Langdon T. Owen, Jr.1 Parsons Kinghorn Harris, pc (801) 363-4300 [email protected]

Selected Title Insurance Issues Title insurance is used in Utah in almost every transaction involving real estate where a lender or a knowledgeable buyer is involved, and for good reason. Let’s review what title insurance does and does not do and its place in a real estate transaction. 1. Uses of Title Insurance. In a real estate transaction, someone (usually at seller’s expense) needs to assure sufficient title. At one time in Utah, attorneys gave title opinions for the closing of real estate transactions, big and small. The opinions were based on title abstracts prepared by licensed abstractors. Now such opinions are almost extinct in Utah, having been superceded by title insurance. Occasionally, a lawyer needs to give a legal opinion on a title issue, but these are usually on narrow issues or in transactions where a title policy cannot be obtained, such as certain mineral rights transactions. Of course, legal opinions on transactional issues other than title remain common and advisable in larger transactions. (See separate materials regarding legal opinions.) The pervasiveness of title insurance is the result of a number of factors: •

often can be obtained more quickly

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larger financial resources of insurance carrier in case of a claim

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longer term responsibility of insurance carrier (lawyers die)

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covers risks not disclosed by a record search and thus not covered by a lawyer’s liability on an opinion (e.g., forgery, duress, undisclosed heirs, or old dower or curtesy rights)

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institutional lenders require title insurance, as do secondary market purchasers of mortgages

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relatively inexpensive, one-time premium

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This article is provided for informational purposes only. It is not intended as, and does not constitute, legal advice. Further, access to or receipt of this article by anyone does not create an attorney-client relationship. Although this article was believed to be correct within the scope of its purposes when written, it may be incorrect or incomplete, was not intended to comprehensively cover any subject, does not cover a number of related matters, and does not cover anyone’s particular situation. As such, it is not reasonable for anyone to rely upon this article with respect to any particular legal matter. Rather, readers are encouraged to retain a licensed attorney to provide individualized and current legal advice.

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title company will often have a very wide experience in underwriting property and dealing with a variety of issues, and title agency will often be aware of local issues

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risk spreading is combined with risk discovery and reduction

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contract liability without need to prove negligence.

On the other hand, not every possible risk is covered by title insurance; thus, real estate lawyers are, as always, key players in large transactions along with realtors in both large and small transactions. There remains no substitute for good legal and business advice; for example, deciding which title exceptions are defects and arranging for appropriate and timely cures to defects requires knowledge and experience, giving appropriate notice of defects requires familiarity with the contract and legal principles, negotiating and drafting the contract and related documents and preparing the transaction for closing requires legal expertise, and helping the client decide whether the transaction is worth pursuing, given the possible risks and rewards, requires business experience and expertise. Also, a good survey should be obtained in significant transactions, performed by a capable surveyor with malpractice insurance. (See the Alta Minimum Standard Detail Requirements for Alta/Acsm Land Title Surveys, (2-23-2011).) The survey standards have some options which can be agreed to by the parties. Further, professional property inspections and environmental surveys may be advisable, again performed by appropriate persons with malpractice insurance. Some insurers are without title plants and operate based only on updating a competitor’s earlier thorough search in a prior transaction, and thus do not so much act to prevent problems as to assume the risk of them, since with lower overhead, they can absorb more risk. 2. Picking the Title Company. There are a number of factors which are important in selecting an appropriate title insurer, including •

title agency’s prior familiarity with the title, particularly where a short time to close is involved

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title agency service and responsiveness

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the preference of a party to the transaction or the party’s advisors

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fees and costs

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the financial condition and resources of the insurance underwriter, particularly where the transaction is large, including reinsurance or coinsurance, or excess coinsurance

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location of the title agency 2

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availability of special endorsements.

In order to be able to handle larger transactions, insurance underwriters may use reinsurance where the insurer itself obtains insurance to cover losses in excess of a certain amount, coinsurance where two or more insurers take portions of the coverage with the buyer having direct recourse to each coinsurer, or excess coinsurance where the risk of loss over a certain amount is coinsured but at or below that amount only one insurer is responsible. The financial capacity of a particular insurance underwriter is typically analyzed based on insurance commission filings, rather than shareholder financial reports, because commission filings are more uniform and contain more statistical information. Such filing forms in many jurisdictions derive from the National Association of Insurance Commissioners. (See sample Utah Insurance Commission materials.) Some leaders or buyers are wary of using small, local title agencies to handle the closing of large transactions. Thus, in a significant transaction, a closing protection letter may be required where the underwriter with a large net worth contractually protects the recipient of the letter from theft or other wrongdoing by the title agency or its employees. Such letters have their own coverages and exclusions. (See the 12-1-11 ALTA standard forms for single transactions and for multiple transactions.) The lender’s contributory negligence is not a defense against the underwriter’s liability under such a letter. Lawyers Title Insur. Corp. v. New Freedom Mortg. Corp., 645 S.E.2d 536 (Ga. App. 2007). Damages under the letter are contract, not tort, damages. Lehman Bros. Holdings, Inc. v. Hirota, 2007 WL 1471690 (M.D. Fla. 2007) applying Indemnity Insur Co. of No. Ameri. v. Amer. Aviation, Inc., 891 So.2d 532 (Fla. 2004) (economic loss rule discussed). 3. Obtaining Appropriate Coverage. In larger transactions, coverages, exceptions to coverage, and special endorsements to extend coverage, are all negotiable. In 2006, the American Land Title Association (ALTA) promulgated a series of new forms for use by title insurers. These are now, for the most part, the basis from which negotiations proceed. (See list of standard ALTA forms of coverage and standard endorsements, and see copies of the standard lender and owner coverages.) Forms of real estate sales contracts, trust deeds, etc., sometimes contain a specification of the form of title insurance to use; these form contracts need to be updated to refer to the new ALTA forms of coverage. It is best not to assume that the insurer is using an unchanged version of the 2006 ALTA standard form as a starting place; the form should be reviewed or confirmation obtained from the title agency. The lender’s standard coverage is, as before, broader than the owners’ standard coverage. In addition, some lenders obtain, over and above the policy, an insured closing letter to protect against the conduct of the closing agent. The first step to obtaining appropriate coverage for an owner is for the owner to obtain its own coverage because the lender’s coverage provides no protection to the owner. The supposed indirect benefit of the pay down of the declining loan balance due to a title issue is of little benefit to an owner stuck with an investment that is worth less or is altogether worthless. When 3 {00055848.DOC / 2}

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the loan is paid, no further coverage remains. More importantly, however, the borrower’s warranty of title under the mortgage will continue as a liability of the borrower, as will the note obligation, to which obligations the title insurer will be subrogated. (An attempted waiver of subrogation is not authorized by the policy and may adversely affect coverage.) Further, if the owner leases the property to a tenant, the likely covenant of quiet enjoyment in the lease will be breached by the defective title of the owner who could be subject to an award of damages for such breach. The lender’s title insurer simply has no duty to the borrower-mortgagor, whether to properly investigate title or otherwise, even where the borrower pays the premium. See Gaines v. Amer. Title Ins. Co., 220 S.E.2d 469 (Ga. App. 1975). Some endorsements are needed due to the type of interest involved, for example, condominium or planned unit development interests. Other endorsements are to provide desired protections as to certain items, such as zoning, mechanics liens, encroachments, etc. Sometimes an underwriter will agree to insure against an item it is required to show on Schedule B of the insurance binder or preliminary title report, usually for an additional risk premium. However, the next time the property changes hands, the other party may not be willing to accept the covered exception, or may not accept it with insurance from the original insurer. Thus, obtaining such coverage is not the end of the issue, but a further analysis will be needed of whether other insurers would be willing to cover the risk. An insurer may be asked to insure a critical easement for access to the property (i.e., not just that some access is available, but that this particular key access is valid); this will entail insuring, as well, title to the land over which the easement runs. Special coverage for other key items may be obtained, as well. Some exceptions can be modified so that an unacceptably broad exception is sufficiently narrowed to become acceptable. For example, an exception for “rights of tenants” could become one for “rights of tenants, but only under the terms of existing leases.” Easements for utilities can be referred to by actual location according to a survey meeting ALTA standards, rather than just by recorded legal descriptions. If the insured is aware of a title defect, it must inform the insurer of it, or it will not have coverage for that defect. As with other forms of insurance, the wrongful conduct toward the insurer of a coinsured (or partner or shareholder) may have the effect of destroying coverage for the other coinsured, absent a separate policy or a specific provision in a single policy protecting such coverage for the coinsured who does not act wrongfully. A nonimputation endorsement may be requested. There is a difference between insurable title and marketable title; if marketable title is to be insured, the policy needs to state this coverage. The standard 2006 ALTA owner’s form provides this coverage. 4. Understanding Policy Limitations. Policies of title insurance contain general exceptions, usually listed in Schedule A, and specific exceptions arising from regional or local requirements and a search as to the particular property, usually listed in Schedule B. These 4 {00055848.DOC / 2}

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exceptions need to be reviewed and understood, and, if appropriate, eliminated through correction or negotiation for coverage. However, there are more general concerns to be understood, as well. Let’s review some of those concerns. An inflation rider might be obtained to increase coverage as value increases, but this may not be sufficient to give full coverage in the future if the property value increases due to improvements or other factors, thus a retroactive increase in coverage, for an additional premium may be advisable at some time. Also, the policy cap amount is apportioned among parcels. If one parcel increases in value, its apportioned cap does not increase by applying the caps from the other parcels. In the future after a closing, an acquisition of an interest in the property owner as part of a corporate reorganization or partnership change can in some cases eliminate any further coverage for the organization; thus, in significant future transactions, the effect on existing title insurance should be considered. For example, some cases have held that the addition or subtraction of a partner from a partnership creates, under state law, a new partnership and that the coverage of the former partnership does not continue to the new partnership. See, e.g., Fairway Dev. Co. v. Title Ins. Co. of Minn., 621 F.Supp. 120 (N.D. Ohio 1985). See also UCA §§ 48-1-22 (tenancy in partnership) and 48-1-26 (dissolution on change in parties to relationship by one partner’s ceasing to be involved). Also, transfers to organizations for interests in them may eliminate coverage. See Shotmeyer v. New Jersey Realty Title Ins. Co., 948 A.2d 600 (N.J. 2008) (transfer from general partnership to limited partnership among the same individuals eliminated coverage); Point of Rocks Ranch, LLC v. Sun Valley Title Ins. Co., 146 P.3d 677 (Ida. 2006) (purchasers of property transferred to a limited liability company owned by them and thus lost coverage). If the transfer is not “by operation of law,” the problem of loss of coverage may exist. The new form of ALTA owner’s policy has provisions to help deal with this issue. The definition of the insured needs to be reviewed carefully. (See the definition in the 2006 ALTA form, which now helps solve many such issues.) For a review of such issues under prior forms of policies, see Marc Weinreich, “Commercial Transactions: Who Does the Title Insurance Cover?,” Prob. & Prop., Mar.-Apr., 1992, 42, 43; and see Joyce Dickey Palomar, “Limited Liability Companies, Corporations, General Partnerships, Limited Partnerships, Joint Ventures, Trusts - Who Does the Title Insurance Cover?,” 31 Real Prop. Prob. & Tr. J. 605 (Winter 1997). The title coverage is to pay for an actual loss, if and when it occurs, up to the insurance limit, not to clear title. If it is cheaper and easier to clear title, the insurer may do so, but is not obligated to do so and may just defend title when an issue arises or may just pay the insured the loss (up to the limit) when it occurs. The policy coverage generally continues even after the owner transfers or agrees to transfer title, so long as the owner retains an interest in the land, is the mortgagee of a purchase money mortgage, or has liability under a title warranty covenant in a warranty deed. Thus, quitclaim deeds can cut off coverage for the owner and also will cut off indirect access to that 5 {00055848.DOC / 2}

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coverage by the new owner because a warranty claim will not exist. Special warranty deeds limit the scope of the warranty for which coverage may continue. The coverage under a lender’s policy does not accumulate on top of the owner’s policy; if the insurer pays the lender, the mortgage is reduced and, separately, so is the owner’s coverage under the policy. (This is why there is a discount for the lender’s policy.) The insurer has rights of subrogation which must be protected, or coverage can be reduced or eliminated, and actions by the insured which increase the risk of the insurer may also eliminate or reduce coverage. Some of these actions are specific coverage limits or covenants in the policy, such as the requirements on the insured for giving notice of a claim, for providing cooperation, and for not assuming or settling any liability without the consent of the insurer. As mentioned above, coinsureds will want to be careful about possible wrongful conduct by other coinsureds toward the insurer. Alternative dispute resolution through arbitration may be required under the policy. (See ALTA arbitration rules (1-1-06).) 5. Ways to Dispose of Title Objections. There are several ways title objections can be eliminated. •

Claims or liens can be paid off (such as taxes, mortgages, mechanic’s liens, etc.) or, if agreed by affected parties, these matters can be bonded against, indemnified against, escrowed against, or insured over by the title company.

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Documents can be obtained and, where appropriate, recorded, such as quitclaim deeds, reconveyances of trust deeds, releases of rights, terminations of leases, subordinations of liens, surveys, and plat maps.

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Facts can be established by way of affidavits (e.g., identity, marriage, the nonoccurrence of events, adverse or prescriptive use, etc.), recitals in documents (e.g., foreclosure deed recitals), statutory or common law presumptions, or certificates of governmental or organizational officials (e.g., organizational existence and good standing, authority, etc.).

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Court orders or judgments can be obtained, such as quiet title, declaratory relief, probate heirship determinations, will construction decrees, or conservatorship orders, partition decrees, etc.

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Sometimes a statutory cure is available, for example, under the marketable record title act, the recording act, statutes of limitations, or lien expiration rules (e.g., mechanic’s liens without a timely lis pendens providing notice of an enforcement action).

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Other times, affirmative action may be needed to remove an encroachment or structure, or to evict a tenant or trespasser. 6

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The parties may want the contract of sale to contain provisions specifying notice of title objections, allowing some time to obtain a cure of title defects, or providing remedies or limits on remedies relating to title defects. (See sample contract provisions.)

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