Title Insurance Issuance Process
Title Insurance
• Today, most persons holding interests in land rely upon title
insurance as the primary means of title assurance
– Loan policy (insuring validity and priority of lender’s mortgage lien)
is required by secondary market purchasers (e.g., Fannie Mae)
– Owner’s policy not required, but additional cost of owner’s policy is
nominal in transaction where loan policy is also being issued
• Title insurance contract provides (1) indemnity (covers
policyholder’s economic loss due to insured title defect, up to
policy limit) and (2) costs of defending title litigation
• In the typical transaction, the title insurance commitment
plays a key role in buyer’s pre-closing title investigation
– The commitment should identify any title matters that would
defeat the “marketability” of seller’s title (or whatever
standard of title the parties agreed to in their contract)
– If the commitment reflects unacceptable exceptions that
Buyer is not bound to accept, Seller must then either
• “Remove” the defect (i.e., get the third party to release it), or
• Persuade the insurer to “insure over” the defect (remove the
exception)
• Upon request, insurer searches title, hopefully identifying all
relevant adverse (third party) interests in the parcel
• Insurer issues “commitment,” which is an agreement to issue
a title policy (on standard policy form), if the transaction closes
and insured pays premium
– Premium is based on total dollar amount of coverage
– Commitment “excepts” (i.e., does not insure) all listed matters
revealed by insurer’s search (Schedule B exceptions)
– Any covered risk not excepted on Schedule B is insured, unless
the risk is excluded under the general policy “exclusions”
Title Insurance Cost (MO)
• Title insurance premium charge is based on (a) risk
premium + (b) title services charge; fluctuates with
amount of coverage
– $100,000 = $130 risk + $300 title services charge + $100
risk/title services charge for simultaneous loan policy = $530
– $250,000 = $250 + $480 + $100 = $830
– $500,000 = $450 + $780 + $100 = $1,330
Title v. Casualty Insurance
• Casualty insurance provides “term” coverage; you pay a
premium for limited “term” of coverage (e.g., 1 year)
– After term expires, you must renew (and pay additional
premium)
• Title insurance has no term; you pay one-time premium,
and your coverage continues to protect you forever
(even after you transfer the land)
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 Uphoff, and am later sued by Uphoff (or his
successor) claiming that my title was defective in breach of a
deed warranty, and the defect was a “Covered Risk” under the
policy, the insurer must defend the lawsuit and indemnify me
against any loss, up to the policy limit
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 Uphoff, I can’t sell him the benefit of my owner’s
title insurance coverage [Condition ¶ 2, p. 266]
– Uphoff must obtain (and pay for) a new title insurance policy
insuring his interest
• In some transactions where title passes by operation of law
(e.g., inheritance), owner’s policy coverage passes with title
[Condition 1(d), pages 264-265]
• Title policy is issued by a title insurance company (by its
authorized agent), typically 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,
interest being insured)
• Schedule B (exceptions for specific matters identified by due
diligence investigation)
Coverage Problems (Note 5, Page 273)
• Which matters would be insured by the
policy, assuming 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?
Title Insurance Claim Analysis
• Is the interest a “Covered Risk”? [pages 260-262]
• If so, did the Insurer “except” the interest 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 262-264]
• If the interest is a Covered Risk that is neither excepted nor
excluded, Insurer liable for Insured’s loss (up to policy limit)
Coverage Problems (Note 5, Page 273)
• Which matters would be insured by the
policy, assuming they were not listed as
an Exception on Schedule B?
– Oil and gas rights reserved in deed delivered
100 years ago?
– Lack of delivery of deed in chain of title?
– Zoning ordinance adverse to Insured’s
intended use?
Mechanics’ Lien
• Each state has a statute that allows a person who
provided labor or materials that went into an improvement
to land to file a “mechanics’ lien” if the person is not paid
for that labor/material
– Lien attaches to land (including the improvements)
– If the lien is not satisfied, lienor can have land/improvements
sold to satisfy the unpaid balance due
Mechanics’ Lien
• A lien filed for work done before closing would be a “Covered
Risk” [¶ 2, p. 260]
– Mechanic’s liens are an “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?
• Risk of mechanics’ lien is significant for Buyer, even when
buying an already-existing home or other building
– Seller typically has “work done” to get the property ready to sell
– If Seller didn’t pay for that work, the contractor has 4-6 month
“window” (period varies by state) in which to file a lien claim
– Once lien claim is filed, mechanics’ lien “relates back” to the
date the work began!
– Thus, Buyer takes title subject to any latent mechanics’ lien
claim of unpaid contractor who files its lien claim after the
closing, but within the allowed “window”!
• 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” insured’s title
• Why would insurer take this risk?
– Insurer may do so if Seller (1) will provide an affidavit
identifying any contractors/suppliers that did work, and (2) will
indemnify Insurer from loss if affidavit is false
– Insurer will then get “lien waivers” from identifying contractors
and suppliers, confirming they’ve been paid
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 a covered risk
[p. 260]
– After closing, insured owns the land
– If the insured party hires a plumber and fails to pay them, the
resulting mechanics’ lien is “created by” the insured party and
is thus excluded [Exclusion 3(a), p. 263]
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.”
• In commercial transactions, Insured will have to accept
covenant being listed on Schedule B, but Insured will usually
ask for qualification “but violation will not result in a forfeiture
of Insured’s title”
“Residential Use Only” Covenant?
• It is a covered risk (an “encumbrance”) [¶ 2, p. 260], but,
if discovered, 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
• Would that be acceptable to me as a Buyer/insured
party? What sort of assurance might I want?
Reservation of Oil/Gas Rights?
• It is covered risk [¶ 1] (oil and gas rights would be 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/except reservation that was made 100 years ago
(unless it is updating a search it made more than 40 years ago)
• If not excepted, insured has claim if assertion of right
causes loss (subject to policy limit)
Lack of Delivery of Deed in Chain of Title?
• Covered risk [¶ 2(a)(iii), page 261]
• Insurer will not except this defect on Schedule B,
because Insurer will almost certainly have no way to
discover the defect (latent risk)
• If insured is ejected by true owner, insured has claim
(recovery subject to policy limit)
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)
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”)
• Note: ALTA Residential Owner’s policy form does provide
insured homeowner w/ some protection against zoning
risk
– ¶ 14(b): covers loss due to certain zoning violations recorded
in public records, if not excepted on Schedule B
– ¶ 19: covers cost to move structures due to zoning 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)
Visible Encroachments
• Where neighbors have acted without
appreciation of historical boundaries,
visible (but still unknown) encroachments
arise, e.g.,
– Insured person’s garage encroaches onto the
next door neighbor’s land
– Next door neighbor’s fence encroaches onto
the Insured person’s land
Problem 2
• 2005: Buyer buys home for $150,000, and obtains owner’s policy
from Chicago Title (CT) (policy limit = $150,000)
• 2014: Smith sues to eject Buyer and prevails
– Smith’s prior deed was recorded, but CT “missed it” due to
negligent search when it issued title commitment and policy
– Home’s value is now = $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?
• These encroachment are “Covered Risks” unless excepted by
Insurer
– 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]
• In title commitment, Insurer will typically include a “survey exception”
on Schedule B
– “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
showing no encroachments appear to exist
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)
• Other courts have refused to allow recovery in tort
beyond the policy limit, either because:
– Some courts hold the 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 ¶ 15(b) (omitted in book): “Any claim of loss or
damage that arises out of the status of the Title or by any action
asserting such claim shall be restricted to this policy.”
• By contrast, other states (NE, CA, MA) refuse to enforce such a clause
as a valid waiver of tort liability
Insurer’s Liability in Missouri
• RSMo. § 381.071 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
Problem 2
• Courts in MO have found that a 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)]
• Note: sometimes, loss due to a title defect will not be 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)
Loan Policies
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 new policy
w/increased coverage (or self-insure beyond policy limit)
• In commercial transactions, Insured can obtain “Inflation
endorsement”
• Jane’s lender, First Bank, is requiring her to
get and pay for a loan policy
– The commitment for that policy showed no
exceptions or exclusions that called into
question the marketability of the title
• Jane reasons
– If I suffer a failure of title, insurer will pay off my
loan
– Thus, there’s no need for me to buy and pay
for an owner’s policy, since I get the indirect
protection of the loan policy
• Why is Jane wrong?
Problem 3
• If owner gets a mortgage loan, mortgage lender will require
the owner to obtain and pay for a loan policy [p. 269], in the
amount of the 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
insured lender the lesser of (1) the unpaid loan balance, (2)
FMV of land, or (3) policy limit
• 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 the time of title loss (FMV << mortgage
balance), 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, when Insurer pays First Bank, it would become 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!