Title Insurance Process. Title v. Casualty Insurance. Title Insurance Cost (MO)

Transcription

1 Title Insurance Process Customer requests title commitment Insurer searches title, identifies (hopefully) all third party interests in the land Insurer commits to issue a policy if transaction closes and insured pays premium Commitment takes exception for all listed matters revealed by insurer s search (Schedule B exceptions) (i.e., policy does not insure loss due to those matters) Any covered risk not excepted on Schedule B is insured, unless it is covered by general policy exclusions Title insurance commitment thus plays key role in buyer s pre-closing title investigation It identifies any title matters that would defeat marketability (or agreed-upon title quality standard) Seller must then either remove defect (get third party to release it) or persuade the insurer to insure over the defect Title Insurance Cost (MO) Title insurance premium is based on (a) risk premium + (b) title services charge; fluctuates with amount of coverage $100,000 coverage = $430 premium $200,000 coverage = $630 premium $500,000 coverage = $1,230 premium Title v. Casualty Insurance Casualty insurance provides term coverage; you pay premium for limited term of coverage Title insurance has no term; you pay one premium for coverage that protects you forever 1

2 Transferability Note: owner s policy of title insurance is NOT transferable When Grantor sells to Grantee, Grantor s title insurance coverage does not run to benefit Grantee [Conditions 2(a), p. 245] Grantee must obtain (and pay for) new title insurance policy Transferability Instead, title insurance continues to insure you even after you ve sold the parcel [Condition 2(a), p. 245] If you are later sued by a later owner for breach of a deed warranty b/c your title was defective, and risk was covered by your policy, title insurer indemnifies you Title Insurance Claim Analysis Is the title problem a Covered Risk? If so, has it been excepted from coverage on Schedule B? If not, is it listed as an Exclusion from coverage in the general exclusions? If not, title insurance company is liable for loss caused by the defect (up to policy limit) Mechanics Lien Each state has a statute that allows contractor or materials supplier to file a mechanics lien for labor/materials incorporated into building Once lien is filed as per statute, lien relates back to date work was first performed or material provided ( first spade rule) 2

3 Risk of mechanics lien filing is a substantial risk, particularly when you are buying an existing building Seller often has had work done on the property to get it ready to sell If that work wasn t paid for, the unpaid contractor may have 4-6 months (depending on the state s law) to file a lien claim Once filed, though, the contractor s lien claim relates back to the time when work was done! Thus, Buyer of land takes title subject to latent mechanics lien claims of unpaid contractors if those contractors file their lien claims on a timely basis! Problem 5: ALTA Form Would the following be insured under 2008 ALTA owner s insurance policy [pp ], if not excepted? Mechanics lien, filed after policy is issued, by a plumber who worked on the land before the policy was issued Mechanics lien, filed after policy is issued, by plumber who worked on the land after policy was issued Mechanics Lien Lien filed for work done before closing is a covered risk [ 8(e), p. 241] Lien filed for work done after closing is not a covered risk After closing, if insured party hires plumber and fails to pay them for their work, and lien is asserted, lien is created by insured and is excluded [Exclusion 4(a), p. 244] Problem 1: ALTA Form Would the following be insured under 2008 ALTA owner s insurance policy [pp ], if not excepted? Recorded covenant that limits use of the land to single-family residential purposes only and prohibits smoking on premises? 3

4 Residential Use Covenant If not excepted on Schedule B, it is a covered risk [Covered Risk 5, p. 240] But, if insurer finds it in title search, insurer will list it as an exception on Schedule B [p. 250] If it is an exception, then insured can t recover for loss due to enforcement of covenant But, insured would still be protected if violation resulted in forfeiture (complete loss of title) [Covered Risk 13, p. 241] Problem 5: ALTA Form Note 6(g), p. 255: Insured party wants to build a shopping center on undeveloped land, but zoning ordinance prevents that use Would insured party have a valid claim under the policy? Zoning Matters Zoning matters are an exclusion [Exclusion 1(b), p. 243] to typical policy To get protection against zoning risks, you would generally have to get (and pay for) a specific zoning endorsement to policy (which would provide coverage despite Exclusion) Cost for zoning endorsement: 15-20% of standard underwriting charge Zoning: ALTA Form Note: 2008 ALTA form does provide insured w/ limited protection against zoning risk 14(b): covers loss due to certain zoning violations recorded in public records 19: covers cost to move structures due to zoning violation 20: covers loss b/c use as single-family residence violates applicable zoning 4

5 Covered Risks 2008 ALTA homeowner s policy provides relatively comprehensive coverage By contrast, older forms in common use provide lesser or different coverages Note: once a policy is issued, it isn t updated as the corresponding ALTA form changes (policy governed by original form s terms) Example: Zoning E.g., insured party is sued by city to relocate house b/c of setback violation 2008 ALTA form: this is a Covered Risk [ 19, p. 242] [Exclusion 1 otherwise excludes coverage for zoning problems] 1992 ALTA form: this risk was excluded altogether; insured had no coverage unless he/she obtained (and paid for) a separate zoning endorsement 2000: O conveys to A; deed is recorded but misindexed 2006: O conveys to B; B obtains title insurance 2012: A brings quiet title action vs. B; court rules in A s favor Majority rule: misindexed deed still gives constructive notice to subsequent purchasers Would B have coverage? Loss due to eviction by holder of misindexed deed is covered risk [ 1, p. 240] Title searcher might not find it in a search, and thus might not except it on Schedule B Note: company that had insured the land before and maintained its own in-house tract index WOULD find the problem 5

6 Other Protected Risks Forged deed in your chain of title Unauthorized deed in your chain of title Deed in your chain of title was never validly delivered Title searcher simply misses a recorded matter (i.e., fails to list it on Schedule B-II) Other Problems: ALTA Form Would the following defects be insured under the 2008 ALTA form? Your garage encroaches onto the neighboring parcel of land? 2008 ALTA form: cost of removing garage is a Covered Risk [ 21] This coverage isn t automatic, however If the Title Insurer does not receiving a new certified survey (showing no such encroachment), Insurer will take survey exception on Schedule B-II Buyer must provide new survey to get survey exception removed Problem : Buyer buys home for $125K and obtains clean owner s policy from Chicago Title (CT) (coverage = $125K) 2006: Buyer gets evicted by Smith (TO) Smith s deed was recorded, but was negligently missed by CT when it issued title commitment Home s value is now = $300K CT tenders Buyer a check for $125K (policy limit, but Buyer instead sues CT for $300K damages for a negligent title search Result? 6

7 Insurer: Duty of Care? Courts have split Some states: yes, insured may recover in tort (beyond policy limit) if insurer conducted negligent title search [e.g., AR, KS, NE] Rationale: insurer knew/should have known insured would rely upon title commitment in deciding whether to complete the purchase (relying upon insurer s superior expertise) Insurer: Duty of Care? Other courts have refused to allow recovery beyond policy limit, either: B/c insurer has no duty of care (insurer is insuring title, not certifying it or giving a title opinion) [e.g., TX] B/c court gives effect to policy language [Conditions 8] limiting insured to making claims only in contract, under policy [e.g., IL] Insurer s Liability in Missouri RSMo provides that (1) title insurer can t issue title insurance policy without first conducting a title search (2) title insurer shall not knowingly issue any owner s title insurance policy or commitment to insure without showing all outstanding, enforceable recorded liens or other interests against the title which is to be insured Insurer s Liability in Missouri Jury can find title company had a duty to use due care in preparing a preliminary title commitment [Evinger, 726 S.W.2d 468 (Mo. Ct. App. 1987)] This duty exists if commitment states insurer is liable for actual loss incurred in reliance in undertaking in good faith... to acquire... the estate... covered by this Commitment [Rosenberg, 764 S.W.2d 684 (Mo. Ct. App. 1988)] 7

8 Problem 2 Note: often, loss due to a title defect will not be due to insurer s negligence Many defects (e.g., defects in execution or delivery of a deed in the chain of title) can t be discovered, even by a prudent search! As a result, insured person needs to be sensitive to policy limits as time passes (and land appreciates in value) Appreciation: ALTA Form Condition 9: each year for 5 years, policy limit increases by 10% Earlier forms do not have this condition, but similar coverage was offered by inflation endorsement Max. increase = 150% of policy amount If land increases in value by more than 150%, insured needs to obtain a new policy that increases coverage (and pay higher premium) Loan Policy of Title Insurance If owner gets a mortgage loan, lender will require the owner to obtain/pay for a loan policy of title insurance [p. 253] A loan policy insures the lender as to: The validity of the insured mortgage, and The priority of the insured mortgage vs. other mortgages and other liens Loan Policy of Title Insurance If Buyer later suffers a complete failure of title, Lender suffers a complete loss of its security In that case, Insurer will pay Lender for its loss, i.e., lesser of (a) balance of mortgage loan, (b) value of land, or (c) policy limit 8

9 Jane is buying a home Lender (Bank) requires a loan policy Based on Schedule B-2 of the commitment for the loan policy, Jane decides that Seller s title appears to be acceptable She asks: Do I really need to get and (pay for) an owner s policy? Problem 8 Scenario: After 5 years, Jane is ejected by paramount title holder due to defective title Balance due on mortgage: $100,000 FMV of home: $150,000 If Jane has no owner s policy, Insurer does not have to pay Jane for her $50,000 lost equity in the home Even worse, after paying Bank, Insurer becomes subrogated to Bank s rights under mortgage loan Thus, Insurer could sue Jane to collect the mortgage note (i.e., she still has to repay the loan!) This would not be true if she had an Owner s Policy (Insurer can t assert subrogation rights against its own insured) 9