The opinion of the court was delivered by: Cedarbaum, J.
In 2010, at two New York mortgage refinancings, the settlement agent misappropriated closing funds wired to her by Cole Taylor Bank ("Cole Taylor"). Fidelity National Title Insurance Company ("Fidelity") sues for a declaratory judgment that title insurance policies were never issued in connection with the two mortgage refinancings, and that it owes Cole Taylor no obligations arising from these closings. Cole Taylor counterclaims that Fidelity breached its contracts, that Fidelity is estopped from denying coverage, and that Fidelity's denial of insurance coverage constitutes bad faith. The parties agreed to try the case on submitted, stipulated facts, and I held a Daubert hearing to determine whether the testimony of Cole Taylor's expert, Felice Shapiro, was admissible. After considering all of the evidence, I make the following findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52(a).
Fidelity is a title insurance company with offices in New York. Cole Taylor is an Illinois chartered bank and makes mortgage loans in several states, including New York. At all relevant times, Johns and Lee Real Estate Service, LLC ("Johns and Lee") was a policy issuing agent of Fidelity pursuant to the terms of a written agreement (the "Agency Agreement").
In addition to serving as Fidelity's policy issuing agent, Johns and Lee also engaged in escrow and settlement services for real estate transactions. It advertised itself as "Your Full Service Title Company and Settlement Agent." Tami Demers was the principal of Johns and Lee.
The Agency Agreement expressly stated that Johns and Lee was Fidelity's agent for the sole purpose of issuing title commitments and policies. The Agency Agreement also prohibited Johns and Lee from engaging in escrow or closing activities on Fidelity's behalf.
On or about August 2010, Cole Taylor approved a mortgage loan application by Jeffrey Nusbaum, Jr. and Kelly Nusbaum for $220,451. The Nusbaums were to use the loan proceeds to refinance the existing mortgage on their property in Schaghticoke, New York. On or about September 2010, Johns and Lee issued a Commitment for Title Insurance for a form ALTA Policy, naming Cole Taylor as the proposed insured. Prior to the closing and execution of the mortgage, Cole Taylor sent a HUD-1 settlement form and written closing instructions to Johns and Lee, outlining the acts that Johns and Lee was to perform on Cole Taylor's behalf at the Nusbaum closing. Demers signed and returned a copy of the written closing instructions and the HUD-1 to Cole Taylor. She acknowledged and agreed to Cole Taylor's closing instructions by signing as "settlement agent." Fidelity never communicated directly with Cole Taylor regarding the closing.
On or about October 4, 2010, Cole Taylor wired $219,169.48 to the bank account of Johns and Lee. Demers subsequently stole these funds for her personal use. Demers did not satisfy the first mortgage loan on the Nusbaum property, nor did she pay the mortgage recording fees. She did not pay Fidelity the premium due for its title insurance policy or record Cole Taylor's mortgage. Nevertheless, at the closing, she "marked up" the Nusbaum Commitment for Title Insurance.*fn1
Johns and Lee also served as settlement agent in connection with a refinancing in Albany of a mortgage held by Gregory E. Dahlmann and Christine M. Dahlmann. At the Dahlmann closing, Demers again misappropriated all funds for her personal use.
Since the prior mortgages on the Nusbaum and Dahlmann properties were not satisfied, on November 17, 2010, Cole Taylor wrote to Fidelity to demand full coverage of its losses pursuant to the title commitments issued at the closings. Fidelity denied the request for coverage on the ground that the preconditions to the issuance of the title policies were not fulfilled. Furthermore, Fidelity contended that even if the title policies were deemed to have been issued, the claims would not be covered under ALTA Policy Exclusions 3(a) and 3(e). These exclude from coverage "[d]efects, liens, [and] encumbrances" that are "created, suffered, assumed or agreed to by the Insured Claimant," or that result in "loss or damage that would not have been sustained if the Insured Claimant had paid value for the Insured Mortgage." Form ALTA Policy, Exclusions 3(a) & 3(e).
I. Actual and Apparent Authority
According to Fidelity, Cole Taylor's losses were caused by Johns and Lee when Demers was acting as Cole Taylor's settlement agent. Thus, the conduct of Johns and Lee is imputed to Cole Taylor, and ALTA Policy Exclusions 3(a) and 3(e) apply. In opposition, Cole Taylor argues that Johns and Lee was acting as Fidelity's agent for all activities at the closings because Johns and Lee was Fidelity's agent for the purpose of issuing title commitments.
Under the Agency Agreement, Johns and Lee was prohibited from engaging in closing activities on Fidelity's behalf. Fidelity could be bound by the acts of Johns and Lee as an escrow, settlement, or closing agent only if Fidelity had issued a "closing protection letter." It is ...