- Learn why title insurance is necessary.
From The Commercial Real Estate Practice Manual With Forms
Real estate has been a valuable asset held by a person or entity. The transfer of it has been a major concern. The first legislation pertaining to recording ownership of real property was enacted in the English colony of Virginia in 1626 and required that all land sales be recorded within one year of the date of transfer in the General Court at Jamestown. Another law was passed in Virginia 14 years later providing that a deed without delivery of possession would be fraudulent unless entered in some court.
As the recording system developed, other property rights, such as easements, rights of way, liens, life estates, tenancies, subsurface rights, air rights, and future interests were recorded against particular real property.
For years, most real property transfers were handled by conveyancers, who were not lawyers but were experts on real property law. The buyer required that the title not be subject to the interest of others for whom the buyer would be responsible. Thus, before transferring title, the conveyancer searched the records to determine whether there were any interests that could create liability for an owner.
The need for title insurance finally became evident after the case of Watson v. Muirhead.1 Watson, the innocent purchaser, brought the action against Muirhead for negligence, claiming Muirhead, as a conveyancer, did not report some recorded judgments. Muirhead, in fact, knew of some recorded judgments, but elected in good faith to ignore them after consultation with his lawyer. Muirhead was successful and Watson had no recourse.
First Title Insurance Company
After the Watson case, a group of conveyancers in Philadelphia met and, in March l876, formed the first title insurance company, The Real Estate Title Insurance and Trust Company. Commonwealth Land Title Insurance Company was the direct successor of The Real Estate Title Insurance and Trust Company and observed its centennial in the “City of Brotherly Love” the same year our nation celebrated its bicentennial of the signing of the Declaration of Independence in Philadelphia. A second Philadelphia insurer, Land Title and Trust Company, was chartered in 1885, but by then the title insurance business had spread to other areas.
Subsequently, title insurance companies started in other large cities, including New York City, Chicago, Minneapolis, San Francisco, and Los Angeles. The German American Loan and Trust Company of New York was formed by savings associations, which were organized and controlled by persons of German origin who had high regard for both thrift and security. On June 1, 1883, The German American Loan and Trust Company of New York wrote the first New York title insurance policy. The name of that company was changed the following year to The Title Guarantee and Trust Company, and many years later to The Title Guarantee Company. It subsequently was acquired by Pioneer National Title Insurance Company, which was later merged into Chicago Title and Trust Company. The first California title insurance company was formed in San Francisco in 1886.
While local title companies increased in their number of locations, the title insurance business did not become national in character and operation until after World War II. The nationalization of the title insurance business was prompted by returning servicemen and by the expansion of housing and commercial developments nationwide. For years, each title company had issued its own form of title insurance policy. This was difficult for big users, such as mortgage lenders, who had to read the entire policy each time.
Around 1927, when one mortgage company was issuing more than 100 mortgages a year, it wanted a uniform policy. At that time, the Northern California Board of Title Underwriters prepared a standard form of policy that, with two exceptions, was adopted for use by all California title insurance companies. Other title associations in Pennsylvania, New York, and New Jersey prepared and adopted standard forms of their own about the same time, but the forms still lacked uniformity.
Development of the Standard Form
In 1928, representatives of many life insurance companies, including Metropolitan Life Insurance Company, The Prudential Insurance Company of America, The Equitable Life Assurance Society of the United States, John Hancock Mutual Life Insurance Company, and New York Life Insurance Company, drafted and adopted a form of policy, designated the Life Insurance Company Standard Form Loan Policy, or “the LIC Form.” The insurance companies demanded that the LIC Form be used for all insurance given relative to their mortgage loans.
A number of title companies that resented this outside interference and pressure, and that claimed the LIC Form did not conform to local practices, formed the title insurance industry trade association, originally called the American Title Association (ATA), which is now known as the American Land Title Association (ALTA). The ATA developed a form for the voluntary use of its members. In 1929, after the terms and provisions were considered at joint meetings of representatives of the title companies and of the counsel for the life insurance companies, the form of policy known as the American Title Association Standard Loan Policy, or “ATA Loan Policy,” was approved by the ATA. Subsequently, in 1943, after a number of conferences, the ATA adopted the ATA Loan Policy–Revised and the ATA Loan Policy–Additional Coverage.2
It was not until 1958 that consideration was given to having a form of owner’s policy insuring marketability. In 1959, after many more conferences between the representatives of the title industry and the life insurance industry, two forms of owner’s policy were presented for approval and were ultimately adopted—one that insured marketability and one that did not.
Other forms approved over time were the Facultative Reinsurance Agreement in 1961; the Single Form Policy, which could insure either owner or lender, in 1970; and two forms of endorsements insuring, to a limited extent, compliance with zoning requirements, in 1973 (this latter coverage is still unavailable in certain areas of the country).
Forms of Policies
Since the time of these original forms, six basic forms of policies of title insurance were created. These are:
1. Owner’s Policy
2. Owner’s Leasehold Policy
3. Lender’s Policy
4. Lender’s Leasehold Policy
5. Construction Policy
6. Residential (plain language) Policy.
There is also a special form of policy for use by the U.S. government in its purchase and condemnation matters.
The policies were revised in 1962, 1969, 1970, 1986, 1987, 1988, 1990, 1992, 1997, 2001, 2006, and 2007. In October 2001, the ALTA Leasehold Owner’s Policy and the ALTA Leasehold Loan Policy were withdrawn as approved forms. In their places the ALTA adopted the Leasehold Endorsement 13 (Leasehold Owner’s) and the Leasehold Endorsement 13.1 (Leasehold Loan) to become part of the ALTA Owner’s Policy and the ALTA Loan Policy, thus making the exclusions from coverage, exceptions, and conditions and stipulations in each of those policies applicable to the leasehold coverage unless otherwise specified in the Leasehold Endorsements.
The Leasehold Endorsement protects the tenant if its possession is lost, provided the lease granted the tenant the right of possession. It also protects the tenant if the lease permitted the tenant to use the premises for a particular purpose and the tenant is prevented from such use due to a title matter. However, if there are restrictions of record prohibiting the designated use, and if the document containing the restrictions is listed as an exception to title, then the tenant would have no claim against the title insurer unless the zoning endorsement was attached to the policy insuring such use.
The “Lease Term” is defined as the basic term plus any renewal periods, provided there is a valid option to renew or extend the term contained in the lease. If there were no option to renew or extend the term contained in the lease, then the title insurance coverage would terminate upon the termination of the initial lease term, unless an endorsement extending the policy is obtained when the lease is renewed.
Presently, the forms that the title companies prefer using are the 2006 form of policies and endorsements, although some revisions to the forms and endorsements were adopted effective January 1, 2008. Prior to the 2006 revisions, the insurance industry had rewritten its standard policy forms in 1987 and again in 1992. Those policies became known as the 1992 ALTA Owner’s and Loan Policies. The forms the title companies preferred to use then were the 1992 forms, the 1987 Residential (plain language) Policy, and the 1963 U.S. Policy. While some revisions were required due to court decisions expanding the liability of the title companies under the policies far and above what the title companies ever intended, it is a credit to the initial draftsmen that much of the original drafting is still reflected in the policies today. The 2006 policy forms clarify some coverage, add new covered risks to what had previously been exclusions, and add coverages that the courts had determined to be insured, but that the title companies thought were not insured. The 2006 policy forms bear the adoption date of June 17, 2006, and are known as the 2006 ALTA Owner’s Policy, the 2006 ALTA Loan Policy, and the 2006 ALTA Short Form Residential Loan Policy.
In addition to the policy forms, the ALTA has created forms for title commitments, facultative reinsurance agreements, insured closing letters, and endorsements to the policies insuring certain factual situations.
American Land Title Association Approved Forms
While no title company is bound to use the ALTA approved forms, all title companies use the forms in most instances in order to receive a greater acceptance of their policies by their customers. In some states—for example, New York and Texas—the forms might vary somewhat from the approved forms because of the requirements or limitations imposed by the state insurance commissioners. Other areas might have a local form as well as the national form (e.g., Chicago) or a state form (e.g., New York), and some states (e.g., Florida) issue an Owner’s Policy (Form A, not insuring marketability, unless a specific request is made for Form B, which insures marketability).
The ALTA decided to bring the forms current for the twenty-first century by adding developments such as electronic conveyance and mortgage transactions. At the present time, the ALTA has the following forms, with the latest revisions indicated by the date after the name of each form. A more detailed explanation of coverages and limitations to coverages will be contained in the following chapter.
1. 2007 ALTA Short Form Residential Loan Policy (01/01/08)
2. ALTA Expanded Coverage Residential Loan Policy (01/01/08)
3. ALTA Homeowner’s Policy (01/01/08)
4. ALTA Short Form Expanded Coverage Residential Loan Policy (01/01/08)
5. 2006 ALTA Loan Policy (06/17/06)—This policy insures the specified lien held by a lender as security for the loan made by the lender to the owner of the estate. The policy would also protect any assignee of the lender.
6. 2006 ALTA Owner’s Policy (06/17/06)—This policy insured the owner, named as the insured in the policy of the particular estate being covered, and any successor in interest who succeeds the named insured by operation of law, but not by purchase.
7. 2006 ALTA Short Form Residential Loan Policy (06/17/06)—This policy insures a lender that is the holder of a lien on a residential property and any successor in ownership to the indebtedness secured by the lien.
Other recent forms adopted or amended by the ALTA are:
• ALTA Commitment Form (06/17/06)
• ALTA Plain Language Commitment Form (06/17/06)
• CPL—Closing Protection Letter (01/01/08)
• CPL—Limitations (01/01/08)
• CPL—Single Transaction Limited Liability (01/01/08)
Endorsements—The American Land Title Association has approved the following endorsements that may be used with its policies:
• ALTA Endorsement 1—06 (Street Assessments)
• ALTA Endorsement 2—06 (Truth-in-Lending)
• ALTA Endorsement 3—06 (Zoning Unimproved Land)
• ALTA Endorsement 3.1—06 (Zoning—Completed Structure)
• ALTA Endorsement 4—06 (Condominium)
• ALTA Endorsement 4.1—06 (Condominium)
• ALTA Endorsement 5—06 (Planned Unit Development)
• ALTA Endorsement 5.1—06 (Planned Unit Development)
• ALTA Endorsement 6—06 (Variable Rate Mortgage)
• ALTA Endorsement 6.2—06 (Variable Rate Mortgage—Negative Amortization)
• ALTA Endorsement 7—06 (Manufactured Housing Unit)
• ALTA Endorsement 7.1—06 (Manufactured Housing—Conversion: Loan)
• ALTA Endorsement 7.2—06 (Manufactured Housing—Conversion: Owner’s)
• ALTA Endorsement 8.1—06 (Environmental Protection)
• ALTA Endorsement 9—06 (Restrictions, Encroachments, Minerals)
• ALTA Endorsement 9.1—06 (Restrictions, Encroachments, Minerals—Owner’s Policy: Unimproved Land)
• ALTA Endorsement 9.2—06 (Restrictions, Encroachments, Minerals—Owner’s Policy: Improved Land)
• ALTA Endorsement 9.3—06 (Restrictions, Encroachments, Minerals—Loan Policy)
• ALTA Endorsement 9.4—06 (Restrictions, Encroachments, Minerals—Owner’s Policy: Unimproved Land)
• ALTA Endorsement 9.5—06 (Restrictions, Encroachments, Minerals—Owner’s Policy: Improved Land)
• ALTA Endorsement 10—06 (Assignment)
• ALTA Endorsement 10.1—06 (Assignment and Date Down)
• ALTA Endorsement 11—06 (Mortgage Modification)
• ALTA Endorsement 12—06 (Aggregation)
• ALTA Endorsement 13—06 (Leasehold—Owner’s)
• ALTA Endorsement 13.1—06 (Leasehold—Loan)
• ALTA Endorsement 14—06 (Future Advance—Priority)
• ALTA Endorsement 14.1—06 (Future Advance—Knowledge)
• ALTA Endorsement 14.2—06 (Future Advance—Letter of Credit)
• ALTA Endorsement 14.3—06 (Future Advance—Reverse Mortgage)
• ALTA Endorsement 15—06 (Non-Imputation—Full Equity Transfer)
• ALTA Endorsement 15.1—06 (Non-Imputation—Additional Insured)
• ALTA Endorsement 15.2—06 (Non-Imputation—Partial Equity Transfer)
• ALTA Endorsement 16—06 (Mezzanine Financing)
• ALTA Endorsement 17—06 (Access and Entry)
• ALTA Endorsement 17.1—06 (Indirect Access and Entry)
• ALTA Endorsement 18—06 (Single Tax Parcel)
• ALTA Endorsement 18.1—06 (Multiple Tax Parcel)
• ALTA Endorsement 19—06 (Contiguity—Multiple Parcels)
• ALTA Endorsement 19.1—06 (Contiguity—Single Parcel)
• ALTA Endorsement 20—06 (First Loss—Multiple Parcel Transactions)
• ALTA Endorsement 21—06 (Creditors’ Rights)
• ALTA Endorsement 22—06 (Location)
• ALTA Endorsement 22.1—06 (Location and Map)
Every endorsement in the above list also has a counterpart without the “—06” in its endorsement number to signal that it is the form that should be issued with the 1992 ALTA Owner’s or Loan Policies, as applicable. Recent endorsements revised or newly adopted by ALTA include:
• ALTA Endorsement 21—06 (Creditors’ Right) (adopted 01/01/08)
• ALTA Endorsement 23—06 (Co-insurance—Single Policy) (adopted01/01/08)
Other endorsements to title policies available to the insured in some statesare:
a. Tax Foreclosure Subordinate to Easement Endorsement—Insures that easement will not be terminated by a tax foreclosure.
b. Shopping Center Endorsement—Insures the owner of the property that the covenants made as to the use, repair, maintenance and improvement of, or payment of times on, the property of the covenantor will be binding on the covenantor.
c. Utility Facility Endorsement—Provides that the insured premises have water, gas, electric, telephone, storm sewer, and sanitary sewer services either over public rights of way, or directly adjacent to the premises, or over easements that benefit the land.
d. Endorsement Insuring the Interest of Incoming Partner—Interest of incoming partner is insured for his proportionate interest in the partnership, provided his name is listed as an insured on the policy.
e. CLTA Endorsement 100 (similar to ALTA Form 9.3—06)—affords lenders protection with respect to violations of private property restrictions that could impair the mortgage lien.
In addition to the ALTA forms, there are other forms used in specific areas. In New York, California, Texas, and Illinois, there are local forms of title policy. In Florida, unless the insured asks for the Owner’s Form B title insurance policy, which insures marketability, the insurer will issue a Form A policy, which does not insure marketability.
ALTA Facultative Reinsurance Agreement (10/17/92)
Many times in large transactions, the initial or primary title insurer does not have sufficient capital to satisfy an insured that the insured will be adequately protected. If the insured requests reinsurance, the primary insurer will seek other insurers to assume a portion of the risk. For example, assume a policy is to be issued for $100 million. Title Company A, the primary insurer, has a net worth of $75 million. The insured does not want to rely upon Title Company A for more than $25 million of the risk and requests reinsurance. Title Company A may get Title Company B, having a $150 million net worth, to take $35 million of the risk, and get Title Company C, having a $200 million net worth, to take $40 million of the risk. The three title companies would enter into a Facultative Reinsurance Agreement, with Title Company A, called the Ceder, taking the primary risk of $25 million and Title Company B and Title Company C taking the secondary risks, as reinsurers, for $35 million and $40 million, respectively. The policy would be issued by Title Company A for $100 million and both the policy and the Agreement would be given to the insured.
ALTA Tertiary Facultative Reinsurance Agreement (Type III) (01/01/08)
This is similar to the Facultative Reinsurance Agreement. In a Tertiary Facultative Reinsurance Agreement, the primary insurer, called the Ceder, will retain a certain portion of the risk, while other companies will assume a certain portion over the primary portion in a secondary position if the loss is higher than the primary amount. A second group of title companies will then assume the balance of the risk over and above the primary and secondary coverage.
1. 57 Pa. 161 (Pa. 1868).
2. Smith, Evolution of the Title Policy, TITLE NEWS, Am. Land Title Ass’n, Feb. 1976.