Gimme 5: What Every Lawyer Should Know about Title Insurance
By Erica Bose and Matthew Nesburn, associates at Cox, Castle & Nicholson LLP, who represent developers, investors, and lenders in a variety of residential and commercial real estate transactions. They can be reached at firstname.lastname@example.org and email@example.com.
Real estate transactions often depend on the ability of the owner or lender to obtain an acceptable form of title insurance. The following provides an overview of the basic issues and terms related to title insurance, though the focus is primarily on owner’s title insurance.
1. What is title insurance, and how does it differ from other types of insurance?
Title insurance provides coverage to the policyholder against loss or damage caused by matters existing as of the date of the policy that affect legal title to real property. Most often, title policies insure the validity of fee simple ownership or the validity and priority of a mortgage lender’s lien, but title insurance also can insure other interests in real property such as easements and leases.
While other types of insurance generally insure against loss caused by future events, title insurance covers claims based on past events that have caused an existing defect in the insured interest. Because title insurance coverage only covers events existing as of the date of the policy, title insurers work to uncover and eliminate as many of these risks as possible prior to issuing the policy. They do this by both excluding the most common types of claims from coverage as a general practice and by categorizing any particular risks uncovered by the title company as specific “exceptions” to the policy for which there is no coverage.
2. What are the differences between CLTA and ALTA title insurance coverage?
A CLTA (California Land Title Association) Standard Coverage Policy of title insurance, commonly referred to as “standard coverage,” is the most basic and least expensive form of title insurance. Standard CLTA coverage insures against the following claims: (i) title to the real property being vested in a person or entity other than the insured; (ii) defects, liens, and encumbrances upon title that are recorded; (iii) lack of a right of access to and from the real property; (iv) lack of a marketable interest in the real property; and (v) a forgery or failed conveyance in the chain of title.
An ALTA (American Land Title Association) Extended Coverage Policy of title insurance, commonly referred to as “extended coverage,” is the broadest form of title insurance. An ALTA policy is considered “extended” because, in addition to all the claims that a CLTA policy covers, it may cover: (i) matters that a survey would disclose; (ii) easements not disclosed by the public records; (iii) encroachments, discrepancies or conflicts in boundary lines not shown by the public records; and (iv) rights of parties to possession of the real property.
3. What are some common exclusions and exceptions to title coverage?
Exclusions and exceptions are items that will not be covered under the policy. General exclusions from coverage are listed on the policy jacket and include: (i) matters arising after the effective date of the policy; (ii) matters “created, suffered or assumed” by the insured; (iii) matters known by the insured as of the date of the policy but not disclosed to the title company; (iv) violations of zoning or environmental protection laws; and (v) claims based on the transaction creating the insured interest being deemed a fraudulent conveyance or preferential transfer.
Schedule B of the policy lists the exceptions from coverage including both title issues specific to the subject property (including all documents recorded against the property) and the following standard exceptions: (i) boundary line disputes, easements, or claims of easements not shown in the public records (only in a CLTA policy); (ii) taxes or special assessments left off the public record; (iii) claims of parties with rights of possession if not a matter of public record; (iv) unrecorded mechanic’s liens; and (v) mineral and/or water rights. Further, unless a current ALTA survey of the property is provided, the policy will contain an exception for matters that such a survey would have revealed. While some exclusions and exceptions cannot be covered by title insurance, many of them can either be removed, modified, or insured over through the use of endorsements.
Practice Pointer: The general exception for parties with rights of possession should be limited, if possible, to current tenants by providing the title company with an affidavit stating that no parties other than the current tenants have any such rights. In the context of a purchase and sale, requiring a seller to provide such an affidavit is often the subject of negotiation and should be requested by buyer’s counsel.
4. What are title insurance endorsements?
Endorsements to a title policy are addenda or attachments to the policy that either correct or modify a previously issued policy or modify the exclusions or exceptions of a title policy or add additional coverage. Some common endorsements add coverage for loss due to forced removal of improvements due to third-party easement rights or for loss due to third-party mineral rights. Others extend coverage for loss due to the failure of the land to be legally subdivided or the failure of an access easement benefiting the subject property to provide access. Endorsements create a greater liability for the title insurance company and therefore usually require the payment of a fee for each such endorsement. California differs from many other states in that it does not dictate by statute the types of endorsements (and associated fees) that a title company can include in a title policy. In fact, in California, the flexibility to add specific language to existing endorsements or to add specialized endorsements is only limited by the title company’s willingness to issue such endorsements.
5. What happens to title policyholders in the event a title insurance company becomes insolvent?
The severe downturn in the title insurance business, most vividly exemplified by the recent emergency sale of several large title insurance subsidiaries of LandAmerica Financial Group, Inc. to a rival company, begs the question posed above. When an insurance company becomes insolvent, the state’s insurance commissioner works directly with the state courts to either become the conservator of the company, running its business directly in an attempt to rehabilitate it, or to become a receiver, marshaling the company’s assets to liquidate the company. Upon liquidation, the company’s guaranty funds, accumulated over the years in accordance with statutory requirements, are used to pay claims up to the maximum statutory amount (which varies by state) and to purchase reinsurance for policyholders. To the extent that the assets of the company are not sufficient to purchase comparable reinsurance or pay existing claims, policyholders will likely be left without effective recourse for insured claims.