By: Robert Feldman, RKF Law Offices LLC
© RKF LAW OFFICES LLC, 2022
What is Title Insurance.
In modern real estate law, it is rare that a purchase and sale of real estate would close absent title insurance. Title Insurance is different from other types of insurance. Most insurance provides protection against future events, for example, automobile insurance insures against future injury, while title insurance is backwards looking, it’s an examination of public records to confirm a property’s legal ownership and to ensure that no defects in the title record could negatively affect the status of ownership, including voluntary transfers (deeds, easements), voluntary encumbrances (mortgages, easements, covenants, conditions and restrictions) as well as involuntary transactions (foreclosures, notice of pending litigation (Lis Pendens) mechanic’s and tax liens and among others. A mattered covered under the policy will include providing legal defense for any competing claim of ownership or defects not listed as exclusions on the policy, including legal fees as well as recovery of loss for any insured matter not excluded from coverage, up to the dollar limits of the policy.
Effect of Title Insurance.
Title Insurance indemnifies owners against losses arising from defects in title. However, title insurance, like any title policy, has conditions and exclusions. Title insurance will defend against a lawsuit challenging title and reimburse the insured against losses covered under the policy, up to the dollar limits provided in the policy. Prior to title insurance, attorneys were engaged to search the public records and produce a tract search, (like a genealogy search) confirming ownership and encumbrances on title to a property. The attorney would prepare an abstract and opinion of title for the client. Certain rural counties still rely on an abstract system; however, most metropolitan areas rely almost exclusively on title insurance. Title insurance carriers now have “title plants” where they can electronically search the county records and compile a search record (“tract search”) which is then converted into a title commitment and then at closing, a final title insurance policy. Modern tract searches are customarily limited to 20-year search history, built from the title plants earlier tract searches, rather than a more comprehensive search extending for the entire history of ownership of the property.
Recordings, Tract Search and Chain of Title.
Most states use a similar recording system where instruments intending to convey title or encumber title are recorded with the county government, typically the Recorder’s or County Clerk’s office in county where the property is located. Upon filing, the county official indexes the document which forms part of the “chain of title.” The index includes the parties’ names, the legal description and the tax identification number for the property. Early entries were handwritten then upgraded to micro fiche, and currently, scanned and electronically entered into the county records. Most states are “Notice Filing” states, meaning the public at large is charged with knowledge of documents once recorded and therefore the first instrument recorded will have “priority” over subsequently filed documents. Consequently, deeds issued on the same day compete for priority and the first deed recorded takes ownership ahead of the subsequently recorded deed; same principal holds true for mortgages, with the first recorded mortgage having priority (first right to foreclose), also known as “first position,” over a subsequently recorded mortgage or any other subsequently recorded documents. Priority affects all recorded instruments, including deeds, mortgages, restrictions, easements, and any other number of instruments. However, by statute, certain liens including federal tax liens, real property taxes, and in many states, mechanic’s liens take “super priority” and jump ahead of earlier recorded liens including mortgages, meaning the super priority lien can foreclose its lien and generally eliminate rights or interests with lesser priority.
A title commitment is the document created by the title company as a commitment to issue a title insurance policy. The commitment is the precursor issued to prospective buyers and mortgage lenders, giving a snapshot of all recorded instruments and identifying the status of property taxes as well as any recorded liens, mortgages, other encumbrances, or other matters affecting title (easements, covenants and restrictions, etc.). Schedule A of the commitment is the cover jacket identifying the type of policy to be issued, proposed insured, the effective date of the title search, the legal description of the property, dollar limits of coverage. Schedule B-1 to the commitment includes all requirements for issuance of the policy including items like transfer taxes, ordinance or code compliance, status of taxes, among others. Schedule B-II, arguably the most critical, includes all “exceptions to title,” which are not necessarily title “defects.” For example, an existing mortgage is an exception to title, but will be released upon closing, while easements or covenants, conditions and restrictions are exceptions that may not necessarily be a defect, but in any event, typically cannot be eliminated as exceptions. Lis Pendens, or litigation, or tax liens are examples of exceptions that can be resolved by payment of money and thereby released, and upon release, would no longer be defects to title and upon satisfaction would be removed from Schedule B-II.
Major title companies in the US issue policies based upon standards enunciated by the American Land Title Association (ALTA), a non-profit trade association of which the majority of title insurance companies are members. ALTA creates sample policy forms that include standard terms and conditions across the industry, including uniform policy jackets with standard conditions, as well is standard form endorsements for the policies to expand coverage; most policies include these standard endorsements and in commercial settings, are critical for obtaining necessary broader coverage.
Institutional Lenders, and most sophisticated private lenders will mandate issuance of a “loan policy.” Though similar in look to an owner’s policy, a lender policy will provide insurance particular to a mortgage lender. A loan policy assures the lender of the priority (1st lien), and enforceability of its lien (mortgage). The policy is an amount equal to value of the mortgage loan, and is for the sole benefit of the lender; the buyer or owner has no rights under the lender policy.
When the title commitment is ordered, a title examiner at the title company will review the tract search and copies of the documents of record, confirming ownership, liens, easements, covenants and restrictions, claims or any other rights or interests recorded against title to the property. The title search may reveal the existence of recorded defects such as unpaid taxes, unsatisfied mortgages, judgments and tax liens against the current or past owners, easements, restrictions and court actions. Matters that are discovered in the search can be excepted, resolved or extinguished prior to the closing of the transaction. Counsel for a buyer and/or lender will review the commitment and address any “defects” or “un-permitted” exceptions to title shown on Schedule B-II. As noted, claims such as delinquent taxes, mechanics liens, etc. must be resolved, mortgages are paid off, covenants, conditions and restrictions and easements are reviewed to be sure they don’t adversely affect the buyers’ intended use. Items that are resolved are removed form Schedule B-II on the final policy to be issued. The final policy will also include “Gap” coverage, meaning the policy will insure over the period between the date of the commitment through the date of recording. Any defects or unpermitted exceptions appearing after the policy date are insured. Any unknown or recorded defects, meaning rights or claims that are not shown by the public records and, therefore, are not discoverable by a tract search are insured. Other types of risk including fraud, forgery, incompetence or incapacity of any party are insured in most cases, subject to the specific facts and circumstances.
© RKF LAW OFFICES LLC, 2022