In Chanda v. Federal Home Loans Corp. (2013) 215 Cal.App.4th 746, the court analyzed application of the so-called “collateral source” rule to preclude evidence of title insurance, in the context of a claim by a lender against a broker for negligence and breach of fiduciary duty. Specifically, the lender argued that the broker had failed to properly protect it against fraud and forgery in connection with certain loans made by the lender and arranged by the broker. The notary, who was the sole point of contact for the broker with the ostensible borrowers, told the broker that the borrowers were unavailable to meet in person, but that she (the notary) would obtain the necessary signed and notarized loan documents. The broker agreed. The notary then forged the names of the borrowers to the loan documents, including deeds of trust, and forged their signatures again on a subsequent, larger, replacement loan. When the ostensible borrowers/property owners learned that their signatures had been forged, they sued the lender and the loan broker, among others, to cancel the fraudulently obtained trust deeds and recover damages. The lender in turn sued the broker, alleging negligence and breach of fiduciary duty in failing to protect against the notary’s fraud.
The trial court excluded all evidence that title insurance was obtained by the broker for the lender, on the basis that it was irrelevant to any of the issues and inadmissible under the collateral source rule. The collateral source rule is a rule of evidence and substantive law that provides that if an injured party gets payment for his or her injury from a collateral source such as insurance, that payment should not be deducted from the damages that he or she can collect against the tortfeasor. The policy is to encourage parties to protect themselves by obtaining insurance coverage and avoid the risk that evidence of plaintiff’s insurance coverage may diminish its recovery.
The broker argued that the fact that it had arranged for title insurance for the lender was relevant because it provided protection against forgery, and tended to rebut the lender’s claim that the broker did nothing to mitigate against the risk of fraud or forgery. The trial court excluded the evidence, even though lenders’ counsel argued to the jury that the broker had no policies, procedures or practice manuals relative to protecting clients or investors from fraud, and had in fact done nothing to protect the lender against potential fraud.
The broker appealed, and the Court of Appeal held that the trial court had made an error in excluding evidence of the title insurance. First, there is nothing that prevents reference to the existence of insurance if the evidence is otherwise admissible. Here, the evidence of the existence of title insurance was clearly relevant here because it could be used by the broker to argue that it had in fact taken some steps to protect the lender against fraud and forgery, namely, obtaining title insurance. Second, any risk that the lender’s chance of recovery would be diminished by reference to title insurance – which is what the collateral source rule seeks to avoid – could be minimized by appropriate instructions to the jury. For example, the jury could be instructed that it is not to consider any recovery under the title insurance policy in assessing damages as this is a matter for the judge to address after the verdict.
The Court also determined that the fact that the notary had forged the borrower’s name was not a “superseding” cause which absolved the brokers of liability. One of the requirements in applying the doctrine of “superseding cause” is that the third party conduct occur after the defendant’s (i.e., broker’s) conduct. In this case, that could not be established because the broker’s involvement and the notary’s involvement were contemporaneous and intertwined events. Accordingly, the trial court was correct not to instruct the jury on the doctrine of superseding cause, because it was not applicable.