Victor’s Insider Scoop: A Refresher Course on Title Insurance Part II
March 14th, 2009 | top of page
Last monthʼs newsletter offered an introductory review of Title Insurance. This monthʼs Insider Scoop also comes courtesy of David Miller of Chicago Title but delves into a few aspects in greater detail. If you need more info or have a title insurance issue not discussed here then call Dave at 602.667.1030 or firstname.lastname@example.org or www.chicagotitle-miller.com.
Types of Insurance
In general, there are two types of insurance policies. The first (and least protective) is the Standard Coverage policy. The second (and more protective), is the American Land Title Association Extended Coverage (ALTA) policy. Standard Coverage policy The Standard Coverage policy generally covers matters affecting title, that occurred in the past, and that are not specifically excluded from the policy terms. Importantly, with few exceptions, the Standard policy does not cover title issues that arise after the effective date of the policy. Further, the Standard policy does not cover items specifically excluded from the policy. For example, the Standard policy typically covers:
• Liens or encumbrances that were of record, but were not specifically identified in the title policy
• Unmarketability, and
• Lack of access
If the actual vesting on latest “vesting deed” differs from the policy, the insurer is generally liable to the owner for damages incurred by the owner by reason of such inaccuracy. This broadly guarantees to the purchaser that the selling entity owns and can convey clear title to the purchaser. For obvious reasons, the description of the selling entity under any definitive purchase agreement for the sale of the property should mirror the vesting identified under the Preliminary Title Report verbatim.
Liens or encumbrances:
A lien or encumbrance is generally a claim on title by a third party (i.e. easements, leases, options, deeds of trust, etc.). These “liens and encumbrances” are typically identified in the policy as an exclusion from coverage (discussed below), so as a practical matter, this coverage protects against any mistakes the insurer made in preparing the title policy (by failing to identify all matters of record excluded from title policy coverage).
This coverage generally protects the purchaser where the property is rendered unmarketable to a third party by reason of a title matter. Courts interpreting this coverage item, however, have eroded the benefit of this coverage to a purchaser, finding that virtually all property has some marketable value, and thus, corporate counsel may not want to rely on this coverage item for any particular purpose in deciding whether to purchase real property.
Lack of access:
This coverage item insures against landlocked parcels, and will pay the purchaser resulting damages if access to the parcel is entirely unavailable.
American Land Title Association Extended Coverage (ALTA) policy The American Land Title Association Extended Coverage (ALTA) policy generally covers everything that the Standard policy covers, plus it insures against:
• Unrecorded liens, encumbrances, taxes and assessments
• Discrepancies, conflicts in boundary lines, shortage in area, and encroachments (when combined with an ALTA Survey and Endorsement 116.1 (discussed below))
This coverage is substantially broader than the Standard policy, because in general, it covers matters that are not “of record” as well as matters which are not shown on an ALTA Survey certified to the title company. Naturally, the cost of an ALTA Policy and Survey is substantially more than a Standard Policy.
Exclusions from Coverage (Standard/ALTA) Under the Standard and ALTA policy, the following are typically excluded from coverage:
• Laws, ordinances, regulations and policy powers
• Rights of eminent domain
• Matters controlled by the insured (created or known to the insured)
• Creditors rights claims (pre-bankruptcy fraudulent conveyances & preferential transfers). This “creditor’s rights” exclusion is often negotiated out of the policy (discussed below).
1970 vs. 1992 Policy Form A quick note on 1970 vs. 1992 Policy forms. Some courts have construed the 1970 Policy to cover damages suffered by an owner with respect to certain environmental issues affecting the property. For this reason, if the insurer is willing, corporate counsel may seek to require that the insurer issue the policy on the 1970 form. In 1992, the standard policy form was revised to exclude coverage for environmental contamination. Note, however, that even with the 1970 policy in place, the insurer’s “boilerplate” exclusions may significantly reduce coverage under the 1970 policy. In such circumstances, the 1992 Policy may provide more protection.
Preliminary Title Reports
There is a common misconception that Preliminary Title Reports represent the current state of title. They do not. Rather, the Preliminary Title Report is a (preliminary) offer to issue insurance subject to specific exclusions stated in the report, and may (and often do) contain errors. The title insurance company is not liable for these errors unless the purchaser suffers damages as a result of the error, and coverage for the error is not excluded under the policy terms. Accordingly, corporate counsel should be skeptical of the accuracy of the Preliminary Title Report and carefully review its terms, including (a) vesting, (b) exceptions to coverage, (c) the boilerplate exclusions, (d) the underlying documents, and (e) the ALTA Survey. An approach to reviewing the Exceptions to Coverage is discussed below: Exceptions to Coverage (aka Schedule B) The following is a list of liens and encumbrances that are typically excluded from coverage by the title company in “Schedule B”:
• Property taxes
• Assessments (special districts)
• Easements (utility, service, adjacent owner, land use)
• Rights of way
• Development Agreements
• Monetary liens
Classify as major or minor Corporate counsel may desire, as a first approach to reviewing the “Schedule B” exceptions, to classify the exceptions as major or minor. For example, a utility easement located across the rear five feet of the property may be a minor exception if there are no structures on the easement and the easement area is not needed for access; whereas an easement running through the center of the property or an existing building is a major exception.
If major, determine whether they are capable of removal. If an exclusion is major, determine whether it is capable of removal. Some exceptions simply cannot, as a practical matter, be removed (i.e. tax liens), and hence, a decision needs to be made whether to purchase the property with the encumbrance. If capable of removal, corporate counsel should either (a) seek to remove the major exception from coverage by causing the seller of the property to remove the underlying lien or encumbrance, or (b) seek to have the title company remove the exclusion or “insure over” the exception by issuing an endorsement which specifically covers the purchaser for any damages resulting from the defect, lien or encumbrance in question. Obviously, having the lien or encumbrance extinguished by the seller would be the best approach from a purchaser’s perspective. If not removed, but covered under the title policy, there is a risk that the title coverage may not be available if the title company files bankruptcy or goes into receivership, the policy limits are insufficient, or another exclusion in the policy limits coverage.
Review Underlying Documents and ALTA Survey In addition to a review of the exclusions, corporate counsel should ask the title company for a copy of the underlying documents referenced in “Schedule B” and carefully review the same to fully understand the scope of title matters specifically excluded from coverage. Corporate counsel should also review the ALTA Survey in coordination with the Preliminary Title Report and underlying documents to ensure that they are consistent and accurately reflect the exposures that the policy holder is willing to assume.
Endorsements negotiated under the policy expand or modify the policy terms or “insure over” policy risks. The need for endorsements depends on the needs of the transaction. The following endorsements are commonly included in a commercial title policy transaction:
• 116.1 (incorporates survey): Insures that the property is as stated in the ALTA survey
• 103.7 (expanded access rights): If access to a public street is of concern, this endorsement can be used to expand coverage over and above the lack of right of access coverage in the underlying policy
• 116.7 (lawfully created parcel): Insures that the parcel is a legal parcel
• 100.9 (CC&Rs): Primarily insures against present violations of any recorded CC&Rs
• 116.4 (contiguity): May be useful if buying two, but separate, joining lots to cover against loss resulting from a gap between the two lots. (i.e. if the legal descriptions start from different points of beginning)
• 123.1 (zoning): Insures that certain zoning classifications are applicable to the property
• (creditor’s rights): Removes the creditor’s rights exclusion from the policy
• (arbitration): Removes insurer’s right to demand arbitration under policies which are less than 1M. This arbitration provision was added to the 1992 Policy form.
This is a very general description of these policy endorsements. Corporate counsel should review the actual endorsement to determine the scope of the coverage and needs for the transaction.
In any significant real estate transaction, corporate counsel negotiating the transaction should carefully review, and if appropriate, negotiate the title policy to meet the transaction needs and project risks. If such review and negotiation is not performed prior to entering into a definitive agreement for the purchase of the property, counsel drafting and negotiating the purchase agreement would be well advised to include special provisions in the purchase agreement to ensure that title issues may be properly vetted and negotiated with the title company prior to committing the company to the purchase, and that a practical mechanism is in place to require the selling party to remove title objections, where appropriate. Also, because an ALTA Policy and Survey has an associated material cost component, cost considerations should be appropriately allocated in the purchase agreement between the seller and purchaser.
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