From Commercial Real Estate Practice Manual With Forms, Second Edition, Chapter 10
In most states today title insurance policies are standard in form. A title insurance policy is considered a contract of indemnity and not a guaranty.1 In determining liability under the policy, the entire contract, including the exclusions, exceptions, and conditions, is examined.2 As a general rule, ambiguities are construed in favor of the insured and against the insurer.3 The first page of a title policy contains the insuring provisions, subject to the exceptions to coverage that appear in “Schedule B” of the policy and the “Exclusions from Coverage,” both of which will be discussed later.
The Owner’s Policy insures against any loss an insured owner might sustain by reason of:
1. Title to the estate or the interest of the insured being vested other than as stated in the policy.4
2. Any defects in, or liens or encumbrances upon, the title:5
(a) This covers defects caused by:
i. forgery, fraud, undue influence, duress, incompetency, incapacity or impersonation.
ii. lack of authority of any person acting on behalf of true owner.
iii. failure of proper creation, execution, witnessing, acknowledgment, notarization or delivery of any document affecting title.
iv. failure to create a document by electronic means authorized by law.
v. execution under power of attorney that is invalid because it has expired.
vi. failure of documents to be properly filed, recorded or indexed in the public records.
vii. any defect in any judicial or administrative proceeding through which title or the lien of the insured mortgage is derived.
(b) the lien of real estate taxes or assessments imposed on the title by a governmental agency due and payable, but unpaid; or
(c) relative to encroachments or adverse circumstances.
3. Unmarketability of title.6
4. Lack of a right of access to and from the land to a public roadway.7
5. Recorded notice of violations or enforcement of various laws or regulations restricting or prohibiting the use or enjoyment of the land.
6. Recorded notice of any enforcement action based on the exercise of any other governmental police power not addressed in covered risk 5.
7. The exercise of the right of eminent domain if notice of the exercise is recorded.
8. Any taking by a governmental body if notice of the right to exercise is recorded.
9. Avoidance in whole or in part based upon voidability of transaction vesting title under the federal bankruptcy or state insolvency creditors’ rights laws.
10. Any defect in or lien on the title filed or recorded prior to the recording of the deed and not covered in risks 1 through 9 above.
The insurer also agrees to pay costs, attorneys’ fees, and expenses incurred in the defense of the title it has insured.
The new forms eliminate the coinsurance provision, the apportionment provision, and the requirement for sworn proof within 90 days after an insured determines facts giving rise to a loss and for production of policy as a condition for payment of loss. Additionally, the new forms add an automatic 10% increase in coverage provision if the insurer pursues the right to litigate, a choice of laws forum provision, and an endorsement incorporation reference provision.
The Loan Policy insuring the mortgagee’s interest in a parcel of real property also insures against loss an insured lender may sustain, besides the insured items, covered risks, and cost of defense insured in the Owner’s Policy, by reason of the following:
1. The invalidity or unenforceability of the lien of the insured mortgage upon the title.
2. The priority of any lien or encumbrance over the lien of the insured mortgage.
3. The lack of priority of the lien of the insured mortgage over any statutory lien for services, labor or material:
(a) arising from any improvement or work related to the land which is contracted for or commenced prior to the date of the policy; or
(b) arising from any improvement or work which is contracted for or commenced subsequent to the date of the policy but which was financed by proceeds of an indebtedness secured by the insured mortgage which at the date of the policy insured had not advanced or is obligated to advance funds.
4. The invalidity or unenforceability of an assignment of an insured mortgage provided the assignment is shown on Schedule A.
In addition to the abovementioned eliminations and additions, the Loan Policy eliminates the “last dollar” problem and, if needed, will require a last dollar endorsement. The Loan Policy also added that the insured may choose to have loss determined on either the date the claim is made or the date the claim is settled and paid. Additionally, the Loan Policy revised the arbitration clause to increase the threshold from $1 million to $2 million in which the arbitration can be unilaterally invoked by the insurer or the insured.
Exclusions From Coverage
On the second page of the Owner’s Policy, there are “Exclusions from Coverage.”8 The exclusions include:
1. Any law affecting the occupancy, use or enjoyment of the land, environmental protection laws, police power, and other similar laws;
2. Eminent domain unless notice was in the public records on the date the policy was issued;
3. Defects created by the insured, or known to the insured but not by the insurer, and any defects causing no loss to the insured or attaching subsequent to the date of the policy;9
4. The insured’s failure to pay value for its interest; and
5. Any creditor’s rights claim or bankruptcy law but excluding creditor’s rights in the past chain of title.
The Loan Policy adds to the following to those exclusions:
a. Unenforceability of the lien of the insured’s mortgage because of the inability or failure of the insured to comply with the “doing business” laws of the state;
b. Invalidity or unenforceability because of usury or consumer protection or truth-in-lending laws; and
c. Dealing with post-date of policy, real estate tax, and assessment liens that became due and payable between the date of the policy and the date of recording of the mortgage.
The third exclusion above is very important and is the one most often overlooked. If a defect in title is known to the insured but not to the insurer, the insurer will not be liable for any loss incurred as a result of that defect. The mere fact that the insured may have been fortunate enough to be issued a policy without the insurer having found out about the defect does not give the insured any protection. Because of this exclusion, it is always better to advise the insurer in writing of any defects in title or to have the insurer list the defects in the title binder or title commitment. The insurer should indicate that it is insuring title notwithstanding the defects by either acknowledging receipt of written notice of the defects or showing that the defects are being omitted or removed from the title binder or title commitment. If possible, it would be wise to have the insurer give affirmative insurance against the defects.
Also, under the third exclusion, there might be a defect in title, such as an easement, which was not known at the time of the closing but might not cause the insured to lose any money. Under those circumstances, the insured will not have a claim against the insurer.10
In addition to the above-noted exclusions, the Loan Policy adds the following additional exclusion:
Statutory liens for services arising for work contracted for or commenced after the date of the policy and not paid for from the loan proceeds.
It should be noted that while the insurer is insuring the validity and enforceability of the lien of the mortgage, it is not insuring the validity or collectability of the mortgage debt.11 A title based on a forged instrument, however, is insured under the policy.12
Following the “Exclusions from Coverage” and usually on page 3 of the policy is Schedule A. This is a very important part of the policy. It will set forth the following:
1. Insurer—The name and address of the insurer will be included. This will be a quick reference of the place where claims are to be sent.
2. Amount of insurance—This should be the purchase price of the property or the amount of the mortgage lien, as the case may be.
3. Date and time of the policy—This is the date and the time up to which title was searched and is insured. If an insured is obtaining an Owner’s Policy, it will want the date and time after the deed is recorded. If the insured is a mortgagee, it will want the title and lien insured up to the time the mortgage is recorded.
4. Name or names of the insureds—This should be as broad as possible. Parties who have a participating interest in the purchase of the property or in a mortgage loan should be identified in the title insurance policy or they will not be covered under the policy.13 In the Fairway Development Company case,14 one of the two original partners transferred his interest in the general partnership to the other general partner, who, in turn, transferred the departing partner’s interest to a third party. The court said that the original partnership, which was insured, dissolved when one of the original partners sold his interest. A new general partnership was created when the third party bought the interest, previously held by the departing partner. Because the new general partnership was not the named insured, although it had the same name, the insurer was not liable. As is discussed in Chapter 11, there is a Fairway Endorsement that can protect a partnership in the event of transfer of a partnership interest.
5. Estate or interest being covered by the policy—This can be a fee estate, a life estate, a leasehold estate, an easement, a first or second mortgage lien, or some other form of interest or tenancy in the real property.
6. Name or names of persons or entities holding the interest being insured—This can be the fee simple owner, if the mortgagee’s lien is being insured.
7. Legal description of the interest—Some policies will refer to Schedule C for the legal description. If a leasehold estate is being insured, the description must contain the complete identification of the lease. In a leasehold endorsement, a leasehold estate is defined as “the right of possession for the Lease Term.” The “Lease Term” is defined as “the duration of the Leasehold Estate, including any renewals or extended terms if valid option to renew or extend is contained in the Lease.” The “Lease” is defined as “the lease agreement described in Exhibit A.” It would appear that it is no longer necessary to set forth the term of the lease in Schedule A. One must be certain that only the lease is properly identified in Schedule A, together with identifying any modifications and amendments to the lease.
8. Endorsements—A new optional section is added to the Schedule of the 2006 Loan Policy for insurers electing to use this section. It is a “check the box” list of commonly used endorsements. If the box is checked, that particular endorsement is incorporated in the policy.
The next section of the Policy is Schedule B, which pertains to the liens, encumbrances, easements, judgments, encroachments, and other items affecting the title to the property being insured that the insurer is excluding from the coverage. In other words, the insurer represents that the insured has good or clear title or right to the estate being insured except for the items listed in Schedule B.
In an Owner’s Policy, the insurer will except from coverage initially in the title commitment and then, unless evidence is furnished to satisfy the insurer sufficiently so that the insurer may delete the items as exceptions, in the Title Policy, the following standard exceptions:
1. The first mortgage, if the insured obtains a purchase money mortgage to acquire the property or any other mortgages made by the ownerinsured to acquire the real property;
2. The rights or claims of parties in possession not shown on the public records;
3. Any encroachments, overlaps, boundary line disputes, and any other matters disclosed by an accurate survey and inspection of the premises;
4. Any easements or claims of easements not shown on the public records;
5. Any lien or right to a lien, for services, labor or materials furnished, that is imposed by law and that is not shown on the public records; and
6. Real estate taxes or special assessments that are not shown as existing liens on the public records.
Standard exceptions Nos. 2 and 5 above are usually removed upon delivery of an affidavit of the owner to the insurer stating that there are no persons in possession, other than the owner and the owner’s family, or tenants under leases, and stating that no work has been done on the property for a certain period of time, usually 90 days. The time is dependent upon the period fixed by state law in which a laborer, materialman or contractor could file a mechanic’s lien after doing work on the insured property.
Standard exceptions Nos. 3 and 4 above usually are removed if a current survey and report of inspection of the property are furnished to the insurer, but the insurer may except from insurance any specific encroachments, easements, or other defects or violations that are shown on the survey. At times, the insurer might want an additional certificate from the surveyor as to the facts after a visual inspection of the property.
Standard exception No. 6 above can be removed if the insurer does a special tax search. But if any assessments are found or if any assessments have been authorized by law but not imposed at that time, the insurer would except those assessments. In some states, real estate taxes can be a lien, although they are not due and payable. The insurer will take exception to those real estate taxes and the exception will be acceptable to the insured, but the insured should ask the insurer to give affirmative insurance that the real estate taxes excepted “are not yet due and payable.”
1. Sattler v. Philadelphia Title Ins. Co., 162 A.2d 22 (Pa. Super. Ct. 1960); Maggio v. Abstract Title & Mortgage Corp., 98 N.Y.S.2d 1011 (1950).
2. Dist.-Realty Title Ins. Corp. v. Jack Spicer Real Estate, Inc., 373 A.2d 952 (Md. 1977); Batdorf v. Transamerica Title Ins. Co., 702 P.2d 1211 (Wash. App. 1985); First Amer. Title Ins. Co. v. Seaboard S&L Ass’n, 315 S.E.2d 842 (Va. 1984).
3. First Nat’l Bank of Minn. v. Fidelity Nat’l Title Ins. Co., 572 F.2d 155 (1978); First Amer. Title Ins. Co. v. Seaboard S&L Ass’n, 315 S.E.2d 842 (Va. 1984).
4. Laabs v. Chicago Title Ins. Co., 241 N.W.2d 434 (Va. 1984).
5. Hall v. San Jose Abstract & Title Ins. Co., 342 P.2d 362 (Cal. App. 1959); Foehrenbach v. German-Amer. Title & Trust Co., 217 Pa. 331 (1907).
6. Allison v. Ticor Title Ins. Co., 907 F.2d 645 (7th Cir. 1990), appeal after remand, 979 F.2d 1187 (7th Cir. 1992); Lick Mill Creek Apts. v. Chicago Title Ins. Co., 231 Cal. App. 3d 1654 (App. 1991).
7. Gates v. Chicago Title Ins. Co., 813 S.W.2d 10 (Mo. App. 1991); Marriott Fin. Servs., Inc. v. Capitol Funds, Inc., 217 S.E.2d 551 (N.C. 1975), rev’g part, aff’g part, 209 S.E.2d 423 (N.C. App. 1994); Krause v. Title & Trust Co. of Fla., 390 So. 2d 805 (Fla. App. 1980).
8. Blaylock Inv. Corp. v. Standard Title Ins. Co., 335 F. Supp. 1284 (W.D. La. 1971); Muscat v. Lawyers Title Ins. Corp., 351 N.W.2d 893 (Mich. App. 1984
9. Schultz Mgmt. v. Title Guarantee Co., 551 N.Y.S.2d 527 (A.D., 1st Dept. 1990).
10. Gibraltar Savings. v. Commonwealth Land Title Ins. Co., 905 F.2d 1203 (8th Cir. 1990); Cale v. Transamerica Title Ins. Co., 225 Cal. App. 3d. 422 (App. 1990); Youngblood v. Lawyers Title Ins. Corp., 923 F.2d 161 (11th Cir. 1991).
11. Bank of Miami Beach v. Fidelity & Casualty Co. of N.Y., 239 So. 2d 97 (Fla. 1970).
12. Parker v. Title & Trust Co. of Fla., 429 So. 2d 1267 (Fla. App. 1983); Coast Mutual Building-Loan Assn. v. Security Title Ins. & Guarantee Co., 57 P.2d 1392 (Cal. App. 1936).
13. Border City S&L Ass’n v. First Amer. Title Ins. Co. of Mid-Amer., 768 F.2d 89 (6th Cir. 1985).
14. Fairway Dev. Co. v. Title Ins. Co. of Minn., 621 F. Supp. 120 (N.D. Ohio 1985); but see Ticor Title Ins. Co. of Cal. v. Amer. Resources, Ltd., 859 F.2d 772 (9th Cir. 1988).