This month, in Centennial Development Group, LLC v. Lawyers Title Insurance Corp., the Arizona Court of Appeals ruled that even though the title company failed to disclose an easement in the title policy for purchase of real property, Arizona statutes (ARS §20-1562(5)) bar a claim for negligence against the title insurance company. The statute states that a title report is not an abstract of title and “is not a representation as to the condition of title to real property but does constitute a statement of the terms and conditions on which the issuer is willing to issue its title insurance policy if the offer is accepted.” Thus, the title insurance company will not be liable for negligence, but may still be liable for breach of contract. So if there was an easement, lien, encumbrance or other defect discovered that the title insurance company failed to discover and/or disclose, the damages for breach of contract would be the difference in value of the property with and without the defect in title.
However, the title company would not be liable for what is called “consequential damages” (damages for items that come up as a result of the error). Thus, if the encumbrance made the property so costly that the owner had to relinquish it to trustee’s sale or foreclosure, the damages for loss of the property would not be covered. Similarly, if the existence of an undisclosed easement gave a third party leverage to interfere with property development, those losses due to negotiating with the easement holder probably would not be covered. Now the purchaser who wants to be extremely cautious may consider, in addition to title insurance, paying for an abstract of title to obtain a report “intended to be relied upon by the person who contracted for receipt of the representation.”
On the positive side for the property owner, the Court of Appeals ruled that the property owner was entitled to contract damages that occurred while the insured held title to the property even if the suit was filed after the property was sold.