Sample Claim – Improper Reliance on the Mutual Indemnification Agreement

I am the Claims Liaison for the FNTG NY Agency Department. As a liaison between our agents and the FNTG claims department, I analyze and investigate many claims. Since claims prevention is always our goal, I thought it would be helpful to review a sample claim involving improper reliance on the mutual indemnification agreement:

Facts: Agent was asked to insure a purchase. The title report revealed an open mortgage given by the seller.  Agent requested clearance from the prior title agent, and was provided with information that the prior agent had relied upon to omit the mortgage under the Mutual Indemnification Agreement (“MIA”).  It turns out that the prior agent was involved in a fraud and never paid off the seller’s prior mortgage when this agent had handled a refinance transaction. The holder of the prior unpaid mortgage started a foreclosure action. We made a claim against another underwriter under the MIA. The other underwriter denied the claim, asserting that the documentation furnished by its agent, in particular, the type of check allegedly used to pay off the mortgage, did not comply with the provisions of the MIA, and thus claimed that our agent was not entitled to rely on the MIA in clearing the open mortgage.

Amount of loss: $370,000.00 plus $106,000 in litigation expenses.

What went wrong: The prior agent that had committed the fraud gave our agent a number of documents to show that the prior mortgage was paid off. Among the documentation was a check drawn on a certain corporation’s business account. The other underwriter asserted that this does not fulfill the requirements of the MIA, which requires, in part, that the new title company (that is, the “Indemnitee” under the MIA) obtain a copy of “the certified, bank or attorney(s) escrow account check(s) issued for payment of the amount stated in the payoff letter as due”. (See Second Amended and Restated Mutual Indemnification, Section 3(h)(ii).)

Underwriting Issues: The MIA is not a cure-all for clearing any and all open title objections. The provisions of the MIA must be strictly followed.  Not only must the exception(s) requiring clearance be included in the list of “Covered Defects”, but the manner of clearing any particular defect must also be followed.

In addition, just because there has been a prior policy issued on the property in question does not mean that you are necessarily entitled to rely upon it for the exception(s) in question. If you have any doubt about whether the MIA applies to a pending transaction, please contact one of our underwriting counsel.

Please let us know if you need a copy of the full Mutual Indemnification Agreement.

If you have any claims-related questions or comments, I encourage you to respond to this post. You can also contact me at or (914) 682-3904.