Title Abstract/Title Opinions. Title Insurance. Title Insurance

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1 Title Abstract/Title Opinions Historically, a buyer of land would typically rely upon an attorney s legal opinion as to the quality of the Seller s title The attorney would reach this opinion based upon the attorney s review of the title abstract (all of the recorded documents in the chain of title for the property) Suppose that a buyer suffered a loss of title b/c a prior deed in the chain of title turned out to be a forgery. Could buyer recover from the attorney? Attorney title opinions are not an ideal source of title protection (and rarely used anymore) Attorney s liability could be established only if attorney failed to meet the appropriate standard of care However, even a prudent title searcher probably would not discover that a deed in the chain of title was a forgery (at least based solely on the record) If the attorney s opinion met the accepted standard of professional care, the attorney is not liable (even if the attorney s opinion turned out to be wrong) I.e., attorney s opinion is not a guarantee of title quality Title Insurance Today, most persons rely upon title insurance as the primary means of title assurance/protection Two types of title insurance policies Loan policy: this policy insures the validity and expected priority of lender s mortgage lien on the land Loan policy is required by secondary market purchasers (e.g., Fannie Mae, Freddie Mac) Owner s policy: insures the owner s title Title Insurance Benefits of insurance contract: if the title problem is a Covered Risk, title insurer must (1) indemnify the insured (i.e., must pay to cover insured person s economic loss due to the insured title defect, up to policy limit) (2) pay the legal costs the insured party would incur in defending title litigation or in obtaining a cure of the defect Note: Insurer must pay insured party s costs of defense in litigating over a covered risk, even if insured prevails 1

2 Title Insurance Issuance Process Upon request, insurer searches title and (hopefully) identifies all relevant adverse (third party) interests in the parcel Insurer issues commitment, which is an agreement to issue a title policy on a standard policy form, if the transaction closes and insured pays the required premium (based on total dollar amount of coverage) Commitment excepts (i.e., it does not insure) all listed matters revealed by insurer s search (Schedule B) Any Covered Risk not excepted on Schedule B is insured, unless the risk is excluded under the general policy exclusions In modern transactions, the title insurance commitment plays a key role in the buyer s preclosing title investigation Commitment should identify (on Schedule B) any title matters that would defeat marketability of title If Schedule B shows exceptions that Buyer has not agreed to accept, Seller must then remove the defect (i.e., get 3rd party to release it) or Buyer can rescind In some cases, Seller may be able to persuade the insurer to insure over the defect (remove the exception), if parties have agreed insurable title is acceptable and insurer is willing to accept risk Title Insurance Cost Total cost is comprised of 2 parts: 1) Risk premium (not surprisingly, this increases as the amount of coverage increases) E.g., $300,000 coverage = $290 (MO) E.g., $3,000,000 coverage = $2,000 (MO) 2) Title services charge (reflects the insurer s costs of preparing the commitment and maintaining its title plant, i.e., its internal tract index) Title v. Casualty/Liability Insurance Casualty insurance and liability insurance provides term coverage; you pay a premium for limited term of coverage (e.g., 6 months or 1 year) After the term expires, you must renew the coverage and pay an additional risk premium for the new term By contrast, title insurance has no term You pay a one-time premium, and your coverage continues to protect you forever (even after you transfer the land) 2

3 Does Coverage Run with the Land? Generally, an owner s policy of title insurance is NOT transferable in sale transactions If I sell my home to Strong, I can t sell her the benefit of my owner s title insurance policy [Condition 2, p. 266] Strong will have to must obtain (and pay a premium for) a new title insurance policy insuring her interest In some transactions where title passes by operation of law (e.g., inheritance), owner s policy coverage does pass with title [Condition 1(d), pages ] Post-Transfer Protection However, title insurance continues to insure me, even after I sell the land to a purchaser and no longer own it [Condition 2, p. 266] If I sell to Strong, and am later sued by Strong (or her successor) for breach of a deed warranty because of a title defect, and the defect was a Covered Risk under the policy, then the insurer must defend the lawsuit and, if I lose, indemnify me against any judgment, up to the policy limit Title policy is issued by a title insurance underwriter (e.g., Chicago Title Insurance Company), by one of its authorized agents (e.g., a local title company) Policy is typically issued on a form promulgated by the American Land Title Association (ALTA) Components of Policy Covered risks (types of defects insured) Exclusions (types of defects excluded from coverage by policy form itself) Conditions (definitions; claims process) Schedule A (date, description of property, coverage amount, statement of interest being insured) Schedule B (exceptions for specific matters identified by title search and thus not covered) 3

4 How Are Claims Triggered? A potential claim can be triggered in a variety of different ways, including: Insured party has contract to sell, and buyer refuses to close due to claimed defect Insured party gets sued in ejectment or in suit to quiet title to some/all of land covered by policy Insured party gets sued for injunction against current or anticipated use Insured party gets denied permit/approval Title Insurance Claim Analysis Is the interest a Covered Risk? [pages ] If so, did the Insurer except it from coverage by listing it as an exception on Schedule B? [page 264] If not, did the Insurer exclude it from coverage under the Exclusions from Coverage? [pages ] If the interest is a Covered Risk and is neither excepted nor excluded, then Insurer liable for Insured s loss (up to policy limit) Coverage Problems [Note 5, p. 273] Which matters would be insured by the policy, assuming that they were not listed as an Exception on Schedule B? Mechanic s lien for work done PRIOR to Policy Date? For work done AFTER Policy Date? Residential use only covenant? Coverage Problems [Note 5, p. 273] Which matters would be insured by policy, if not excepted on Schedule B? Lack of delivery of deed in chain of title? Suit vs. insured for breach of deed warranty? Zoning ordinance adverse to Insured s intended use? 4

5 Mechanics Lien Each state has a statute that allows a person who provided labor or materials for an improvement to land to file a mechanics lien if they aren t paid Mechanics lien attaches to land (including the improvement to the land) Lien relates back to when work was commenced by lienor ( first spade rule) If the bill isn t paid, lienor can have land/improvements sold to satisfy the unpaid balance due Mechanics lien risk is significant for Buyers, even when buying an already-existing home/building Seller typically has work done to get land ready to sell If Seller didn t pay for that work, the contractor has 4-6 month window period (which varies by state) in which to file notice of a lien claim Once lien claim is actually filed, lien relates back to the date the contractor s work began! Thus, Buyer of land takes title subject to risk of latent mechanics lien claims held by any unpaid contractor (who could file lien notice after closing)! Mechanics Lien A lien filed for work done before closing would be a Covered Risk [ 2, p. 260] Mechanic s liens are not a specific Exclusion Such a lien would be covered, unless the Insurer took a specific exception on Schedule B (which it typically does, at least initially, in its title insurance commitment ) As title insurer, would you be willing to bear this risk (i.e., to remove the exception from Schedule B)? If insurer does not except this risk, it will have to indemnify insured if a mechanics lien arises This means insurer will have to pay off the unpaid liens to clear the insured s title Why would insurer take this risk? Insurer may do so if Seller (1) provides an affidavit identifying any contractors/suppliers that did work, and (2) agrees to indemnify Insurer from loss if affidavit turns out to be false Insurer will then get lien waivers from identified contractors and suppliers, confirming they ve been paid 5

6 Mechanics Lien What about a lien filed by a contractor for work done after the closing? Lien filed for work done after closing is not covered [p. 260] After closing, the insured party owns the land If insured party hires a plumber and fails to pay, the resulting mechanics lien is created by the insured party and is thus excluded [Exclusion 3(a), p. 263] Residential Use Only Covenant? A covered risk (an encumbrance ) [ 2, p. 260], but, if discovered in title search, Insurer will except it on Schedule B If so, the insured person can t recover for loss or cost incurred due to enforcement of covenant against them Is that acceptable to me as an insured? What sort of assurance might I want? ALTA Residential Owner s Policy Covered Risk 13: Insurer is liable if Your Title is lost or taken because of a violation of any covenant or restriction, which occurred before you acquired Your Title, even if the covenant, condition or restriction is excepted in Schedule B. By contrast, in commercial transactions, Insured will have to accept covenant being listed on Schedule B, but will ask insurer to modify Schedule B to warrant that violation will not result in a forfeiture of Insured s title Reservation of Oil/Gas Rights? It is a covered risk [ 1] (oil and gas rights are interest in land that belongs to surface owner if not severed) Insurer will except it on Schedule B if discovered But if insurer does only 60-year search, it may not discover reservation that was made 100 years ago (unless it is updating a search made >> 40 years ago) If not excepted, insured has claim if assertion of right causes loss (subject to policy limit) 6

7 Lack of Delivery of Prior Deed in Chain? Covered risk [ 2(a)(iii), page 261] Insurer will not take an exception for this defect on Schedule B, because Insurer will almost certainly have no way to discover the defect (this is a latent risk) If insured party ends up being ejected by the true owner, insured has claim (recovery subject to policy limit) Lawsuit vs. Insured for Breach of Deed Warranty? Yes, if the lawsuit is based on a Covered Risk, and that risk was not excepted on Schedule B Condition 2, p. 266: policy continues to protect insured party even after insured property has conveyed the land ( coverage of this policy shall continue... so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title ) Zoning Matters Generally, zoning matters are excluded from coverage [Exclusion 1, p. 263] Existing violations of zoning are covered ONLY if notice of violation has been filed in the Public Records prior to Policy Date To get protection for zoning -related risks, Insured must get (and pay for) a specific zoning endorsement to the policy (which would override the Exclusion) Note: ALTA Residential Owner s policy form (included with the discussion questions) does provide insured owner w/protection against some zoning risks 14(b): loss due to certain zoning violations recorded in public records, if not excepted on Schedule B 19: covers cost to move structures due to a zoning violation (such as a setback violation); no need for separate endorsement 20: covers loss b/c use as single-family residence violates applicable zoning ordinance; no need for separate endorsement 7

8 Visible Encroachments Where neighbors have acted without appreciation of historical boundaries, visible (but still unknown) encroachments can arise, e.g., Insured owner s garage could encroach onto the next door neighbor s land, or Neighbor s fence could encroach onto the Insured s land Problem Freyermuth buys home from Uphoff At time of contract, next door neighbor (Smith) has a fence that encroaches onto Freyermuth s land by 2 feet Freyermuth does not know fence is an encroachment Several years later, when encroachment is discovered, Smith sues to quiet title to the encroachment area by adverse possession Would Freyermuth be covered under his owner s title insurance policy? Encroachments Fence encroachment is a Covered Risk that would be covered by the policy, unless excepted by Insurer on Schedule B Risk of lost title/costs of defense due to adverse possession claim [Covered Risk 1] Unmarketable title due to potential dispute over removal or relocation of improvements [Covered Risk 3] Encroachments and Surveys In issuing a title commitment, Insurer typically include a survey exception on Schedule B This will exclude coverage of Rights and claims of persons in possession of the Land on the Policy Date and rights and claims that would be reflected by a contemporaneous survey of the Land To remove survey exception, Insurer will require a new as built survey (one that shows all improvements) that shows that no encroachments appear to exist 8

9 Now suppose RWF is buying a house from Uphoff and the title commitment is taking a survey exception RWF isn t sure whether neighbor s fence is encroaching, but doesn t want to spend $500 to have a new survey done Uphoff shows RWF the survey that was done when Uphoff bought the house in 2000 RWF asks the title insurer to remove any exception for the location of the neighbor s fence based on the old 2000 survey Should title insurer do it? Surveys Surveys can vary in terms of the detail they provide If 2000 survey not only showed the fence, but showed the distance from the fence to Uphoff s house (and that distance is still the same in 2016), insurer might remove exception for possible fence encroachment If 2000 survey didn t show the fence, or the distance from the house to the fence, insurer will keep exception unless new survey is prepared Problem : Buyer buys land for $150K, gets owner s policy from Chicago Title (CT) (policy = $150K) 2016: Smith sues to eject Buyer and prevails Smith s prior deed was recorded, but CT missed it because it conducted a negligent search In 2016, land s value is = $300,000 CT tenders $150,000 under the policy; Buyer instead sues CT for $300,000 for negligence. Should CT be liable in tort to Smith? Does Title Insurer Have Duty of Care in Searching? Courts have split Some states: yes, insured party may recover in tort (beyond policy limit) if insurer conducted negligent title search [e.g., AR, KS, NE] Rationale: insurer knows/should know that insured is relying upon the title commitment in deciding whether to buy (relying upon insurer s superior expertise) 9

10 Other courts have refused to allow recovery in tort beyond the policy limit, either because: Some courts hold insurer has no duty of care (insurer is insuring risk, not certifying title) [e.g., TX, NJ] Other courts give effect to policy language limiting the insured to recovery only in contract [e.g., IL] E.g., Condition 8 of Residential Owners Policy: Any claim You make against Us must be made under this Policy and is subject to its terms. By contrast, other states (NE, CA, MA) refuse to treat that clause as a valid waiver of tort liability Insurer s Liability in Missouri RSMo provides: (1) title insurer can t issue a title insurance policy without first conducting a title search (2) title insurer shall not knowingly issue any owner s title insurance policy or commitment to insure without showing all outstanding, enforceable recorded liens or other interests against the title which is to be insured Leading Missouri Cases Title company had a duty to use due care in preparing a preliminary title commitment [Evinger, 726 S.W.2d 468 (Mo. Ct. App. 1987)] Where the commitment stated that the Insurer was liable for actual loss incurred in reliance in undertaking in good faith... to acquire... the estate... covered by this Commitment, Insurer was held liable for the entire loss suffered by Insured due to negligent title search by Insurer [Rosenberg, 764 S.W.2d 684 (Mo. Ct. App. 1988)] Problem 2 Note: sometimes, loss due to a title defect is not due to insurer s negligence Some defects (e.g., defects in execution or delivery of a deed in the chain of title) aren t discoverable by a prudent search For these defects, even in MO, Insured s recovery for loss would be capped at policy limit + any costs of defense Thus, Insured must be sensitive to the policy limit as time passes (and as the land appreciates in value) 10

11 Appreciation ALTA Residential Owner s policy form provides that each year for 5 years, the policy limit increases by 10% Maximum increase = 150% of policy amount If land value increases > 50% (either due to market appreciation or improvements), insured must obtain a new policy w/increased coverage (or must self-insure beyond policy limit) In commercial transactions, Insured can obtain Inflation endorsement Loan Policies If owner gets a mortgage loan, mortgage lender will require the owner to obtain and pay for a loan policy [p. 269], for amount = principal balance of the loan, that: Insures lender of the validity of the mortgage Insures lender of the priority of the mortgage vs. other liens If owner suffers complete failure of title, Insurer will pay the insured lender the lesser of (1) the unpaid loan balance, (2) FMV of land, or (3) the policy limit Jane s lender, First Bank, is requiring her to get and pay for a loan policy The loan policy is clean (shows nothing that calls into question the title Jane is acquiring) Jane reasons: If my title is bad, insurer will pay off the loan; thus, there s no need for me to buy and pay for an owner s policy, since I get the protection of the loan policy indirectly Is she right or wrong? Problem 3 The loan policy does NOT protect Jane s title risk 1) If Jane has equity in the land (FMV >> mortgage balance) at time of title loss, lender s loan policy would not indemnify her against that loss 2) If Jane s loan is underwater at time of loss, Insurer will only have to pay First Bank up to FMV of land; thus, mortgage debt won t be FULLY paid off, and Jane would still be liable for the balance (in most states) 3) Also, if Insurer pays off Jane s mortgage, it becomes subrogated to First Bank s rights under the loan documents Thus, if it pays First Bank the mortgage debt, Insurer could then turn around and sue Jane on the note to collect the entire balance of the debt! 11