By Steven A. Freeman, Stephen V. Masterson, Philip M. Midgen, and Ann E. Miller, Attorneys, Glaser Weil Fink Jacobs Howard Avchen & Shapiro LLP
This chapter addresses the unique elements of title insurance, the scope of coverage under title policies (see Sections 54.01 through 54.07), the loss covered under title insurance policies (see Sections 54.08 and 54.09), the insured's obligations to the insurer (see Section 51.10), and the insurer's duty to defend (see Section 54.11). Although title insurance policies are similar to other policies in that they have declarations, coverage provisions, exclusions, and conditions, there are several features that make title insurance policies unique:
• Title insurance policies provide first party coverage that indemnifies insureds for certain of their losses. But, unlike most other first party policies, specific alternative methods for determining the amount of a covered loss are included in the policy;
• Title policies in the main insure against claims on title that exist at the time the policy is issued-title policies are in the main retrospective, not prospective as most other policies are;
• Although title insurance policies provide first party coverage, they obligate the insurer to defend causes of action against the insured affecting title to the insured property or the priority of a secured interest in the property;
• Premiums on Title Insurance are paid when the policy is issued, but the policy remains in effect until the insured no longer has an insured interest in the property or note secured by the property. There is no temporal limitation in the policy that terminates coverage at a certain date.
The effect of each of these differences is discussed throughout this chapter. Although title insurance has been in use for over a hundred years, there is a dearth of cases on many important issues. Therefore, because there is frequently no law on an issue of interest, an understanding of the principles involved is critical to determining the meaning of the terms of title insurance policies.
Section 54.01 discusses the purpose and nature of title insurance. Title insurance facilitates transactions in real estate by providing insureds who acquire an interest in real property indemnity for specified losses if the interest acquired is not as specified in Schedule A of the policy. The insured is generally an owner who acquires title to an interest in the property or a lender who has lent money and has taken back a mortgage or trust deed that secures payment of the loan. Title policies are generally written on standard forms such as those published by the American Land Title Association ("ALTA") or by regional organizations. Title policies generally provide coverage for defects in title that exist at the time the policy is issued and specifically exclude coverage for defects in title that arise after the policy is issued. Accordingly, title insurance is bought by paying one premium at the time of the issuance of the policy, and the policy generally continues in effect as long as the insured has an interest in the property. There are three coverages sometimes found in title polices that are for defects that arise after the policy is issued-mechanic's lien coverage, creditor's rights coverage, and gap coverage. Title policies issued to construction lenders frequently state requirements that if met, subject to the terms of the policy, provide coverage for mechanic's liens; since 2008, mechanic's lien coverage has been the source of numerous claims. Creditor's rights coverage for the transaction by which the insured obtained an ownership or security interest in the property is rarely if ever currently obtainable, but some argue that the 1970 policy provides coverage when an insured's interest in the property, mortgage, or trust deed is avoided due to federal bankruptcy or state creditors' rights laws. The better rule is that such financial risks are not part of title insurance. Gap coverage refers to coverage from the time the policy is issued until the instrument creating the insured's interest in the property is recorded. Gap coverage is part of the 2006 ALTA policies and is available by endorsement under prior policies.
Section 54.02 discusses the determination of the identity of the insured in a title policy. The named insured is specified in Schedule A of the policy. Under an owner's policy, the named insured remains the only insured with limited exceptions under some policies that allow changes to the insured's identity when the insured entity changes form, when the owner has changed by operation of law, or when the insured owner transfers title as part of the insured's estate planning. To facilitate the secondary market in loans secured by real property, loan policies define the insured to include each successor owner of the loan. When a loan is syndicated after the policy is issued, the extent of the various investors' rights to enforce the policy is largely undetermined.
Section 54.03 discusses the duration of a title insurance policy. There is not fixed period of time over which a title policy provides coverage - rather, the insured pays a premium at the inception of the policy, and the policy provides coverage as long as the insured has an interest in the insured property. With limited exceptions, an owner's policy terminates when the owner no longer has an interest in the property. If the insured owner sells the property and either takes back a purchase money security (mortgage or trust deed) or the owner sells the property and makes general warranties of title, the policy generally continues in effect to protect the original named insured from losses due to a defect that prevents the insured from enforcing the security interest or for losses due to the buyer's enforcement of the warranties. However, a breach of a special warranty will generally not be covered as it will be precluded from coverage under Exclusion 3(a) because it would be a defect or other matter created, suffered, assumed, or agreed to by the insured. A buyer of an insured property is not covered under a title policy issued to the seller. A loan policy remains in effect until the underlying debt is paid. If the lender forecloses and obtain title to the property, the lender will still have coverage to the extent of the unpaid debt. As with an insured owner, if the lender forecloses and sells the insured property, the lender still has coverage to the extent the lender took back a purchase money instrument or the lender made warranties in the sale of the property.
Section 54.04 discusses the title risks covered by both owner's and lender's policies. Both owner's and loan policies insure the following risks:
• The ownership interest described in the policy is accurate, both as to the estate owned (fee simple, easement, etc.) and as to the manner in which it is held (joint tenancy, tenants in common, etc.);
• The real property described in the policy in Schedule A is the property in which the insured has the described interest, but the policy does not insure that the property has value, is of a certain size or quality, or that fixtures on the property do not encroach on neighboring property;
• Any defect, lien, or encumbrance on title, by which others claim an interest in the property inconsistent with the insured interest, but there is generally no coverage regarding the condition, value, use, or merchantability of the land.
ALTA policies generally cover off record defects, and title policies generally cover liens for unpaid taxes or assessments at the date of policy. The following off record risks affecting the chain of title are covered by specific coverage provisions of the 2006 ALTA policy, and, although not listed, are generally covered by earlier policies: forgery in the chain of title but not of a note that creates a secured debt; fraud; undue influence; duress; incapacity; impersonation; unauthorized transfer; improper creation, notarization, or delivery; invalid power of attorney; defective judicial or administrative proceeding; and errors in electronic recording. Title policies also insure that the title listed in Schedule A is marketable at the time the policy is issued, which means that the title insured under the policy will be such that it would not allow a buyer to be released from the obligation to purchase because of the state of the title. Marketable title does not insure that the property has value or that the property is in any particular physical condition, only that the state of the title is as insured. Although there has been some disagreement, the better view is that the coverage for unmarketable title, as other coverages, is subject to the conditions and exclusions in the policy. If the insured property is being used in violation of a land use restriction, the better view is that such a violation does not affect title and is not covered; however, there are courts that have held to the contrary. Violation of environmental laws are also not covered as they do not affect title to the insured property; however, a lien on the property for environmental cleanup costs that was in existence at the time the policy was issued would be covered. Coverage for loss caused by a lack of a right of access only insures legal access to the insured property, but not that the access is practical, desirable, or direct. When access may be in doubt, an insured should obtain an endorsement that specifically insures that an identified route and type of access is available as need by the insured. The 2006 ALTA policies provide coverage for encroachments, overlaps, boundary line disputes, and shortages in area and other matters that would be disclosed by an accurate survey and inspection; prior ALTA policies exempted those risks unless the insured obtained a survey of the property. If notice is provided in the public records, title insurance generally also provides coverage for violation of land use and environmental restrictions and for the exercise of governmental police powers or eminent domain. Creditors' rights coverage protects the insured from certain claims that the transfers in the chain of title were fraudulent or preferential under federal bankruptcy, state insolvency, or other creditors' rights laws. Currently, under the 2006 ALTA policy, such coverage is obtainable only for transfers (1) that took place prior to the insured obtaining an insured interest, (2) that was not timely recorded, or (3) that was recorded but the recoding failed to give notice to a purchaser for value or a creditor. It is important for the insured to obtain gap coverage-coverage for liens or defects that are recorded after the title policy is issued but before the document creating the insured's interest is recorded. Prior to the 2006 ALTA policies, gap coverage was provided by an endorsement; under the 2006 policies, it is automatically provided but does not apply to liens for taxes or government assessments.
Section 54.05 discusses covered risks that are specific to only loan policies. Loan policies insure the validity, enforceability, and priority of the insured mortgage or trust deed. A loan policy does not insure that any amount of the loan will be repaid or recovered on foreclosure-the loan policy covers losses only from the insured lender's inability to foreclose on the property or from the lender not having the priority insured by the policy. Generally, a loan policy will state the priority of the insured security in Schedule A and will list prior liens as exceptions in Schedule B. Mechanic's liens are also insured against by most loan policies-that coverage applies to statutory liens for work performed or contracted for prior to the policy date and, in an exception to the general rule of coverage for only pre-policy defects and liens, to statutory liens that arise after the date of the policy if they are financed at least in part by the secured loan funds that the insured lender had advanced or was obligated to advance at the date of the policy.
Section 54.06 discusses exclusions that are commonly found in title insurance policies:
• For violations of land use and environmental regulations that do not appear in the public records as of the date of policy;
• For exercise of the right of eminent domain that does not appear in the public record and would not bind a purchaser for value without knowledge;
• For defects and other matters created, suffered, agreed to or assumed by the insured - while there is some dispute as to the nature of the insured's conduct that is required for the application of the created aspect of the exclusion, the better view is that the insured must intend to perform the act that creates the defect but need not intend to create the defect (e.g., the emerging consensus is that coverage is precluded when a mechanic's lien results from an insured lender's failure to fully disburse a construction loan);
• For defects and other matters known to the insured, not known to the insurer, not recorded, and not disclosed in writing prior to the date the policy is issued-actual knowledge of the matter is required for this exclusion to apply, and until the date the policy is issued, the insured is required to inform the insurer in writing of any such matter of which it has actual knowledge.
• For defects and other matters that cause no loss to the insured - the provision is most frequently applied to limit recovery under loan policies to situations in which the borrower has defaulted, as without a default, there is no loss to the insured lender;
• For defects and other matters that attach or were created after the date of the policy -this provision does not apply to covered mechanic's liens, gap coverage, or creditors' rights coverage;
• For a loss that would not have occurred had the insured paid value - in most states, to the extent an owner insured would be considered a bone fide purchaser for value despite paying inadequate consideration, there would be coverage under the policy, even if the value were grossly inadequate, but to the extent that a lender's underlying debt is unenforceable, coverage would be precluded;
• For a loss that is caused by a creditors' rights claim - (see the creditor's rights discussion above in the paragraph discussing Section 54.04).
Section 54.07 discusses the information found in Schedule B of a title policy. Part I of Schedule B lists items designated as exceptions that the title insurer has found in its title search that it is not willing to insure against under the policy. Such exceptions often include specific and identified tax liens, mechanic's liens, utility easements, and other encumbrances. Also, prior mortgages or trust deeds are frequently found in Part I of Schedule B of a loan policy so that the insured security is not insured to have priority over the specific, identified prior security instruments. When there is a matter identified in Part I of Schedule B and the insurer is nevertheless going to insure against (i.e., write over) it, best practice is not simply to delete the matter from Schedule B; rather, it should be listed in Schedule B and then there should be an endorsement that specifically states the matter in Part I of Schedule B that is going to be insured. The failure to list a deleted item sometimes leads to claims by the insured that it was never informed of the problem and was damaged by the insurer's failure to inform. Although a title insurer should not have liability for such a failure, much money can be spent in litigation when a covered lien or encumbrance is not listed and then written over. In a loan policy, Part II of Schedule B identifies specific liens that are subordinate to the insured lien.
Section 54.08 discusses the measure of the insured's loss under owner's and loan policies. Generally, title policies are policies of indemnity for actual monetary loss. Furthermore, a title policy does not insure the value of the property. While actual monetary loss has no agreed upon definition, the loss under an owner's policy is usually limited to the lesser of the amount of insurance listed in Schedule A and the value of the property with and without the covered title defect. Loan policies limit the loss to the least amount ascertained by three measures - the amount of insurance listed in Schedule A, the value of the property with and without the covered title defect, and the amount of the unpaid debt secured by the insured instrument. The 2006 ALTA policy contains a fourth possible limit to the amount of insurance that applies only to government agencies - the amount of the insurance contract or guaranty entered by the government agency. When calculating the amount of insurance, defense fees and costs paid by the insurer are not deducted from the policy amount. However, any prior payments to the insured for a loss are deducted from the amount of insurance, and, under an owner's policy, any payment to a lender under a related loan policy for the same loss is deducted from the amount of insurance available to an owner. Also, under a 2006 ALTA owner's or loan policy, if the insurer attempted to make title as insured and failed, the policy amount is increased by 10%. When there has been a partial loss due to a title defect or when the property has substantially decreased in value, the amount of the loss is likely to be less than the amount of insurance. In such cases, the difference in value between the property with and without the defect is likely to be the applicable measure of the loss. Under a loan policy, the amount owed on the debt must also be considered, and if it is less than the amount of insurance or the diminution in value due to the title defect, the insurer will only pay the principal and interest owed to the insured lender.
Section 54.08 also discusses the split in authority as to whether a title insurer is liable in tort for losses to the insured that result from a negligent title search that leads to a preliminary title report or commitment that does not list all of the title defects that exist. The better rule applied in California, New York, and Texas is that title insurers are not liable for consequential damages that result from a negligent failure to uncover title defects; in those states, the title insurer's liability, if any, is based on the terms of the insurance policy. This is the better rule for two reasons. First, a preliminary title report is simply an offer to sell insurance-it is not paid for and does not bind anyone until there is an acceptance. If a potential insured wants to obtain representations as to the state of the title without entering a policy, it can buy an abstract of title that makes just such representations. Second, a title policy is an indemnity policy whereby the insurer agrees to cure a covered defect or pay for the loss caused by the defect according to the measures discussed in the prior section of this abstract. Holding a title insurer liable for consequential damages caused by an offer it makes to a potential insured changes the nature of title insurance. Nonetheless, based on statutes that require title insurers to make reasonable title searches, courts in Nevada and New Mexico have held title insurers liable for omissions in preliminary title reports.
Section 54.09 discusses the determination of the date of loss - the date at which the insured loss is measured. Under the 2006 Policies, the insured is given a choice between the date the claim is made and the date the claim is paid to determine the amount of the loss. Generally, when the value of the property is decreasing over time, the insured will choose the earlier date, when the claim was made; when the value of the property is increasing over time, the insured will choose the later date, when the claim is paid. Since an insured lender suffers no covered loss until it forecloses and is unable to recover the amount owed because of a title defect, under a loan policy, the date of foreclosure is usually the date of loss; however, if the title defect prevents the lender from foreclosing, the date that a court rules that because of the defect the lender may not foreclose is likely to be the date of loss. For an owner under a pre-2006 policy, the courts are not unanimous as to the determination of the date of loss. Most often, courts hold that the date of the loss is the date the insured discovers the title defect. Probably adjusting the date of loss to benefit the insured, some courts have held that the date of loss is the date the policy is issued, which is beneficial to the insured when property values are falling; and other courts have used the date title fails, which is beneficial to insured when property values are rising.
Section 54.10 discusses the insured's obligations when making a claim under a title policy. The insured is obligated to give prompt written notice of a claim or litigation that may be covered by the policy, and the failure to do so will reduce any coverage that would have otherwise been available to the extent the insurer is prejudiced by the failure. Under most title insurance policies other than the 1970 ALTA policy, the insured is obligated upon the insurer's request to provide a signed proof of loss describing the alleged defect and the providing the insured's calculation of the amount of the covered loss, and the insured must sit for an examination under oath. Generally, the insurer may name one or more individuals whose examination will be taken and should give the insured advance notice of the subjects to be covered at the examination. A request for a examination under oath should specify the date, time, and location of the examination, and it is best practice for the insurer to provide a free transcript of the examination to the insured and to inform the insured that at the insured's expense, the insured may have a personal attorney at the examination.
Section 54.11 discusses a title insurer's duty to defend, which under most title policies extends only to covered causes of action. Although liability policies providing for a defense any suit seeking covered damages have generally been judicially construed as obligating the insurer to defend the entire suit once a covered claim is made in that suit, this case law may not be applicable to the narrower defense of "only those stated causes of action alleging matters insured against" prescribed by title insurance policies.
Cross Reference: For practical guidance in dealing with issues arising from title insurance, see New Appleman Insurance Law Practice Guide Chapter 36, Understanding Title Insurance.
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Steven A. Freeman is the leader of the Insurance Coverage Group at Glaser Weil Fink Jacobs Howard Avchen & Shapiro LLP in Los Angeles, California. Mr. Freeman has represented insurers and insureds under liability, health, errors and omissions, malpractice, and entertainment policies for 28 years and, for the last 10 years, has focused on title insurance. Mr. Freeman has represented title insurers in numerous major claims, several involving losses alleged to have been in the hundreds of millions of dollars. Much of his title insurance work has focused on coverage for mechanic's liens and for alleged fraudulent transfers.
Stephen V. Masterson is of Counsel in the Insurance Coverage and Litigation Groups at Glaser Weil Fink Jacobs Howard Avchen & Shapiro LLP in Los Angeles, California. For the past 20 years Mr. Masterson has represented corporate and institutional clients in a broad range of complex and multiparty insurance coverage disputes. Representative matters include title insurance, construction, hospitality, aerospace, business interruption, environmental, and directors and officers liability coverage matters.
Philip M. Midgen is of Counsel in the Insurance Coverage and Litigation Groups in the Los Angeles office of Glaser Weil Fink Jacobs Howard Avchen & Shapiro LLP. Mr. Midgen handles a wide variety of insurance coverage matters, including complex insurance advice and litigation with a focus on media and third-party liability coverage and title insurance.
Ann E. Miller is an Associate in the Insurance Coverage Group in the Los Angeles office of Glaser Weil Fink Jacobs Howard Avchen & Shapiro LLP. Ms. Miller handles a wide variety of insurance coverage matters involving multiple types of insurance and focuses on complex title insurance claims.
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