title insurance coverage: what real estate counsel must...

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Presenting a live 90-minute webinar with interactive Q&A

Title Insurance Coverage:

What Real Estate Counsel Must Know Latest Developments in ALTA Coverage and Endorsements for Owners and Lenders

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, NOVEMBER 28, 2017

Sarah D. Cline, Attorney, Shulman Rogers Gandal Pordy & Ecker, Potomac, M.D.

Danielle Dolch, Attorney, Shulman Rogers Gandal Pordy & Ecker, Potomac, M.D.

Michael R. O'Donnell, Partner, Riker Danzig Scherer Hyland & Perretti, Morristown, N.J.

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Title Insurance Coverage: What Real Estate Counsel

Must Know

Latest Developments in ALTA Coverage and Endorsements for

Owners and Lenders

The Title Policy consists of several parts:

(1) The Coverage and Exclusions;

(2) The Exceptions;

(3) The Conditions and Stipulations of coverage; and

(4) Endorsements.

Covered Risks

Explains what is insured and excluded in every policy.

Schedule A

Includes general policy information, including the amount of the insurance, the name of the insured and the property covered by the policy.

Schedule B

Contains “Exceptions” from coverage including standard exceptions and special exceptions that are unique to the insured land such as specific liens and encumbrances the insurer found on the property.

Conditions and Stipulations

Define policy terms and address various matters including claims procedures, and the insured’s duty to give prompt notice of any claim and duty to cooperate with the title insurer.

November 27, 2017 6

Michael R. O'Donnell Partner Riker Danzig Scherer Hyland & Perretti LLP

Sections of the Basic Policy

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Any loss or damage incurred by the insured by reason of:

Title to the estate vested in another;

A lien or encumbrance on the title not excluded or excepted from the policy;

Unmarketable title;

Lack of a right of access to and from the land; or

Violation of any law, ordinance, permit, or governmental regulation (including zoning) if a notice of violation is recorded in the Public Records as defined by Policy.

November 27, 2017

Michael R. O'Donnell

Partner

Riker Danzig Scherer Hyland & Perretti LLP

What Is Insured (Owner’s Policy)


Partner


10

Access

Fid. Nat’l Title Ins. Co. v. Woody Creek Ventures, LLC, 830 F.3d 1209 (10th Cir. 2016) (affirming that 30-year right-of-way to access property does not render title unmarketable, even if the lack of a permanent right of access “lessens the economic marketability”).

Kimble v. Land Concepts, Inc., 345 Wis. 2d 60, rev’d on other grounds, 353 Wis. 2d 377 (2014) (finding coverage for the insured when access to property via easement had terminated).

Zoning

Feit v. Donahue, 826 P.2d 407, 410 (Colo. App. 1992) (house sold with “an existing zoning violation which eventually resulted in the revocation of the certificate allowing occupancy” rendered title unmarketable and was covered by policy).

Somerset Sav. Bank v. Chicago Title Ins. Co., 420 Mass. 422 (1995) (denying coverage for undisclosed zoning restriction that required property owner to obtain consent from railroad before constructing condominiums).

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Partner


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Loss or damage incurred by the insured by reason of: The invalidity or unenforceability of the lien of the insured mortgage

upon the title; The priority of any lien or encumbrance over the lien of the insured

mortgage; Lack of priority of the lien of the insured mortgage over any

statutory lien for services/labor/materials for work begun before the policy was issued;

The failure of an assignment of mortgage as shown in the title commitment to vest title to the insured mortgage in the named insured assignee free and clear of all liens; or

Violation of any law, ordinance, permit, or governmental regulation (including zoning) if a notice of violation is recorded in the Public Records as defined by Policy.

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Partner


What Is Insured (Lender’s Policy)

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BV Jordanelle, LLC v. Old Republic National Title Insurance Company, 830 F.3d 1195 (10th Cir. 2016) (affirming that a title insurance policy did not cover a loss caused by an assessment levied against the insured property after the policy was issued, even if the assessment was based on a Notice of Intention to levy assessments that pre-dated the policy).

First Cmty. Bank v. Commonwealth Land Title Ins. Co., 2014 WL 4720153 (M.D. La. Sept. 22, 2014) (holding insured lender entitled to coverage when property had been encumbered by another mortgage superior to insured’s mortgage).

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Partner


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Exclusions are standardized limitations on the coverage of a title policy that define title risks that a policy generally does not cover.

Unlike with exceptions, exclusions cannot be removed.

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EXCLUSIONS IN A TITLE

POLICY

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Exclusion 3(a): This exclusion bars recovery for defects “created, suffered, assumed or agreed to” by the insured.

Under the language of the exclusion, defects are created, suffered, assumed or agreed to by the insured where they arise from the insured’s deliberate act or omission. See Bank of Am. v. Chicago Title Ins. Co., 2017 WL2215012 (N.D. Ill. 2017).; see also Feldman v. Urban Commercial, Inc., 87 N.J. Super. 391, 404 (App. Div. 1964).

This exclusion is intended to prevent the title insurer from being liable for matters caused by the insured’s intention, illegal, or inequitable conduct.

This cannot be simple negligence on the part of the insured.

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Exclusion 3(a)

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Plaza Home Mortg., Inc. v. Fid. Nat. Title Ins. Co., 145 A.D.3d 1048 (N.Y. 2d Dept. 2016).

The insured lender loaned money to borrowers and, in exchange received a mortgage on the borrower’s property. The title insurance company issued a policy to the lender insuring the first-lien position of the mortgage. During the closing, however, the lender wired the proceeds to the borrowers’ counsel with instructions to perform certain closing duties, including paying off the prior mortgage on the property. After discovering that the prior mortgage was not paid off and that its mortgage was not the first lien on the property, the insured filed a claim with the title insurance company, which was denied. The Supreme Court held that, by wiring funds to the borrowers’ attorney and asking the attorney to perform certain duties, the insured had designated the attorney as its settlement agent and created the defect.

But see Fifth Third Mortg. Co. v. Chicago Title Ins. Co., 692 F.3d 507 (6th Cir. 2012) (title insurer cannot deny coverage under 3(a) by claiming that the insured lender created the defect through its careless underwriting and that it should have discovered that the purported borrower did not own the property).

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Case Examples

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Exclusion 3(b): This exclusion bars recovery for defects not known to the insurer and not contained in the public records, but known to the insured and not disclosed to the insurer in writing before the issuance of the policy.

This exclusion “is akin to a notice requirement for an insured. Its effect is to impose on the insured a duty to disclose to the insurer any defects of which the former has knowledge. . .” Barlow Burke, Law of Title Insurance, §4.05 (3d. Ed. 2016 supp.) (citation omitted)

Courts have interpreted 3(b) to require that the insured have actual knowledge of the defect.

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Partner


Exclusion 3(b)

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Case Examples

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Partner


Manchester Fund, Ltd. v. First Am. Title Ins. Co., 332 N.J. Super. 336 (Law Div. 1999) The insured brought action against the title insurer to recover the costs of

defending a civil forfeiture action. The court found that the insurer did not have to provide coverage under 3(b) exclusion where the insured’s attorney learned, before issuance of the policy, that a mis-indexed lis pendens existed on the property, but failed to inform the insurer.

Carrington v. Chicago Title Ins. Co., 2015 WL 6758365 (N.J. Super. Ct. App. Div. Nov.

6, 2015) The insured sought coverage from the title insurer when her siblings filed a

complaint claiming that they had an agreement that the insured would purchase the property in her name only and convey it to the siblings at a later date. The court affirmed that this alleged defect was known to the insured and not the insurer and excluded under 3(b).

1031 Props., Inc. v. First Am. Title Ins. Co., 301 P.3d 500 (Wash. Ct. App. 2013) The insured’s claim was not barred by 3(b) because it observed power lines

across the property, because the observation of the power lines did not mean that the insured had actual knowledge of the recorded easement allowing the power lines.

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Exclusion 3(c) bars coverage for: “Defects, liens, encumbrances, adverse claims or other matters . . . resulting in no loss or damage to the insured claimant.”

The analysis of whether there is a loss differs between owner’s policies and lender’s policies:

For Owner’s Policies: “Title defects and liens directly and adversely affect the property owner because the owner is entitled to the full market value of the property and that value is immediately reduced by outstanding title defects and liens.” Bohr v. First Am. Title Ins. Co., 2008 U.S. Dist. LEXIS 111191 (M.D. Fl. July 30, 2008)

For Lender’s Policies: “A mortgagee’s loss is measured by the extent to which the insured debt is not repaid.” Cale v. Transamerica Title Insurance, 225 Cal. App.3d 422 (Ct. App. 1990)

Thus, “superior liens or title defects in claims may exist which reduce the market value of the security property . . . yet result in no loss or damage to the insured mortgagee.” Id.

A lender is only indemnified “against loss with respect to the secured indebtedness, not a diminution of profits potentially obtainable from the resale of the property.” Id.

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Exclusion 3(c)


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Case Examples

Green v. Evesham, 179 N.J. Super. 105 (App. Div. 1981): The title insurance company

issued a policy to the insured lender but overlooked a prior mortgage on 33 of the 2,000

acres involved in the transaction. At a sheriff’s sale, the insured ended up acquiring the

deed to all of the land. The land was appraised at $19,143,500, which was well in excess

of the $15,111,063.90 due on the loan. The court held that the insured was not entitled to

recover where there was no showing “that mortgaged property was thereby reduced in

value less than the balance of the underlying debt or that, because of the prior lien,

[defendant] failed to recover full amount of the debt.”

Summonte v. First American Title Ins. Co., 180 N.J. Super 605 (Ch. Div. 1981): The

insured purchased property that was subject to a lien of judgment against the initial sellers

at the time of the purchase. The insurer argued that since the insureds had not had to

spend any money as a result of the judgment, they did not suffer a loss and the insurer

was under no obligation with respect to the lien. The court held that the insurer was

obligated to remove the defect. According to the court, “[t]he properties, whether valued

at the time of purchase or at some other time, are worth less than they would otherwise

be by the amount due on the judgment . . . Consequently, the insured suffered a loss

immediately upon the acquisition of title and that loss was in every sense ‘actual.’”

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Exclusion 3(d) excludes coverage for title defects “attaching or created subsequent to Date of Policy”

Cmty. Credit Union v. AmeriTitle & Abstract, Inc., 822 N.W.2d 737 (Wisc. App. 2012) (holding that insured lender’s claim regarding lack of access was barred because the property was accessible through a temporary easement at the time policy was issued, regardless of the fact that the easement was set to terminate 18 months later).

Carstensen v. Chrisland Corp., 247 Va. 433 (1994) (no coverage when insured was sued for an easement by necessity, as it would have been created after the Date of Policy)

However, for an additional premium, the 2013 Homeowner’s Policy of Title Insurance provides expanded coverage, including for post-policy forgeries or encroachments.

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Exclusion 3(d)


Partner


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Exclusion 3(e) excludes a loss which would not have been sustained if the insured claimant had paid value for title or for the insured mortgage

“[F]ailure of consideration for the [] mortgage was not a covered risk under the title insurance policy” Gerrold v. Penn Title Insurance, 271 N.J. Super. 50 (App. Div. 1994)

First American Title Ins. Co. v. Xwarehouse Lending Corp., 177 Cal. App. 4th 106 (Ct. App. 2009) (warehouse lender for fraudulent loans was not an insured under the policy)

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Partner


Exclusion 3(e)

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Schedule A: Who Is Insured Under an Owner’s Policy?

• Coverage often terminates upon sale or voluntary transfer, but continues to successors “by operation of law,” to entities wholly-owned by the insured, entities that wholly own the insured or an entity under the same ownership as the insured.

• See Shotmeyer v. New Jersey Realty Title Ins. Co., 195 N.J. 72 (2008) (interpreting a 1981 policy and holding that coverage terminated upon the sale of the property from one partnership to another despite the fact that the same two brothers controlled both).

• Under the 2006 policy, the Shotmeyer insured’s coverage would have continued because the sale was to one who “is wholly-owned by an affiliated Entity of the named Insured, provided the affiliated Entity and the named Insured are both wholly-owned by the same person or Entity.”

• New York’s Title Insurance Rate Manual mandates continued coverage if the insured property is transferred “to a member of the named insured’s immediate family as a gift, for no consideration.”

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Schedule B: Standard Exceptions and Special Exceptions

Five standard exceptions are:

Exceptions for rights of parties in possession; Encroachments, boundary, and other matters that an accurate

survey would disclose; Easements not shown by the public records; Construction and worker’s compensation liens; and Taxes that are not yet liens on the public records.

Examples of special exceptions include: easements and rights of way

that are shown in the title search, any encroachment discovered and

not corrected, old land grants, as they are part of the ownership

history, and subdivision restrictions or covenants, as they are

recorded and cannot be changed.

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EXCEPTIONS IN A TITLE POLICY

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Schedule B: Standard Exceptions and Special Exceptions

Parties in Possession Exception

“The rationale for the exception, at least in part, is that possession of land

should put the insured on notice of an adverse interest.” Zimmerman v.

Chicago Title Ins. Co., 28 S.W.3d 584, 586 (Tex. App. 1999) (denying coverage

and explaining that “[t]he character of possession sufficient to give an insured

notice is that which is open, visible, unequivocal, exclusive and actual rather

than constructive.”).

Survey Exception

If the defect can be found in the public records, the survey exception will not

be applied. See McDaniel v. Lawyers’ Title Guaranty Fund, 327 So.2d 852 (Fla.

Dist. Ct. App. 1976) (holding that a recorded utility easement running through

the insured’s property was covered despite survey exception).

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EXCEPTIONS IN A TITLE POLICY

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All policies contain a section on Conditions.

This section contains critical definitions of terms such as “Insured,” “Knowledge,” “Public Records” and “Unmarketable Title”.

The Conditions section further define the insurer and insured’s respective duties and how to measure losses under the policy.

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Conditions of the Policy

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A Loan Policy’s limits are defined by Section 8 of the Conditions of the Policy as the lesser of:

the policy amount;

the indebtedness owed, or

the difference in the value of insured interest with and without the defect.

The insurer “is not required to indemnify a mortgagee upon the mere discovery of a title defect since the mortgagee will not sustain a loss unless the debtor defaults and the mortgagee’s real estate collateral is worth less than the amount of the remaining debt”

See Exclusion 3(c)

An Owner’s Policy’s limits are defined by Section 8 of the Conditions of the Policy as the lesser of:

the policy amount; or

the difference in the value of insured interest with and without the defect.

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Claim Limits and Valuation

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The Insurer has several options in resolving your claim as defined by Sections 5 and 7 of the Conditions of the Policy:

Pay/Tender Payment of Amount of Insurance or Purchase Indebtedness

Pay/Settle with Third-Parties or Insured Claimant

No further obligation is owed if the insurer exercises any of the above options

Defend/prosecute any action

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You’ve Made a Claim: Now What

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Many insureds want payment under the policy shortly after making the claim.

However, pursuant to the Conditions of the Policy, a title insurer may opt to “pursue [ ] litigation to a final determination by a court of competent jurisdiction and . . . in its sole discretion, to appeal any adverse judgment or order.” See Policy, Conditions at No. ¶5(c).

This means that, where an insurer has opted to defend the underlying suit and attempts to clear title or assert all valid defenses on behalf of its insured, the insured is not entitled to have its loss paid prior to a final resolution of the underlying matter. November 27, 2017


Insurer’s Rights to Defend/Prosecute

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The insurer has the right to defend up through appeal, despite any perceived burden on the insured resulting from the length of the litigation.

This is because “[i]f [a] loss were payable before the litigation was concluded, the insurer would be precluded from exercising its option to clear title, or pursu[e] valid defenses on the insured’s behalf when sued.”

Courts have found, however, that interest accruing while the insurer defends is properly collectable as part of a claim.

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Insurer’s Right to Defend/Prosecute

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The insured’s duty to cooperate is set out in (1) Conditions: Duty of Insured Claimant to Cooperate (Section 6 of the Policy); and (2) Conditions: Proof of Loss or Damage (Section 4 of the Policy):

The insured has a duty to “assist insurers in the conduct and defense of actions.”

This includes the use of the “insured’s name” and the “obligation to sign pleadings brought by the insurer.”

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Insured’s Duty to Cooperate

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Role of the legal description: Case Studies

Schedule A, Section 4 describes the land

that is being insured. Not only is it

important that this language accurately

describe the real property, it is also

important that this description covers

everything that the insured (whether an

owner or lender) believes they are

acquiring an interest in. 42

Covered Risk No. 1

1. Title being vested other

than as stated in Schedule A.

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House built on wrong lot

In 2012, Mark and Brenda Voss bought an unimproved lot in a

gated, waterfront community on Florida’s eastern coast. They then

hired Keystone Homes to build a three-story, 5,000 square foot

vacation rental for $680,000.

Keystone built the home, and the Vosses started renting it out.

After the house was completed, a surveyor working on another

property down the street discovered that the house was built on the

neighboring lot, rather than the lot the Vosses own.

Keystone alleged that the surveyor it had hired to stake out the

Voss property staked the wrong lot, and Keystone relied on those

stakes in building the Voss’s home.

Case Study: House Built on Wrong Lot

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Title Policy Endorsements

Endorsements modify the standard policy provisions, and are used to provide the insured with additional coverage not contained in the standard policy. Additional underwriting is required prior to the issuance of an endorsement, and endorsements may be highly negotiated between the insured and the insurer.

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ALTA Non-Imputation Endorsements (15 series)

15-06 (Nonimputation – Full Equity Transfer): this Endorsement form is used when the entire beneficial interest of the entity holding title and named as the insured on Schedule A has been transferred for value.

15.1-06 (Nonimputation – Additional Insured): this Endorsement is used when only a portion of the beneficial interest of the entity holding title and named on Schedule A as the insured has been transferred and the incoming beneficial owner is identified as an additional insured.

15.2-06 (Nonimputation – Partial Equity Transfer): this Endorsement is used when the incoming beneficial owner request to be the insured in its own policy, and its interest has been transferred for value.

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• Exclusions from Coverage 3(a) and (b) in the ALTA Owner’s and Loan policies exclude from coverage matters created, suffered, assumed, or agreed to by the insured or known to insured, but not to the insurer, and not disclosed by the public records.

• The Non-Imputation Endorsement series limit the scope of these exclusions. Specifically, the insurer is agreeing not to assert these Exclusions as defenses to coverage for matters that would be legally binding on a business entity under the law of imputed knowledge.

• The Endorsements further clarify that the insured will not raise as a defense the failure to utilize the protection of recording acts, which is the purpose of Exclusion 3(e). This series of endorsements are usually requested in situations where no deed will be recorded, thereby precluding this protection.

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Before agreeing to provide these endorsements, the insurer will require assurances (in the form of an affidavit and indemnity agreement) that there are no matters known by the party from whom knowledge is to be imputed to the insured entity. The insurer may also require evidence that the affiant has completed appropriate due diligence to support the assertions made in the affidavit. The endorsement will provide coverage to the “innocent” party only.

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ALTA Endorsement 25-06 – Same As Survey

This endorsement insures that the land as described in Schedule A is legally identical to the land as described in the survey identified in the endorsement, even if there is different language in each of the descriptions.

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ALTA Endorsement 17-06 – Access and Entry

• The ALTA policies insure against loss or damage by reason of a lack of “a right of access to and from the Land.” however, the policies do not insure a particular means or quality of access.

• Further, the definition of “Land” in the policies specifically excludes property beyond the area described in Schedule A. “Land” is defined so as not to include any “right, title, interest, estate or easement in abutting streets.”

• The 17 Series of ALTA Endorsements specifically insure the location, use, and quality of access.

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ALTA Contiguity Endorsements – 19 Series

• The ALTA policies do not insure contiguity.

• The Series 19 Endorsements add language to insure contiguity.

• The ALTA Form 19.1-06 provides coverage that the Land in the policy is contiguous to a parcel not insured in the policy (for example, the neighboring parcel; i.e., the endorsement insures that there are no gaps between the subject parcel and the adjoiners).

• The ALTA Form 19-06 provides insurance that: (a) each parcel, in a policy insuring multiple parcels, is contiguous to at least one other parcel insured by the policy; or (b) if some parcels are not contiguous to at least one other parcel, that certain parcels are contiguous to certain other parcels.

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ALTA Zoning Endorsements – 3 Series

• As a general rule, title insurers do not insure development rights. The ALTA policies do not insure that a lot is buildable, or that the land can be developed for a particular use. The 3 Series of Endorsements provide very limited insurance on certain zoning issues.

• ALTA Endorsement Form 3-06 (Zoning – Unimproved Land) provides insurance with respect to the zoning classification covering the Land and the uses permitted on the Land in that zone. It also insures against loss if any of those uses are prohibited by a court order that invalidates the zoning ordinance.

• ALTA Endorsement 3.1-06 (Zoning-Completed Structure) provides the same coverage as above, and also insures against losses from court orders which: (a) prohibit use of the Land for specified purposes allowed by the zoning because certain physical characteristics violate the ordinance; and (b) require removal or modification of the structure located on the Land due to these violations.

• The language of both these endorsements will mirror the zoning ordinance. 63

ALTA Endorsement 16-06 (Mezzanine Financing)

•Only issued where the transaction involves a mezzanine loan (a loan secured by the pledge of an ownership interest in the entity that is the owner of the real property)

•Only issued with an owner’s policy

•No loan policy is issued because the mezzanine lender does not secure an interest in real property

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Summary of coverage:

• Makes the mezzanine lender an assignee of payments under the owner’s policy

o The mezzanine lender is not named as an additional insured in paragraph 2 of the endorsement

• Provides non-imputation coverage to the mezzanine lender in paragraph 4 of the endorsement

• Includes “fairway” coverage in paragraph 5 of the endorsement, acknowledging that coverage will not be adversely affected because of transfer of ownership interests (direct or indirect) in the insured

• Expressly reserves a right to interplead in paragraph 7 of the endorsement

• Reserves the title insurer’s subordinate rights of subrogation and indemnity after the mezzanine lender has recovered its indebtedness in paragraph 8 of the endorsement

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Underwriting Requirements:

• The Company must have an owner’s policy in the current owner

• Execution of a Non-Imputation Affidavit by the insured under the owner’s policy

• Signature of the insured on the endorsement to evidence its consent (or obtain a separate letter from the insured consenting to issuance of the mezzanine endorsement)

• Name the mezzanine lender in paragraph 1 of the endorsement and obtain the signature of the mezzanine lender on the endorsement

• Obtain underwriter approval to issue the endorsement

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ALTA 32 Construction Endorsements

• ALTA 32 construction endorsements are a series of endorsements that provide construction lenders coverage against mechanics’ lien risk arising out of services, labor, material, or equipment performed or supplied in the past

o ALTA 32-06 (Construction Loan – Loss of Priority)

o ALTA 32.1-06 (Construction Loan – Loss of Priority – Direct Payment)

o ALTA 32.2-06 (Construction Loan – Loss of Priority – Insured’s Direct Payment)

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•Only available for loan policies where the underlying indebtedness is a construction loan with Construction Loan Advances (as defined in the endorsement) occurring after Date of Policy

•May be issued on improved or unimproved commercial or residential property

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•The ALTA 32 series of endorsements are intended to work as combinations – one endorsement from the ALTA 32 series (either ALTA 32-06, 32.1-06, or 32.2-06) is paired with the ALTA Endorsement 33-06 (Disbursement)

•Only one endorsement from the ALTA 32 series is issued, but new ALTA 33-06 endorsements are typically issued in connection with each Construction Loan Advance

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• The ALTA 32 series of endorsements provide coverage against loss or damage resulting from the:

1. invalidity or unenforceability of the lien of the Insured Mortgage as security for each Construction Loan Advance made on or before a specified date

2. lack of priority of the lien of the Insured Mortgage as security for each Construction Loan Advance made on or before the Date of Coverage over any lien or encumbrance recorded in the Public Records and not excepted from coverage under Schedule B

3. lack of priority of the lien of the Insured Mortgage as security for each Construction Loan Advance made on or before the Date of Coverage over certain Mechanic’s Liens, if notice of the Mechanic’s Lien is not filed or recorded in the Public Records

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ALTA Endorsement 32-06 (Construction Loan – Loss of Priority)

• Provides coverage against loss or damage arising from the lack of priority of the lien of the Insured Mortgage as security for each Construction Loan Advance made on or before Date of Coverage over mechanics’ liens that have not been recorded in the Public Records, but only if the charges for the services, labor, materials, or equipment giving rise to the mechanics’ lien were designated for payment in documents supporting a Construction Loan Advance disbursed by or on behalf of the Insured on or before the Date of Coverage

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ALTA Endorsement 32-06 (Construction Loan – Loss of Priority)

• Does not insure against loss or damage by reason of any mechanic’s lien arising from services, labor, material, or equipment:

1.furnished after the Date of Coverage; or

2.not designated for payment in the documents supporting a Construction Loan Advance disbursed by or on behalf of the Insured on or before the Date of Coverage

• Does not require that the Company or its agent be involved in the disbursement of funds

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ALTA Endorsement 32.1-06 (Construction Loan – Loss of Priority –

Direct Payment)

• Provides coverage against loss or damage arising from the lack of priority of the lien of the Insured Mortgage as security for each Construction Loan Advance made on or before Date of Coverage over mechanics’ liens that have not been recorded in the Public Records, but only if the mechanics’ lien claimant was paid directly by the Insurer, or by the Insured with the Insurer’s written approval on or before the Date of Coverage as defined in the endorsement

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Direct Payment)


1.furnished after the Date of Coverage; or

2.to the extent that a Mechanic’s Lien claimant was not directly paid by the Company or by the Insured with the Company’s written approval

• The Company or its agent will be involved in the direct payment to specific mechanic’s lien claimants - either by making the payment or by approving it

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Insured’s Direct Payment) • Provides coverage against

loss or damage arising from the lack of priority of the lien of the Insured Mortgage as security for each Construction Loan Advance made on or before Date of Coverage over mechanics’ liens that have not been recorded in the Public Records, but only if the mechanics’ lien claimant was paid directly by the insured or by another person on the Insured’s behalf on or before the Date of Coverage as defined in the endorsement

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Insured’s Direct Payment)


1.furnished after the Date of Coverage; or 2.to the extent that a Mechanic’s Lien

claimant was not directly paid by the Insured or on the Insured’s behalf

• Does not require that the Company or its agent be involved in disbursement of funds

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• Endorsement should be used only for a loan policy issued prior to or during construction

• The requirements for coverage will vary depending on the insurer and the transaction – the insurer may required lien waivers, indemnity bonds from the owners, payment and performance bonds from approved contractors, financial statements, and review of construction documents

• Follow any state-specific bulletin describing the requirements for requesting mechanic’s lien coverage on a loan policy

• Obtain underwriter approval to issue the endorsement

• Comply with the applicable guidelines for issuance of the ALTA Endorsement 33-06 (Disbursement)

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ALTA Endorsement 38-06 – Mortgage Tax

• This endorsement provides coverage to the insured lender in the event that the mortgage is recorded without payment of all taxes/stamps that are due to the appropriate taxing authority upon recordation. This endorsement provides that, if the deficiency is paid (either by the borrower or the insured lender), the insurer will insure against the invalidity, unenforceability, or lack of priority of the Insured Mortgage, resulting from the failure to pay the proper recording tax at the time of recording. No coverage is provided if the insured fails to remedy the tax deficiency on discovery or demand by the taxing authority.

81

ALTA Endorsement 20-06 – First Loss

• This endorsement modifies Condition 8 of the policy, by altering the criteria for determining when a loss is recognized under a loan policy. This endorsement is used only when there is more than one insured parcel.

• Loss is normally the difference between the value of the property with or without the defect, lien or encumbrance insured against. Under normal circumstances, a loss would be difficult to determine until the land was sold after foreclosure.

• This endorsement allows a loss to be recognized whenever a title defect materially impairs the value of and insured parcel, without requiring foreclosure of any of the insured parcels.

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ALTA Endorsement 12-06 (Aggregation – Loan)

85


• Also referred to as the “tie-in,” “cluster,” or “spreader” endorsement

• Issued where a single loan amount is insured by a number of parcels, and the mortgage is recorded in more than one jurisdiction

• Instead of issuing one policy, separate policies are issued for each property in lower amounts

• Only issued with loan policies

• Intended for use with fully improved commercial or residential properties

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• If multiple states are involved in the transaction, then there may be state laws or regulations which prohibit or limit the use of this endorsement in a given state

• Underwriting Requirements:

oObtain underwriter approval to issue the endorsement

oTwo or more loan policies must be issued by the Company (loan policies with other title insurance underwriters cannot be aggregated with policies issued by the Company)

oEach mortgage must state that it secures the entire loan amount

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ALTA 9 Endorsement Series: Restrictions, Encroachments, Minerals

• The “old” ALTA 9 endorsement provided coverage to an owner or a lender against three major title issues: (1) violations of recorded Restrictions, Easements and Agreements (REAs); (2) encroachments; and (3) mineral rights

• In 2012, the entire ALTA 9 series was revised as a result of the holding in Nationwide Life Ins. Co. v. Commonwealth Land Title Ins. Co., 579 F.3d 304 (3d Cir. 2009), amended, 586 F.3d 1011 (3d Cir. 2009) o The issue involved an option to repurchase that was contained in a Declaration of

Covenants, Conditions and Restrictions (CCRs) recorded against the subject property

o Schedule B of the title policy contained a general exception to the CCRs, and an ALTA 9 endorsement was issued

o The ALTA 9 endorsement provided certain affirmative coverage against loss caused by a violation of covenants or restrictions, in existence at Date of Policy, which are not excepted to in Schedule B of the policy

o The 3rd Circuit held that the general exception to the CCRs in Schedule B was not enough to remove the option to repurchase from the affirmative coverage provided in the ALTA 9 endorsement the title company should have “expressly excepted” to the option to repurchase in Schedule B

• Now, this coverage is provided in separate endorsements: ALTA 9 (covenants and private rights), ALTA 28 (encroachments), and ALTA 35 (mineral rights)

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Coverage Loan Policy Owner’s Policy

Covenants, Conditions, and Restrictions 9-06 (Restrictions, Encroachments, Minerals) 9.3-06 (Covenants, Conditions and Restrictions) 9.7-06 (Restrictions, Encroachments, Minerals – Land Under Development)

9.1-06 (Covenants, Conditions and Restrictions – Unimproved Land) 9.2-06 (Covenants, Conditions and Restrictions – Improved Land) 9.8-06 (Covenants, Conditions and Restrictions – Land Under Development)

Private Rights (assessments, options, rights of first refusal, rights of prior approval of future purchasers or occupants)

9.6-06 (Private Rights) 9.9-06 (Private Rights)

Encroachments over boundaries or onto easements

9-06 (Restrictions, Encroachments, Minerals) 9.7-06 (Restrictions, Encroachments, Minerals – Land Under Development) ALTA 28 Series

ALTA 28 Series

Mineral and Subsurface Rights 9-06 (Restrictions, Encroachments, Minerals) 9.7-06 (Restrictions, Encroachments, Minerals – Land Under Development) ALTA 35 Series

ALTA 35 Series

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ALTA Endorsement 9-06 (Restrictions, Encroachments, Minerals –

Loan Policy)

90

ALTA Endorsement 9.1-06 (Covenants, Conditions and Restrictions – Unimproved

Land – Owner’s Policy)

91

ALTA Endorsement 9.2-06 (Covenants, Conditions and Restrictions –

Improved Land – Owner’s Policy)

92

ALTA Endorsement 9.3-06 (Covenants, Conditions and Restrictions –

Loan Policy)

93

ALTA Endorsement 9.6-06 (Covenants, Conditions and Restrictions – Loan Policy)

94

ALTA Endorsement 9.7-06 (Restrictions, Encroachments, Minerals – Land Under Development – Loan Policy)

95

ALTA Endorsement 9.8-06 (Covenants, Conditions and Restrictions – Land

Under Development – Owner’s Policy)

96

ALTA Endorsement 9.9-06 (Private Rights – Owner’s Policy)

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ALTA 28 Series: Encroachments

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ALTA Endorsement 28-06 (Easement – Damage or Enforced

Removal)

Summary of Coverage

• Issued with loan and owner’s

policies

• Improved commercial or residential

property

• Provides coverage for damage to,

or enforced removal or alteration

of, existing buildings, which is

caused by the exercise of use or

maintenance rights associated with

specified easements

• Issuance of the endorsement may

require additional research and

review of an ALTA survey of the

property

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ALTA Endorsement 28.1-06

(Encroachments – Boundaries and Easements)

Summary of Coverage

• Issued with loan and owner’s policies

• Improved commercial or residential property

• Provides coverage for loss or damage arising

out of encroachments of existing buildings on

the Land onto adjoining parcels or onto any

easement located on the Land, or

encroachments onto the Land by existing

buildings on adjoining parcels, unless the

encroachment is identified in Schedule B

• Provides enforced removal coverage for

existing buildings that encroach onto

adjoining parcels or onto an easement

located on the Land, unless the

encroachment is identified in Schedule B and

listed in paragraph 4

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ALTA Endorsement 28.2-06 (Encroachments – Boundaries and

Easements – Described Improvements) Summary of Coverage


• Improved commercial or residential property

• N/A if the property is vacant

• Allows for a transaction-specific definition of

improvements

• Similar to the ALTA 28.1-06, but may provide

broader or narrower coverage depending on the

itemized list of improvements and the nature of

the possible encroachments

• The enforced removal coverage may be limited or

removed as to a known encroachment if it

identified as excepted from coverage under

paragraph 4 of the endorsement

• Issuance of the endorsement may require

additional research and review of an ALTA survey

of the property

101

ALTA Endorsement 28.3-06 (Encroachments – Boundaries and Easements – Land Under

Development)

Summary of Coverage


• Commercial or residential property that is either

vacant and being developed or improved and

having additional improvements constructed

• Similar to the ALTA 28.1-06, but modified to

provide coverage for “Future Improvements” which

are based upon “Plans” (as those terms are

defined in the endorsement)

• The enforced removal coverage may be limited or

removed as to a known encroachment if it

identified as excepted from coverage under

paragraph 4 of the endorsement

• Issuance of the endorsement requires review of an

ALTA survey of the property and review of the

detailed building and site improvement plans

102

ALTA 35 Series: Minerals and Other Subsurface

Substances

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ALTA Endorsement 35-06

(Minerals and Other Subsurface Substances – Buildings)

Summary of Coverage



property

• Provides coverage against enforced

removal or alteration of certain surface

improvements due to the exercise by a

subsurface estate owner of the right to

use the surface of the Land to extract any

subsurface substance

• “Improvement” is defined as only the

building(s) located on the Land at Date of

Policy

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(Minerals and Other Subsurface Substances – Improvements)

Summary of Coverage



property


removal or alteration of certain surface

improvements due to the exercise by a




• “Improvement” is defined as the

building(s) located on the Land at Date of

Policy, as well as other improvements

affixed to the Land at Date of Policy, such

as walkways and parking areas, but

excluding coverage for crops,

landscaping, lawns, shrubbery, or trees

105


(Minerals and Other Subsurface Substances – Described Improvements)

Summary of Coverage



property


removal or alteration of a transaction-

specific list of existing improvements

identified in the endorsement due to the

exercise by a subsurface estate owner of

the right to use the surface of the Land to

extract any subsurface substance

106


(Minerals and Other Subsurface Substances – Land Under Development)

Summary of Coverage


• Commercial or residential property that is

either vacant and being developed or

improved and having additional

improvements constructed


removal or alteration of certain existing

surface improvements and “Future

Improvements” (as defined in the

endorsement) due to the exercise by a




• Issuance of the endorsement requires

review of the detailed building and site

improvement plans for the contemplated

improvements

107

ALTA Endorsement 39-06 (Policy Authentication)


• Intended for use on improved or unimproved commercial or residential property

• Section 14(c) of the Conditions requires that “Any amendment of or endorsement to this policy must be in writing and authenticated by an authorized person, or expressly incorporated by Schedule A of this policy.”

• Endorsements are frequently issued without wet signatures to authenticate them

• The Company will not deny coverage solely on the basis that the policy or any endorsement thereto was issued electronically or lacks signatures in accordance with the Conditions of the policy

108

ALTA Endorsement 39-06 (Policy Authentication)


•Available for all policies in states where this form is not prohibited

•The policy must:

(a) have been issued electronically or lack signatures,

(b) be issued with a policy number, and

(c) include a Date of Policy.

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Sarah Cline gets deals done. A transactional attorney with significant experience in

both residential and commercial real estate deals, Sarah uses her litigation

background to anticipate potential problems in a real estate transaction, and to

address them before they cause undue delay or expense. Clients hire Sarah

because her attentive, holistic approach to real estate transactions ensures

smooth, efficient closings, and clients trust Sarah’s practical advice to resolve any

issues that may arise. While her legal practice encompasses a broad range of real

estate related areas, Sarah focuses her practice on the representation of buyers,

sellers and lenders in the acquisition, sale and financing of real estate.

Sarah D. Cline [email protected]

301-945-9245

110

Danielle Dolch focuses her practice on residential real estate transactions. She draws on her experience in residential real estate transactions to advise home buyers and sellers and real estate agents on a variety of real estate matters.

Danielle M. Dolch [email protected]

301-945-9246

111

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