Volume 3, Number 1
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The Value Provided by the 2006 ALTA Title Insurance Policies
On June 17, 2006, the American Land Title Association (ALTA) adopted many new and revised forms for use by title insurance companies throughout the United States. This article is a brief guide for Washington property lawyers to help them understand the changes made to the basic title insurance forms. A detailed comparison essay and copies of all the forms are available at www.wltaonline.org/resources.
The 2006 policy forms have been designed to more adequately satisfy the needs of the commercial market. The new forms continue to be the basic policy form and appropriate for any property type. Where the ALTA Homeowner’s Policy is available, it continues to be significantly more coverage for residential property.
There should be very little impact on the parties to a real estate transaction or their agents. The new policy forms have the same component parts and look about the same. Commitments will look the same. The changes are primarily on the jacket of the policy. Schedule A will look almost the same and Schedule B is not changed at all.
Just like the prior forms, the new forms automatically provide extended coverage, expecting Schedule B to contain general exceptions where standard coverage is issued. There is very little change to the process of preparing a commitment or underwriting to issue the policy.
The 2006 policy forms provide new value to the Insureds: improved coverage provisions, improved definitions, improved claim administration procedures and substantially improved Conditions describing the rights and duties of both parties.Policy Coverage
There are many new covered risk paragraphs. Upon analysis, there is not such a significant increase in the covered risks. Many of the specific risks that are now detailed were previously included within the few, broad coverage paragraphs. Several of the new coverage paragraphs are matters that were previously an exception contained within the exclusions. This responds to judicial policy interpretation that coverage must be found within the covered risks, rather than construed from exceptions within the exclusions.
For example, the 2006 policy forms are designed to give coverage for creditors’ rights in those circumstances where the 1992 exclusion contained an exception. Although oversimplified, the 2006 forms provide coverage against two creditors’ rights risks. First, the policy protects against any attack against the prior chain of conveyances. Second, the policy protects against any attack against the present transaction due to the failure to record, or the failure of the recording to give legal notice binding upon the bankruptcy trustee.
The 2006 forms continue to exclude coverage against all further creditors’ rights attacks. The only proper method to obtain creditors’ rights coverage with the new policy form is to request the ALTA Form 21-06 Endorsement.
Both the 2006 policy forms include coverage for matters created after the date of policy through the time of recording the insured instruments. Most Washington transactions do not require delivery of a policy dated prior to recordation. The new coverage may provide comfort enabling a change of settlement practices here.
Both new forms state a new Covered Risk against loss caused by encroachments of the neighboring property onto the Insured's land and encroachments of the Insured's improvements onto adjoining land. This is probably new coverage in Washington. Any known encroachment of an improvement should be listed as an exception in Schedule B.Revised Conditions
The primary value of the new basic policy forms is realized from the revisions of the definitions and conditions paragraphs. There are several very significant changes to definitions improving the rights of the Insureds.
Both policy forms improve the rights of successors and assigns as an Insured. These changes should avoid the need for Insureds to obtain endorsements in many circumstances to acknowledge rights to the policy, such as transfers to a trust, mergers, or changes in entity form. This will avoid concern about coverage, avoid the need for an endorsement, and in many cases avoid premium charges for subsequent assurance endorsements.
The 2006 Loan Policy significantly expands the definition of Indebtedness, requiring payment of more types of financial loss to the lender in the event the title company elects to pay the indebtedness to settle a claim.
The new forms respond to several issues that have troubled customers. For example, paragraph 9(b) of the prior loan policies reduced the amount of insurance upon a borrower payment. The 2006 Loan Policy avoids the need for “last dollar” endorsements by defining the Amount of Insurance and deleting that paragraph.
The claim administration paragraphs have been simplified for the Insured. Giving prompt Notice of Claim remains the initial and the critical duty of the Insured. Thereafter, a Proof of Loss is only required in the event the Company is unable to determine the amount of loss or damage and only when requested.
The 2006 policy forms include two new provisions in response to customer complaints about cases where the title insurance company chooses to defend, or prosecute, in order to avoid loss to the insured payable under the policy. That important title company option to establish the title, or to prevent or reduce loss is essentially the same as ALTA policies since 1970.
However, if the title company litigation is not successful, the new forms provide two benefits to more adequately compensate the Insured. Condition paragraph 8(b) provides (1) the Amount of Insurance is increased by 10% and (2) the Insured may determine or measure its loss either when the claim was made or at the conclusion of the litigation.Deleted Conditions
Several provisions have been entirely eliminated from the new forms.
1.The Owner’s Policy Coinsurance Paragraph is Gone
Condition paragraph 7(b) first appeared in the 1987 Owner’s Policy. It reduced the amount of the Insured’s claim in several circumstances, both where the policy amount was less than the land value, but also in cases where the Insured made significant improvements subsequent to the acquisition. Removal of this limitation will increase Insured’s indemnification significantly in many circumstances.
2.The Owner's Policy Apportionment Paragraph Is Gone
Condition paragraph 8 has existed since the 1970 forms. Contained only in owner’s policies, it applies to limit the recovery for loss incurred on one parcel affected by a title claim, when the policy includes more than one parcel of land. Removal of this paragraph provides the full amount of insurance to compensate an Insured’s loss affecting only one parcel.
3.Mechanic’s Lien Exclusion Is Gone
From 1970 through 1992, coverage against unrecorded labor and material liens required interpretation of the broad coverage paragraphs, Exclusion 6 that specified conditions of a lien that would not be covered and Condition paragraph 8(d)(ii) that further specified conditions. The 2006 loan policy specifies the circumstances for mechanic’s lien coverage in one Covered Risk, deletes Exclusion 6 and deletes Condition 8(d).
4. The Lender’s Policy “Subsequent Advance” Limitation Is Gone
Condition paragraph 8(d)(i) stated that the title company was not liable for any indebtedness created subsequent to the Date of Policy. That was a significant limitation on the amount a lender was entitled to receive in the event the title company elected to pay the amount of indebtedness to discharge its obligations. The 2006 Loan Policy clearly includes subsequent advances in the definition of indebtedness.
However, the 2006 Loan Policy does not insure against loss of priority of the lien of the mortgage to the extent of the additional advance. Priority of additional advances is insured by using ALTA form 14, 14.1 or 14.2 endorsements, issued at the date of policy or at the date of the advance.
5.The Lender’s Policy “Liability Noncumulative” Provision Is Gone
Since the 1970 Loan Policy, Condition paragraph 10 provided that a policy insuring a second lien would have a reduction in policy amount if a claim payment was made to an unrelated loan policy insuring a prior lien. Removal of that reduction to the policy liability provides junior mortgage lenders with the full protection of their policy amount.
The Forms Committee of the American Land Title Association in the past four years drafted many new endorsement forms intended to satisfy the growing demand of the title company customers. Review the full list of new and revised endorsement forms at www.wltaonline.org/resources.
The 2006 basic policy forms are substantially different in coverage and formatting, using new definitions. Therefore, the ALTA has adopted a parallel list of endorsements that refer to the new paragraphs, the new definitions and new formatting of the 2006 basic policy forms. The numbering convention that was adopted simply adds “-06" to each endorsement form number, to distinguish the revised forms to be issued with the 2006 policy forms. Substantively, the coverage of the new “-06” endorsements has not been changed.
Dwight was a member of the ALTA Forms Committee during development of the new title insurance forms.