purposes Only” declaration, as an “out”, I find it highly implausible that a Title Agent, under a contract theory, quasi-contract theory, and/or a negligence theory, may rely upon an “oops, I’m sorry, what we stated is wrong, and while you may have relied upon the accuracy of what we provided to you in making a decision to close, we assume no responsibility for the accuracy or in-accuracy of the contents of what may be contained in the Searches” theory. There has to be some semblance of culpability when the contents of the Municipal Department Searches prove to be wrong. If the searches are fore-warned as being worthless, then why bother running the searches?

Collaterally, when a Lender receives a Title Report and examines the Municipal Department Searches, the Lender, no doubt, relies upon the accuracy of the searches. Having said that, since a Title Agent (or its Municipal Search Company), to say the least, should bear responsibility for the accuracy of these searches, the Title Agent, just the same, should be entitled to charge appropriately for these searches, and not only as a pass-through expense, since the Title Agent will find itself bearing the responsibility for the accuracy of these searches, at the very least, as a quasi-insurer as to their accuracy, at the risk of being held financially responsible for their in-accuracy.

I find this Decision to be a pre-disposed aberration, and Title Agencies should not downplay or under-estimate the value of these Municipal Department Searches, the accuracy of these searches, or the potentiality of liability of the Title Agent emanating from the in-accuracy of these searches.