Present: Carrico, C.J., Compton, Lacy, Hassell, Keenan, and
Kinser, JJ., and Whiting, Senior Justice
LAWYERS TITLE
INSURANCE CORPORATION
OPINION BY JUSTICE A. CHRISTIAN COMPTON
v. Record No. 970385 October 31, 1997
NORWEST CORPORATION, ET AL.
FROM THE STATE CORPORATION COMMISSION
In this appeal of right, we focus upon the meaning of
"insurance" in the context of the regulatory jurisdiction of the
State Corporation Commission and its Bureau of Insurance. The
term is not defined in the Code of Virginia, but we have said
that a "shifting of the risk is the essence of insurance." Hilb,
Rogal and Hamilton Co. v. DePew, 247 Va. 240, 248, 440 S.E.2d
918, 923 (1994).
Here, we consider whether the Commission erred in ruling
that it had no authority to regulate a product that is being
offered to consumers in the title insurance market.
Specifically, the dispositive question is whether the product,
called "Title Option Plus" (TOP), involves a shifting of the risk
of title defects, thus constituting insurance subject to
Commission regulation.
In 1995, the Commission issued a rule to show cause against
appellees Norwest Corporation, Norwest Mortgage, Inc., and
American Land Title Company, Inc. The Commission alleged
defendants were violating Code § 38.2-1024 by offering TOP and
thereby transacting the business of title insurance in the
Commonwealth without first obtaining a license from the
Commission. The rule was issued after a Bureau of Insurance
investigation was undertaken in response to a complaint made by
appellant Lawyers Title Insurance Corporation. Lawyers Title was
permitted to participate in the proceeding as a party
complainant.
Subsequently, a Commission examiner conducted a hearing and
issued a report. He found against the defendants and recommended
that the Commission take punitive action against them.
Later, the Commission considered the hearing examiner's
report, the evidence of record, and argument of counsel. In a
1996 Final Order and Opinion, the Commission unanimously
determined "that TOP is not insurance under the current state of
the law in Virginia." Consequently, the Commission dismissed the
rule to show cause. This appeal ensued.
Upon review of a Commission's final order, we do not
consider the matter de novo. On appeal, the Commission's
findings "are presumed to be just, reasonable, and correct."
Swiss Re Life Co. Am. v. Gross, 253 Va. 139, 144, 479 S.E.2d 857,
860 (1997). The Commission's order is entitled to the respect
due judgments of a tribunal informed by experience, and its
decision will not be disturbed when "based upon the application
of correct principles of law." Id.
The facts are virtually undisputed. Norwest Corporation is
a bank holding company and the parent of the other two
defendants. Norwest Mortgage originates first mortgage loans and
sells most of them in the "secondary market" to entities such as
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the Federal National Mortgage Association (Fannie Mae), the
Federal Home Loan Mortgage Association (Freddie Mac), and the
Government National Mortgage Association (Ginnie Mae). American
Land Title, operating under the trade name "ATI Title Company,"
is a title insurance agency licensed in Virginia and performs
searches of titles to real property in this state.
In 1992, Norwest Mortgage and American Land Title began to
develop TOP. TOP is a "process" by which Norwest Mortgage
determines the record status of title to real property in order
to decide whether to make a mortgage loan. The concept grew out
of precedent in the second mortgage loan industry in which
certain mortgage lenders relied on a record title search and
report, not title insurance, to determine whether to make a
mortgage loan. Norwest Mortgage began offering the product to
Virginia borrowers in March 1994.
TOP is available only on Norwest Mortgage loans secured by
first deeds of trust on existing residential property. TOP is
not available on loans for new construction, commercial property,
or leaseholds because "the risks are higher on that type of
property," according to the testimony.
Under the process, if a borrower elects to have TOP apply,
American Land Title prepares a "Title Condition Report." This
Report is not a guarantee of title. It is American Land Title's
representation to Norwest Mortgage that the information provided,
including a list of liens and other encumbrances, is based upon a
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search of the public land records. The Report states it "does
not insure or commit to insure title or the validity, priority or
enforceability of the Lender's lien, and is not intended to be
relied upon as a legal opinion as to the lien status."
Norwest Mortgage charges the borrower a fee for obtaining
such a report. Generally, the TOP fee is 10% less than the
premium on a traditional lender's title insurance policy. If the
Report reveals no title defects in the property offered to secure
the loan, and the borrower meets other requirements to qualify
for a loan, Norwest Mortgage will approve the loan without
requiring the borrower to purchase a lender's title insurance
policy.
In Virginia, Norwest Mortgage's loan is secured by a deed of
trust, which conveys legal title to the property to a trustee who
holds such title in favor of Norwest Mortgage as security for the
loan. Under the terms of the deed of trust, the borrower
represents to Norwest Mortgage that the borrower "is lawfully
seised" of the property and has the right to convey it, that the
property is unencumbered, except for encumbrances of record, and
that the borrower "will defend generally the title to the
Property against all claims and demands, subject to any
encumbrances of record." These deed of trust representations are
made by the borrower whether or not the borrower has elected to
have TOP apply to the transaction.
As we have said, Norwest Mortgage sells its first mortgage
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loans, including TOP loans, on the "secondary market," primarily
to Freddie Mac, Fannie Mae, and Ginnie Mae. Freddie Mac and
Fannie Mae will accept TOP in lieu of lender's title insurance or
an attorney's title opinion. In return, Norwest Mortgage agrees
to cure any title defect in the loan secured by the deed of trust
or to repurchase the loan from these secondary purchasers.
Norwest Corporation further guarantees Norwest Mortgage's
performance. Ginnie Mae accepts TOP on Norwest Mortgage loans,
but does not require the additional guarantee from the parent
corporation.
In its Final Order and Opinion, the Commission focused on
the time "when the TOP transaction occurs" between the borrower
and the lender, and not on the time when Norwest Mortgage sells
the loan. It found that "TOP does not involve the shifting of
risk that is essential to the creation of insurance." It stated
that Norwest Mortgage, "like any lender, incurs a risk that the
priority of its lien is not what it believed it to be when the
loan was made. [Norwest Mortgage] creates and bears that risk
itself by virtue of its decision to make the loan. When lender's
title insurance is purchased, . . . (the lender) transfers its
risk to the title insurance company. But where TOP is involved,
[Norwest Mortgage] retains the title risk." We agree with the
Commission's analysis.
When Norwest Mortgage makes a loan, it is a mortgage loan
secured by a lien interest in the realty. At that point in time,
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Norwest Mortgage incurs a title risk that the loan is not
properly secured or that its lien is not first in priority.
Then, Norwest Mortgage sells that mortgage loan into the
secondary market. At that point, Norwest Mortgage makes a
warranty and representation to the secondary market purchaser
that the loan is a first mortgage loan.
From the time of making the loan to the selling of the loan,
and thereafter for the life of the loan, the risk always is upon
Norwest Mortgage. It bears the risk that the borrower's
representations, made in the covenants of the deed of trust, are
not correct. Parenthetically, if any of the borrower's covenants
are false, then the lender's lien interest in the realty securing
the loan may be in jeopardy, and the borrower is at risk of a
claim by the lender. TOP does not remove this risk from the
borrower. Finally, when the loan is sold on the secondary
market, Norwest Mortgage bears the risk that its representations
and warranties are not correct. Accordingly, throughout the
entire transaction, there is a retention of the risk by Norwest
Mortgage, and not a shift of the risk.
The Commission referred to its own administrative precedents
and found them "both persuasive and consistent with" the view of
this Court that a shifting of the risk is the essence of
insurance. For example, the Commission noted Administrative
Letter 1982-10 issued by the Bureau of Insurance drawing a
distinction between risk retention and risk transfer with regard
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to extended warranty service plans offered by automobile
manufacturers or dealers, on the one hand, and those offered by
third parties, on the other. The Bureau had opined that such
contracts "are policies of mechanical breakdown insurance if
offered by [an entity] other than the manufacturer or seller of
the covered motor vehicle," but such contracts offered by the
manufacturer or seller are "more in the nature of warranties than
of insurance." The Bureau said: "The primary risk of loss under
such contracts must remain with and be borne by the manufacturer
or seller, or the contract will be deemed to be an insurance
policy."
Finally, the Commission addressed the "warranty" issue in
depth. The defendants argued to the examiner that Norwest
Mortgage's contractual obligations under TOP are in the nature of
warranties, not insurance. Thus, defendants argued, because the
Commission does not regulate warranties, a license to provide TOP
in Virginia is not required.
Agreeing with defendants, the Commission rejected the
hearing examiner's analysis, embraced on appeal by Lawyers Title,
based on the nature of warranties for manufactured products. The
hearing examiner said that if a so-called warranty "protects the
purchaser from losses caused by perils unrelated to the
manufacture of the product and outside the seller's control, the
promise to indemnify is more in the nature of insurance" and is
not a warranty. The examiner noted that Norwest Mortgage
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"assumes the risk of both on- and off-record title defects by
guaranteeing [a Norwest] mortgage has first lien status."
However, according to the examiner, "any losses resulting from a
title defect, particularly off-record defects, are unrelated to
any defect or failure in the loan, . . . the so-called `product,'
sold by [Norwest Mortgage]. Rather, the title defects relate to
the collateral securing the loan" and not "the loan itself." The
examiner decided that because these off-record defects, such as
recording errors and forgeries, could not be under the
defendants' control, TOP cannot be a warranty and must instead be
insurance. We agree with the Commission that this analysis is
flawed.
In the context of this discussion, a warranty relates to the
character or efficiency of the product sold, and would not cover
a hazard wholly unrelated to the quality of the product. See
Ollendorff Watch Co. v. Pink, 17 N.E.2d 676, 677 (N.Y. 1938). As
the defendants argue, the representation and warranty by Norwest
Mortgage that its loan is secured by a first lien is a
representation relating to the character and quality of the loan,
the "product." The status of the lien securing the loan is being
warranted. This lien status is as integral to the character and
quality of the loan as the rate of interest and duration of the
loan. For example, a loan secured by a second or third lien
lacks the character and quality of a loan secured by a first
lien.
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And, the fact that Norwest Mortgage's warranties require
indemnification for off-record title defects that are beyond its
control does not mean they are not true warranties. Any after-
discovered defect affecting the status or priority of the lien
necessarily affects the character and quality of the loan,
whether the defect results from a negligent title search by
American Land Title or from an off-record problem not
discoverable by a diligent title examiner. The fact that Norwest
Mortgage has no "control" over these off-record defects does not
mean that Norwest Mortgage has warranted a condition unrelated to
the quality of the loan product sold on the secondary market. A
deficient lien is a defect in the product sold by Norwest
Mortgage, whatever its cause, and its contractual undertaking
with regard to such a defect is a warranty, and not insurance.
In sum, we agree with the Commission's rejection of the
notion "that if a product looks like insurance, and is sold like
insurance, it must be insurance." Hence, we hold that Lawyers
Title has failed to overcome the presumption of correctness of
the Commission's final order, and it will be
Affirmed.
SENIOR JUSTICE WHITING, with whom JUSTICE HASSELL and JUSTICE
KINSER join, dissenting.
I respectfully dissent for the following reasons.
In concluding that the TOP program is not insurance because
the respective risks of defective title remain with the borrower
under the deed of trust and with Norwest Mortgage as the lender,
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the majority merely looks at the facade of Norwest Mortgage's TOP
program without considering its substance. Except for a
statement of how the charge for the TOP contract is computed as
to each borrower and a description of the "Title Condition
Report" (noting the disavowal of an intent to insure the title or
to express a legal opinion of the status of the title), the
majority makes no further mention of the terms of Norwest
Mortgage's so-called TOP "process." 1
Apparently, there are no written contracts between TOP-
purchasing borrowers and Norwest Mortgage which describe what the
buyer receives in return for payment of the TOP fee. According
to the majority, it is simply a "Title Condition Report" which
American Land Title furnishes its parent corporation Norwest
Mortgage for which "Norwest Mortgage charges the borrower a fee
. . . . [g]enerally . . . 10% less than the premium on a
traditional lender's title insurance policy." 2
1
The majority states that "[i]n return [for Freddie Mac's
and Fannie Mae's acceptance of TOP], Norwest Mortgage agrees to
cure any title defect in the loan secured by the deed of trust or
to repurchase the loan from these secondary purchasers."
However, Michael J. Keller, one of the self-styled "co-authors"
of TOP, testified that his employer Norwest Mortgage makes that
agreement on all loans it sells to secondary purchasers.
2
Norwest Mortgage's TOP fee, which the majority indicates is
simply for obtaining the title condition report, is several times
as large as the amount Norwest Mortgage pays its subsidiary
American Land Title for this report. This made me wonder whether
something else is furnished the TOP purchaser by Norwest Mortgage
in return for payment of this larger fee. As I later discovered,
a substantial part of the TOP contract is Norwest Mortgage's
acceptance of a transfer of a part of the borrower's risk of bad
title.
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I do not think that the contractual relations between the
TOP borrowers and Norwest Mortgage can be so confined. In my
opinion, the oral representations by Norwest Mortgage's employees
to induce borrowers to purchase TOP contracts are sufficient to
provide the terms of the oral contract Norwest Mortgage makes
with its borrowers in return for their payment of the TOP
charges.
Since these oral contracts are collateral contracts to the
borrowers' deeds of trust, they may be considered in examining
the scope of Norwest Mortgage's liability. Price v. Taylor, 251
Va. 82, 86-87; 466 S.E.2d 87, 89 (1996); High Knob, Inc. v.
Allen, 205 Va. 503, 506-07; 138 S.E.2d 49, 52 (1964). Further,
if the inducements are sufficient to indicate Norwest Mortgage
has orally agreed to the shifting of some of the risks assumed by
the borrowers in their execution of the deeds of trust, I think
those oral agreements are contracts of insurance under the facts
in this record. See Yates v. Whitten Valley Rental Corp., 226
Va. 436, 438-39, 309 S.E.2d 330, 331-32 (1983); Dickerson v.
Conklin, 218 Va. 59, 65, 235 S.E.2d 450, 454 (1977); Fred C.
Walker Agency, Inc. v. Lucas, 215 Va. 535, 536, 211 S.E.2d 88, 89
(1975).
The record demonstrates that borrowers who participate in
the TOP program buy more than a "Title Condition Report" in
exchange for the TOP fee. Indeed, to induce the execution of a
contract collateral to the loan, Norwest Mortgage's informational
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instructions to its employees promoting the TOP program provide
in part that:
Title Option Plus (TOP) is not lender's title
insurance; rather it is title coverage that costs
borrowers at least 10% less than standard lender's
title insurance, [and] provides the same (or better)
protection against loss.
(emphasis added).
In Norwest Mortgage's "easy script suggestions for
responding to borrower or Realtor questions about TOP" appear the
following pertinent questions and answers:
17. Is there a higher risk to Norwest by issuing this
protection versus title insurance?
Yes, however, ATI [Norwest Mortgage's subsidiary
company doing the title search] has a good track record
compared to the industry in managing the risk of agent
error, negligence, and errors incurred in closing the
loan. We can manage these risks more effectively than
an independent agency structure through Quality
Assurance Program and established accounting controls
that most independent agencies lack.
. . . .
21. How much risk is there in other situations where a
title insurance underwriter would have borne the risk,
such as claims resulting from liens that are not
detectable on the record?
Norwest will establish an allowance for losses to cover
these and other "agent error" losses. We estimate that
these losses will be less than .25%.
. . . .
23. What protection does TOP afford the borrower?
TOP affords protection to the lender only:
. . . .
When a purchase money borrower chooses TOP the
protection is provided to the Lender. TOP indirectly
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protects the borrower to the extent that: a) ATI
[Norwest's title subsidiary] will not issue TOP unless
the title is clean, and b) If a title defect shows up
after closing, ATI will usually have to cure on behalf
of the Lender which would cure for the Buyer as well.
(emphasis added).
Although these and other statements made to TOP purchasers
expressly disavow an intention to provide any kind of insurance
protection to the borrower, I do not think Norwest Mortgage can
conceal the essential nature of its contract by such disclaimers.
Rather, I suggest that whether a particular contract is one of
insurance does not depend on what it is called, but what it does.
Associated Hosp. Serv. v. Mahoney, 213 A.2d 712, 721 (Me. 1965);
People v. Roschli, 9 N.E.2d 763, 764 (N.Y. 1937); cf. Parker v.
Inge, 157 Va. 592, 599, 161 S.E. 884, 886 (1932) (principal-agent
relationship determined by substance rather than form of
contract).
Here, as the majority notes, the borrower covenants in the
deed of trust to "defend generally the title." However, as the
above inducement literature demonstrates, that obligation is
shifted from TOP borrowers to Norwest Mortgage in the TOP program
in which Norwest Mortgage obligates itself to defend against any
claim adverse to the borrower's title.
In my opinion, this shift of obligation is a shift of the
risk of having to defend a claim adverse to the borrower's title.
In support, I note that a contract to provide legal services in
the event of a contingency in return for an up-front fee is one
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of insurance. See Allin v. Motorist's Alliance, 29 S.W.2d 19, 22
(Ky. 1930); Continental Auto Club, Inc. v. Commissioner of Ins.,
60 N.W.2d 180, 181-82 (Mich. 1953); State v. Blue Crest Plans,
Inc., 421 N.Y.S.2d 579, 580-81 (N.Y. App. Div. 1979); Texas Ass'n
of Qualified Drivers, Inc. v. State, 361 S.W.2d 580, 582 (Tex.
Civ. App. 1962); Wayne F. Foster, Annotation, Prepaid Legal
Services Plans, 93 A.L.R.3d 199, 199 n.2 (1979); see also
Physicians' Defense Co. v. Cooper, 199 F. 576, 580-81 (9th Cir.
1912) (applying California statutory definition of "insurance");
Arkansas Motor Club v. Arkansas Employment Sec. Div., 373 S.W.2d
404, 407 (Ark. 1963) (Arkansas statutory definition); Physicians'
Defense Co. v. O'Brian, 111 N.W. 396, 397-98 (Minn. 1907)
(Minnesota statutory definition). But see Vredenburgh v.
Physicians Defense Co., 126 Ill. App. 509, 513 (1906); State v.
Laylin, 76 N.E. 567, 569 (Ohio 1905).
Norwest Mortgage has minimized its risks in issuing TOP
contracts by (1) confining them to existing residential housing,
(2) spreading the risks among a large group of TOP purchasers,
and (3) establishing a reserve against any such losses,
apparently from the fees paid by all TOP borrowers. These
indicia of insurance cannot be obscured by Norwest Mortgage's
representation that TOP is not insurance. See Mahoney, 213 A.2d
at 721; O'Brian, 111 N.W. at 397-398; Roschli, 9 N.E.2d at 764;
Blue Crest Plans, Inc., 421 N.Y.S.2d at 580-81.
Even though the ultimate risk of a title defect remains with
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the borrower under the deed of trust, considering the substance
of Norwest Mortgage's undertaking, I conclude that its obligation
to defend any title claim shifts a part of the TOP borrowers'
risk to Norwest Mortgage in return for the borrowers' payment of
the TOP fee.
The majority reasons that since TOP is nothing more than
Norwest Mortgage's warranty to the secondary purchaser of the
character and quality of the lien securing the loan (the product
sold), it cannot be insurance. However, these warranties do not
relate to the borrower whose rights against Norwest Mortgage are
created in the TOP contract.
For these reasons, I would hold that Norwest Mortgage's TOP
plan is one providing insurance protection to its borrowers and,
therefore, a violation of Code § 38.2-1024. Accordingly, I would
remand this case to the State Corporation Commission for further
action consistent with that conclusion.
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