Title Insurance Today, most persons holding interests in land rely upon title insurance as the primary means of title assurance Loan policy (insuring validity and priority of lender s mortgage lien) is required by secondary market purchasers (e.g., Fannie Mae) Owner s policy not required, but additional cost of owner s policy is nominal in transaction where loan policy is also being issued Title insurance contract provides (1) indemnity (covers policyholder s economic loss due to insured title defect, up to policy limit) and (2) costs of defending title litigation Title Insurance Issuance Process Upon request, insurer searches title, hopefully identifying all relevant adverse (third party) interests in the parcel Insurer issues commitment, which is an agreement to issue a title policy (on standard policy form), if the transaction closes and insured pays premium Premium is based on total dollar amount of coverage Commitment excepts (i.e., does not insure) all listed matters revealed by insurer s search (Schedule B exceptions) Any covered risk not excepted on Schedule B is insured, unless the risk is excluded under the general policy exclusions In the typical transaction, the title insurance commitment plays a key role in buyer s pre-closing title investigation The commitment should identify any title matters that would defeat the marketability of seller s title (or whatever standard of title the parties agreed to in their contract) If the commitment reflects unacceptable exceptions that Buyer is not bound to accept, Seller must then either Remove the defect (i.e., get the third party to release it), or Persuade the insurer to insure over the defect (remove the exception) Title Insurance Cost (MO) Title insurance premium charge is based on (a) risk premium + (b) title services charge; fluctuates with amount of coverage $100,000 = $130 risk + $300 title services charge + $100 risk/title services charge for simultaneous loan policy = $530 $250,000 = $250 + $480 + $100 = $830 $500,000 = $450 + $780 + $100 = $1,330
Title v. Casualty Insurance Casualty insurance provides term coverage; you pay a premium for limited term of coverage (e.g., 1 year) After term expires, you must renew (and pay additional premium) Title insurance has no term; you pay one-time premium, and your coverage continues to protect you forever (even after you transfer the land) Does Coverage Run with the Land? Generally, an owner s policy of title insurance is NOT transferable in sale transactions If I sell my home to Uphoff, I can t sell him the benefit of my owner s title insurance coverage [Condition 2, p. 266] Uphoff must obtain (and pay for) a new title insurance policy insuring his interest In some transactions where title passes by operation of law (e.g., inheritance), owner s policy coverage passes with title [Condition 1(d), pages 264-265] Post-Transfer Protection However, title insurance continues to insure me, even after I sell the land to a purchaser and no longer own it [Condition 2, p. 266] If I sell to Uphoff, and am later sued by Uphoff (or his successor) claiming that my title was defective in breach of a deed warranty, and the defect was a Covered Risk under the policy, the insurer must defend the lawsuit and indemnify me against any loss, up to the policy limit Title policy is issued by a title insurance company (by its authorized agent), typically on a form promulgated by the American Land Title Association (ALTA)
Components of Policy Covered risks (types of defects insured) Exclusions (types of defects excluded from coverage by policy form itself) Conditions (definitions; claims process) Schedule A (date, description of property, coverage amount, interest being insured) Schedule B (exceptions for specific matters identified by due diligence investigation) Title Insurance Claim Analysis Is the interest a Covered Risk? [pages 260-262] If so, did the Insurer except the interest from coverage by listing it as an exception on Schedule B? [page 264] If not, did the Insurer exclude it from coverage under the Exclusions from Coverage? [pages 262-264] If the interest is a Covered Risk that is neither excepted nor excluded, Insurer liable for Insured s loss (up to policy limit) Coverage Problems (Note 5, Page 273) Which matters would be insured by the policy, assuming they were not listed as an Exception on Schedule B? Mechanic s lien for work done prior to Policy Date? For work done after Policy Date? Residential use only covenant? Coverage Problems (Note 5, Page 273) Which matters would be insured by the policy, assuming they were not listed as an Exception on Schedule B? Oil and gas rights reserved in deed delivered 100 years ago? Lack of delivery of deed in chain of title? Zoning ordinance adverse to Insured s intended use?
Mechanics Lien Each state has a statute that allows a person who provided labor or materials that went into an improvement to land to file a mechanics lien if the person is not paid for that labor/material Lien attaches to land (including the improvements) If the lien is not satisfied, lienor can have land/improvements sold to satisfy the unpaid balance due Risk of mechanics lien is significant for Buyer, even when buying an already-existing home or other building Seller typically has work done to get the property ready to sell If Seller didn t pay for that work, the contractor has 4-6 month window (period varies by state) in which to file a lien claim Once lien claim is filed, mechanics lien relates back to the date the work began! Thus, Buyer takes title subject to any latent mechanics lien claim of unpaid contractor who files its lien claim after the closing, but within the allowed window! Mechanics Lien A lien filed for work done before closing would be a Covered Risk [ 2, p. 260] Mechanic s liens are an Exclusion Such a lien would be covered unless the Insurer took a specific exception on Schedule B (which it typically does, at least initially (in its title insurance commitment ) As title insurer, would you be willing to bear this risk (i.e., to remove the exception from Schedule B? If insurer does not except this risk, it will have to indemnify insured if a mechanics lien arises This means insurer will have to pay off the unpaid liens to clear insured s title Why would insurer take this risk? Insurer may do so if Seller (1) will provide an affidavit identifying any contractors/suppliers that did work, and (2) will indemnify Insurer from loss if affidavit is false Insurer will then get lien waivers from identifying contractors and suppliers, confirming they ve been paid
Mechanics Lien What about a lien filed by a contractor for work done after the closing? Lien filed for work done after closing is not a covered risk [p. 260] After closing, insured owns the land If the insured party hires a plumber and fails to pay them, the resulting mechanics lien is created by the insured party and is thus excluded [Exclusion 3(a), p. 263] Residential Use Only Covenant? It is a covered risk (an encumbrance ) [ 2, p. 260], but, if discovered, Insurer will except it on Schedule B If so, the insured person can t recover for loss or cost incurred due to enforcement of covenant against them Would that be acceptable to me as a Buyer/insured party? What sort of assurance might I want? ALTA Residential Owner s Policy Covered risk 13: Insurer is liable if Your Title is lost or taken because of a violation of any covenant or restriction, which occurred before you acquired Your Title, even if the covenant, condition or restriction is excepted in Schedule B. In commercial transactions, Insured will have to accept covenant being listed on Schedule B, but Insured will usually ask for qualification but violation will not result in a forfeiture of Insured s title Reservation of Oil/Gas Rights? It is covered risk [ 1] (oil and gas rights would be interest in land that belongs to surface owner if not severed) Insurer will except it on Schedule B if discovered But if insurer does only 60-year search, it may not discover/except reservation that was made 100 years ago (unless it is updating a search it made more than 40 years ago) If not excepted, insured has claim if assertion of right causes loss (subject to policy limit)
Lack of Delivery of Deed in Chain of Title? Covered risk [ 2(a)(iii), page 261] Insurer will not except this defect on Schedule B, because Insurer will almost certainly have no way to discover the defect (latent risk) If insured is ejected by true owner, insured has claim (recovery subject to policy limit) Lawsuit vs. Insured for Breach of Deed Warranty? Yes, if the lawsuit is based on a Covered Risk, and that risk was not excepted on Schedule B Condition 2, p. 266: policy continues to protect insured party even after insured property has conveyed the land ( coverage of this policy shall continue... so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title ) Zoning Matters Generally, zoning matters are excluded from coverage [Exclusion 1, p. 263] Existing violations of zoning are covered ONLY if notice of violation has been filed in the Public Records prior to Policy Date To get protection for zoning -related risks, Insured must get (and pay for) a specific zoning endorsement to the policy (which would override the Exclusion) Note: ALTA Residential Owner s policy form does provide insured homeowner w/ some protection against zoning risk 14(b): covers loss due to certain zoning violations recorded in public records, if not excepted on Schedule B 19: covers cost to move structures due to zoning violation (no need for separate endorsement) 20: covers loss b/c use as single-family residence violates applicable zoning ordinance (no need for separate endorsement)
Visible Encroachments Where neighbors have acted without appreciation of historical boundaries, visible (but still unknown) encroachments arise, e.g., Insured person s garage encroaches onto the next door neighbor s land Next door neighbor s fence encroaches onto the Insured person s land These encroachment are Covered Risks unless excepted by Insurer Risk of lost title/costs of defense due to adverse possession claim [Covered Risk 1] Unmarketable title due to potential dispute over removal or relocation of improvements [Covered Risk 3] In title commitment, Insurer will typically include a survey exception on Schedule B Rights and claims of persons in possession of the Land on the Policy Date and rights and claims that would be reflected by a contemporaneous survey of the Land To remove survey exception, Insurer will require a new as-built survey showing no encroachments appear to exist Problem 2 2005: Buyer buys home for $150,000, and obtains owner s policy from Chicago Title (CT) (policy limit = $150,000) 2014: Smith sues to eject Buyer and prevails Smith s prior deed was recorded, but CT missed it due to negligent search when it issued title commitment and policy Home s value is now = $300,000 CT tenders $150,000 under the policy; Buyer instead sues CT for $300,000 for negligence. Should CT be liable in tort to Smith? Does Title Insurer Have Duty of Care in Searching? Courts have split Some states: yes, insured party may recover in tort (beyond policy limit) if insurer conducted negligent title search [e.g., AR, KS, NE] Rationale: insurer knows/should know that insured is relying upon the title commitment in deciding whether to buy (relying upon insurer s superior expertise)
Other courts have refused to allow recovery in tort beyond the policy limit, either because: Some courts hold the insurer has no duty of care (insurer is insuring risk, not certifying title) [e.g., TX, NJ] Other courts give effect to policy language limiting the insured to recovery only in contract [e.g., IL] E.g., Condition 15(b) (omitted in book): Any claim of loss or damage that arises out of the status of the Title or by any action asserting such claim shall be restricted to this policy. By contrast, other states (NE, CA, MA) refuse to enforce such a clause as a valid waiver of tort liability Insurer s Liability in Missouri RSMo. 381.071 provides: (1) title insurer can t issue a 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 Leading Missouri Cases Courts in MO have found that a 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)] Where the commitment stated that the Insurer was liable for actual loss incurred in reliance in undertaking in good faith... to acquire... the estate... covered by this Commitment, Insurer was held liable for the entire loss suffered by Insured due to negligent title search by Insurer [Rosenberg, 764 S.W.2d 684 (Mo. Ct. App. 1988)] Problem 2 Note: sometimes, loss due to a title defect will not be due to insurer s negligence Some defects (e.g., defects in execution or delivery of a deed in the chain of title) aren t discoverable by a prudent search For these defects, even in MO, Insured s recovery for loss would be capped at policy limit + any costs of defense Thus, Insured must be sensitive to the policy limit as time passes (and as the land appreciates in value)
Appreciation ALTA Residential Owner s policy form provides that each year for 5 years, the policy limit increases by 10% Maximum increase = 150% of policy amount If land value increases > 50% (either due to market appreciation or improvements), insured must obtain new policy w/increased coverage (or self-insure beyond policy limit) In commercial transactions, Insured can obtain Inflation endorsement Loan Policies If owner gets a mortgage loan, mortgage lender will require the owner to obtain and pay for a loan policy [p. 269], in the amount of the principal balance of the loan, that: Insures lender of the validity of the mortgage Insures lender of the priority of the mortgage vs. other liens If owner suffers complete failure of title, Insurer will pay insured lender the lesser of (1) the unpaid loan balance, (2) FMV of land, or (3) policy limit Jane s lender, First Bank, is requiring her to get and pay for a loan policy The commitment for that policy showed no exceptions or exclusions that called into question the marketability of the title Jane reasons If I suffer a failure of title, insurer will pay off my loan Thus, there s no need for me to buy and pay for an owner s policy, since I get the indirect protection of the loan policy Why is Jane wrong? Problem 3 The loan policy does NOT protect Jane s title risk 1) If Jane has equity in the land (FMV >> mortgage balance) at time of title loss, lender s loan policy would not indemnify her against that loss 2) If Jane s loan is underwater at the time of title loss (FMV << mortgage balance), Insurer will only have to pay First Bank up to FMV of land; thus, mortgage debt won t be FULLY paid off, and Jane would still be liable for the balance (in most states) 3) Also, when Insurer pays First Bank, it would become subrogated to First Bank s rights under the loan documents Thus, if it pays First Bank the mortgage debt, Insurer could then turn around and sue Jane on the note to collect the entire balance!