Maximizing Title Insurance Coverage in Real Estate Transactions
When you retain a lawyer to represent you in connection with your purchase of real estate, two principal things the lawyer should do for you are: (1) conduct a thorough review of the condition of title and, based on that review, (2) recommend title insurance coverage that maximizes the protection available given the circumstances.
The basic process your lawyer should follow in conducting a thorough review of title is:
a. Order the commitment for title insurance and underlying exception documents. The commitment is a written undertaking by the insurance company to issue a policy of title insurance on the terms and conditions set forth in the commitment. The exception documents are the recorded documents that give rise to the property-specific exceptions from coverage shown on an attachment marked “Schedule B-II,” such as easements, subdivision restrictions, reciprocal use agreements, and the like.
b. If the transaction involves commercial, as opposed to residential, real estate, order a survey that meets the minimum requirements of the American Land Title Association (“ALTA”). If the transaction involves residential real estate, order a survey that will permit the title company issuing the insurance to delete certain exceptions from the policy as discussed later (usually called a “stake survey”). The survey acts as a double check on the commitment and allows you to visually locate any exceptions to coverage that can be located in that way, such as easements and encroachments.
c. Receive and review the commitment, survey and underlying exception documents, one against the other, and (1) advise you of any matters he or she thinks may be title risks; and (2) determine whether these risks can be minimized or eliminated through requesting available endorsements to the policy of title insurance.
d. Have the title company correct any errors and make appropriate changes in the commitment (such as deleting from Schedule B-II property-specific exceptions to coverage that don’t apply) and have the surveyor correct any errors or inadequacies in the survey. Your lawyer should always remember to ask if coverage is available for a particular risk revealed by his or her examination. Unlike other types of insurance, many aspects of title coverage are negotiable.
e. Ask the title company to provide in advance of closing a copy of the policy in exactly the form that it will be issued (a “pro forma” title policy) if the situation requires it. This is particularly important in a complex title situation because you will know in advance exactly what the policy will look like before it is issued and will be able to identify and resolve any problems.
Once the title review is complete, the lawyer should take the steps to maximize title insurance coverage considering the facts revealed by the review. Like all other insurance, title insurance is a contract between the insurer and the insured under which the insurer agrees to assume certain risks in consideration for payment. In this case the risks are certain defects in title or liens or encumbrances on title to the property being acquired by you, the insured. As with other insurance, however, certain risks are expressly excluded from coverage. Those are of two types: (1) the general exclusions from coverage that are set forth in the body or text of the policy and the “standard” printed exceptions set forth in Schedule B-II; and (2) the exclusions that are specific to the particular parcel of property that are found on Schedule B-II immediately following the printed exceptions. Maximizing coverage afforded by the basic policy can be accomplished in essentially three ways:
- Extending the coverage by having the title company delete the “standard” printed exceptions contained in the policy;
- Requesting the issuance of certain endorsements to the title insurance policy that cover risks not covered by the title policy but address title risks common to most real estate; and
- Requesting the issuance of “special” endorsements that address title risks particular to your property disclosed by your lawyer’s review of title and survey and any other extrinsic facts of which the lawyer is aware.
There will be some additional expense to maximizing available title insurance coverage, but your lawyer should always advise you of the necessary elements to maximize available coverage and the corresponding costs and explain the risks of not obtaining a particular coverage so that you can weigh the risk versus cost and make a reasoned and educated decision as to whether to obtain that coverage.
Your lawyer will have the title company delete the standard exceptions from the policy as part of the “mark-up” of the title insurance commitment at closing. At closing, the title company will hand-mark the title commitment to reflect the condition of title at the time of closing once all documents and the purchase price have been delivered. This marked-up commitment will serve as your title insurance policy until the actual policy is issued, which can sometimes be delayed for several months after closing. This mark-up includes a notation that the “standard” exceptions have been deleted. A description of each standard exception and the requirements that must met to delete it are as follows:
a. “Rights or claims of parties in possession not shown by the public records,” such as unrecorded leases or easements – deleted upon delivery to the title company of a satisfactory affidavit from the owner*;
b. “Easements or claims of easements not shown by public records” – deleted upon delivery to the title company of a satisfactory affidavit from the owner* and an ALTA survey;
c. “Any encroachments, encumbrances, violations, variation or adverse circumstances affecting title that would be disclosed by an accurate and complete survey of the Land or that could be accelerated by an inspection of the Land” — deleted or limited upon delivery to the title company of an ALTA (or stake) survey;
d. “Any liens, or right to lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the Public Records” (mechanics’ liens) — deleted upon delivery to the title company of a satisfactory affidavit from the owner*;
e. “Taxes or Special Assessments which are not shown as existing liens by the Public Records” – deleted by the title company’s due diligence.
f. General Taxes imposed by the city and county in which the property is located for the year of closing and all subsequent years – not deleted, but marked “none now due and payable” upon the title company’s due diligence.
* It is standard practice for the title company to require the seller of real estate to complete an affidavit that warrants these title issues and makes certain other representations. If the title company is required to cover any losses resulting from these issues, the affidavit contractually obligates the seller to indemnify the title company for any expenses so incurred.
As previously discussed, title insurance can be maximized not only by eliminating the standard printed exceptions to coverage, but also by requesting the issuance of endorsements. Endorsements enhance coverage in one of two ways. They either insure over risks that are specifically excluded from the main policy or they insure interests that are outside the coverage of the main policy. There are many available endorsements to standard owner’s title coverage. Some address situations that may occur rarely. But there are also several endorsements that are fairly common and that should be used frequently as required based on your lawyer’s review of the commitment and survey. It is surprising how infrequently lawyers utilize these. Some of the more often used endorsements are:
a. Zoning (ALTA 3-06)** provides insurance as to the zoning classification in which the land is located and the uses permitted in that zone. It also insures against loss if any of those uses are prohibited by a court order that invalidates the zoning ordinance. There is also a more specific version of this endorsement (ALTA 3.1-06) that applies only to improved property and insures against losses arising from a court order which prohibits use of the property for specified purposes permitted by the zoning or requires removal or alteration of a structure located on the land because certain physical characteristics violate the ordinance, such as the area, width, and depth of the structure, the set back of the structure from the property lines of the insured parcel, the height of the structure, and the number of parking spaces.
b. Comprehensive – Restrictions, Encroachments, Minerals – Improved Land (ALTA 9.5-06)** provides insurance against (1) existing violations of any covenant, condition, or restriction, other than disclosed; (2) existing encroachments across property lines or onto easements, other than disclosed; (3) damage to existing buildings that may result from the exercise of easement rights or mineral interests; and (4) a final court order requiring the removal of an encroachment or denying the right to maintain an existing building because of the violation of a private building setback line or other private restriction.
c. Direct Access (ALTA 17-06)** provides insurance against loss or damage suffered by the insured land not being contiguous to a private right of way, not having physical access to a public right of way, or the limitation of the right of access via existing curb cuts or entries to a public right of way.
d. Indirect Access (ALTA 17.1-06) provides insurance against loss or damage caused by the insured land not having physical access to a public right of way via an access easement shown in the policy as an insured interest or by the limitation of the right of access via existing curb cuts or entries to a public right of way.
e. Single Tax Parcel (ALTA 18-06)** insures against loss resulting from the land described in the policy not constituting a single parcel for real estate tax purposes, separate and apart from other property, or in the event that the permanent tax number identified in the endorsement affects other land in addition to the insured land.
f. Contiguity – Multiple Parcels (ALTA 19-06) insures against loss resulting from two identified, insured parcels of land not being contiguous with one another. This should always be requested when the insured is purchasing multiple parcels of land that he/she believes abut one another, for example, when one is buying multiple parcels to build a single development such as a shopping center.
g. Contiguity – Single Parcel (ALTA 19.1-06) insures against loss resulting from one non-insured parcel of land not being contiguous with the insured parcel. This is used most frequently when the buyer has already acquired a parcel of land in a separate transaction and is presently acquiring another parcel that he/she wants to make sure is contiguous with the first parcel.
h. Location – No Map – ALTA 22-06 insures against loss resulting from a particular building identified by street address not being located on the insured parcel on the date of the policy. This is typically used when a parcel has two addresses or there is confusion as to the proper address.
i. Restrictions and Covenants Violation insures against loss resulting from a final court order denying the right to maintain the existing improvements on the land because of the violation of a covenant, condition, restriction or plat building line which is show as an exception of Schedule B-II of the policy.
j. Survey** insures against loss resulting from the survey specifically identified in the endorsement not accurately depicting the land described in the title insurance policy. This endorsement should be requested every time the buyer obtains a survey.
k. Subdivision insures against loss resulting from the failure of the insured parcel to be a separate and lawfully created tract of land pursuant to applicable state and local laws.
l. Utility-Facility insures against loss resulting from utilities to the land not being located within permitted areas, such as easements and public rights of way. If any utilities serving the insured parcel are located within adjoining easements, it insures against loss resulting from termination of the easement by its grantor.
m. Condominium*** – ALTA 4.1-06 insures against loss resulting from several specific causes, including the failure of the insured parcel and the common elements to be part of a condominium; the failure of the condominium documents establishing the condominium to comply with the legal requirements of the applicable condominium statutes; and the failure of title by reason of a right of first refusal to purchase the unit and its common elements that was exercised or could have been exercised at the date of the title insurance policy.
**Routinely requested in commercial transactions regardless of situation
***Should be requested in connection with all condominium purchases
Each of the foregoing endorsements will require the payment of an additional fee (often negotiable) to the title company . The fee is dependent in part on the title company’s perception of the level of risk and how badly the title company wants the business. Each of the endorsements will require additional due diligence by the title company and, in some instances, additional documentation to be provided by the buyer or seller. It’s also important to remember that these endorsements are not standard among title insurers. When your attorney requests a “comprehensive” endorsement or a “condominium” endorsement from Title Company A, it may not read the same or provide exactly the same protection as the comprehensive endorsement or condominium endorsement from Title Company B. These are addenda to insurance contracts and the wording can be altered. Therefore, it is incumbent upon your lawyer to review the coverage provided in the requested endorsements and not take for granted that they will be consistent with that provided by other insurers or the wording of the ALTA standard endorsements.
In sum, not all title insurance coverage is the same. The quality of coverage you obtain will depend largely on the knowledge and diligence of the lawyer representing you in the transaction. If the lawyer is astute, he or she will thoroughly review the condition of title as shown by the title commitment, exception documents, survey and other factors that may arise in the course of the transaction, identify the title risks particular to the property you are acquiring and tailor the coverage, using available policy formats and endorsements, to protect you against both general risks and those that are specific to your property.