By George Bobo
Key Point. If you deal with transfer of real estate titles, you are going to buy a lot of title insurance but you’ll likely not know much about it.
The American Land Title Association
The origin of title insurance can be traced to an 1868 decision by the Pennsylvania Supreme Court which refused to find a lawyer liable for having given an incorrect opinion about title to real estate leaving the owner without recourse.[1] The first title insurance company was formed in 1876 in Philadelphia and other companies were soon created in many states. They were local companies and policy coverage varied greatly by each company. In the 1920’s several life insurance companies adopted a standard loan policy and each member company was required to issue that form. An industry trade group called the American Title Association adopted a standard title policy in 1929 modeled on the life insurance form. The American Title Association, later named the American Land Title Association (“ALTA”) thereafter created standard title insurance policies, and standard policies (“ALTA policies”), revised over time, are in use today by all national companies issuing title insurance in Georgia and also throughout the United States, with the exception of a very few states. Texas, Florida and Iowa have their own policy forms, but are roughly based on the ALTA policies. ALTA is the trade association for the title insurance industry.
ALTA publishes its standard policies for use by its members, and those standard policies have been approved by Freddie Mac, Fannie Mae, FHA and other governmental bodies involved in real estate lending. Market forces demand uniformity.
An Indemnity Agreement
A title insurance policy is not a guarantee of title subject to the exceptions set forth in the policy, but rather is an indemnity agreement. The logic of that approach can be seen by an example in which a forgery in a prior deed causes title to be void. It may be impossible for a title insurer to acquire title to the property and thereby make good on a guarantee of title if that were the policy requirement. Instead, the policy provides for payment of the actual loss sustained by the insured up to the policy limits. If there is no loss, there is no liability under the policy.[2] In addition to payment of the loss, the policy provides for payment of attorney’s fees incurred in defense of an insured title defect, which is often a major part of the overall financial impact on the insured.
A unique aspect of title insurance is that it covers loss arising from past events, such as forgery or unpaid liens, rather than future events such as fire, accident or natural disasters. Generally the policy insures against unknown title defects but known matters found as part of the title examination, such as easements and restrictive covenants of record appear as exceptions to coverage. If there is a problem with title revealed by the title examination, it must be cleared up prior to issuance of the policy or set up as an exception to coverage in the policy.
ALTA Commercial Policy Forms
ALTA publishes a number of standard title insurance forms, of which residential policy forms including the short form residential loan policy and others are a part. For our discussion of commercial title insurance, the ALTA Owner’s Policy (6-17-06) and ALTA Loan Policy (6-17-06) are our focus and are the title policies issued in connection with commercial property transactions. The policies provisions are divided into: (1) Covered Risks; (2) Exclusions From Coverage; and (3) Conditions of the policy. (Capitalized terms have the meaning defined in the title policies.) A copy of the ALTA Owners Policy (6-17-06) and Loan Policy (6-17-06) and a complete list of the Endorsement forms can be found on the American Land Title Association website. https://www.alta.org/policy-forms/
For many people, reading a title insurance policy or going to an all-night dentist are of equal rank. However, the policies are easy to read, although the nuances of exceptions to coverage and conditions to the policy require study to fully understand their impact.
ALTA Owner’s Policy Coverage
An Owner’s Policy (6/17/06) insures the owner of the property named in the policy against 10 covered risks listed as Covered Risks in the policy [3]. Among the Covered Risks (this list is not all-inclusive) are the following:
- Title being vested other than stated in Schedule A of the policy;
- Any defect in or lien or encumbrance on the title, including;
a. Forgery, fraud, undue influence, duress, incompetency, incapacity, or impersonation;
b. Failure of any person or entity to have authorized a transfer or conveyance;
c. A document affecting title not property created, executed, witnessed, or notarized;
d. Failure to perform those acts necessary to create a document by electronic means authorized by law;
e. A document executed under falsified, expired or otherwise invalid power of attorney;
f. A document not properly filed, recorded or indexed in the public records;
g. A defective administrative or judicial proceeding;
h. The lien of real estate taxes imposed on the title due or payable, but unpaid;
- Unmarketability of title;
- No right of access to and from the land
The Exclusions From Coverage [4] specifically provide that the company will not pay for certain matters, one being zoning violations unless those are insured under the Covered Risks. The Covered Risks cover zoning violations only if a notice has been recorded in the Public Records setting forth the violation or intention to enforce. Some of the Exclusions From Coverage in both owner’s and loan policies can be removed by policy Endorsements described below.
ALTA Loan Policy Coverage
The term “Loan Policy” is a misnomer. The Loan Policy (6-17-06) insures no aspect of the loan nor repayment of the loan by the borrower, but rather insures the lien against the real estate. The ALTA Loan Policy insures against 14 Covered Risks, including:
- All risks listed for Owner’s Policies above plus:
- Invalidity or unenforceability of the lien of the Insured Mortgage upon the Title, including those arising from a. through h. above;
- Lack of priority of the lien of the Insured Mortgage upon the Title over any other lien or encumbrance;
- Lack of priority of the lien of the Insured Mortgage upon the Title as security over statutory liens for services, labor or materials arising from construction of improvements or work related to the Land when the improvements are either (1) contracted for or commenced on or before the date of the policy, or (2) contracted for, commenced, or continued after the date of the policy if the construction is financed, in whole or in part, by proceeds of the loan secured by the insured mortgage that the insured has advanced or is obligated to finance on the date of policy to advance.
- This list is not all inclusive, and other risks are defined as Covered Risks in the Loan Policy.
The standard title insurance commitment contains a list of requirements which must be complied with before the policies (Owner’s and/or Loan) can be issued in order to get the title insurance against Covered Risks. See “Title Commitments” below for details.
Title Insurance Endorsements
A title insurance endorsement adds coverage to the policy either by deleting an exception to coverage listed in the standard policy form, or by adding a coverage against loss not otherwise listed as a covered risk in the policy. ALTA publishes approved endorsement forms. The current list includes 111 endorsements[5], a number of which apply primarily to residential policies. As to commercial policies, informed owners and lenders request endorsements to add coverage to offset the risk associated with how the property is zoned, mineral interests, restrictions on use, encroachments on easements, access and entry and others. Each endorsement to the title policy, whether an owner’s policy or a loan policy, has underwriting requirements that must be complied with, and gathering the information to support the endorsement may take much time. If you want title endorsements, talk with the issuing agent before making the request to understand what is needed to get the endorsements and be ready to supply the needed material. Lead time is necessary. Some endorsements require third party reports, including a land survey, an environmental site report, a zoning report, and / or a letter from the zoning authority having jurisdiction over the land.
The Title Insurance Commitment
ALTA has a form for that too. Before a title commitment can be issued, title to the property must be examined on the public records, which in Georgia include the records of the Clerk of Superior Court of the county in which the property is located, along with tax commissioner records and probate court records. The period of the required record search is 50 years from the date of filing of a reliable source of title such as a warranty deed or a probate proceeding vesting title. Title companies allow the search period to be shortened by reliance on an existing owner’s policy if one can be found. From the examination a report of title is prepared listing those matters which constitute claims against title, such as outstanding mortgages and liens, unpaid property taxes, law suits, income tax liens, mechanic’s liens, inconsistencies in legal descriptions and others. Some of those objections may be eliminated by careful study, but those that are not eliminated are listed as “Requirements” in the title commitment to be dealt with prior to closing, such as payment of outstanding mortgages, or as “Exceptions” to title which cannot be eliminated and will continue to affect title, such as easements and restrictive covenants.
The standard title policy forms include an exception for unfiled mechanic’s liens. Lenders routinely require that the mechanic’s lien exception be removed from the loan policy. If no work has been done or materials delivered to the property within the past 90 days before closing, a sworn affidavit to that effect by the current owner may form the basis for removal of that standard exception. However, where work has been done within that 90 day period, an affidavit by the general contractor listing all the suppliers of services, labor and materials to the property and lien waivers from those on the list along with a lien waiver from the general contractor are required. Those can be troublesome to come by and delay closing by days or weeks.
Standard practice in Georgia is for the agent issuing the title commitment to mark the title commitment at closing to eliminate the Requirements that have been satisfied and to show the effective date of the commitment as the time and date of recording of the deed of transfer (warranty deed or limited warranty deed) and / or the deed to secure debt.
Title Premiums
Different states use different systems for setting title insurance premium rates. In Texas, Florida and New Mexico the insurance commissioner sets title insurance rates and those must be charged by all insurers in those states [6]. The remainder of states use some other form of rate setting, usually by the title insurance companies filing rates with the insurance commissioner of those states. In 2009 the Georgia Insurance Commissioner mandated that title companies doing business in that Georgia file their rates with the commissioner and charge them uniformly without variance or discount.[7] As a result, title insurance rates aren’t subject to negotiation in Georgia. The title companies can change the rates they charge by refiling the rates with the Insurance Commissioner.
Compared with other states, Georgia’s rates are pretty low. As an example, the rate on a $1,000,000 owner’s title policy in Florida is about $5,100 for a sale without endorsements. The premium in Georgia for a $1,000,000 owner’s policy without endorsements is approximately $2,000 depending on which title company issues the policy. These examples assume no loan policy is issued. Florida rates are fixed by the Florida Insurance Commissioner whereas rates in Georgia are decided by each title company and submitted to the Georgia Insurance Commissioner in a free competition environment – market forces at work.
There are four national title insurance companies operating in Georgia and nationally they account for over 80% of title insurance issued each year.[8] Title insurance rates in Georgia don’t vary much from company to company, so shopping based on rates is generally of little use.
In addition to the “basic” or “standard” rate for owner policies, there are discounted rates for refinance loans, called refinance rates, reissue rates, and substitution rates. Not every refinance qualifies for a discount rate, and the rate manuals are not fully explanatory. Title insurance agents usually contact the company to learn those final discounted rates.
Premiums for endorsements are also imposed based on the various risks assumed by the company in issuing the endorsements. Those rates are often combined into a single package and the premium one sees on a closing statement is for the entire package.
Finally, there is a special rate available if both an owner’s and loan policy are issued simultaneously. The premium is based on the larger of the insured amounts (sale price or loan amount) and the premium for the smaller policy is substantially less, often $100 or so depending on the title insurance company issuing the policies.
Footnotes:
1. Watson v Muirhead, 57 Pa. 161 1868 WK 7160 (1868) See a discussion of Watson and the beginning of the title insurance industry in Joyce D. Palomar, Title Insurance Law Sect. 1:3.
2. See Neilsen, Sect 9.1 Nature of Assurances Provided.
3. See American Land Title Association Owner’s Policy (6-19-2006) Covered Risks for a complete list.
4. Id. Exclusions From Coverage
5. The complete list of ALTA Endorsement forms can be found at https://www.alta.org/policy-forms/
6. See the National Association of Insurance Commissioners’ Compendium of State Laws on Insurance Topics, Rate Filing Methods for Property/Casualty Insurance, Workers’ Compensation, Title, compiled as of November 2005.
7. https://www.seyfarth.com/news-insights/no-more-negotiated-title-insurance-rates-in-georgia-effective-june-1-2009.html
8. See 2015 Title Premiums Market Share: Company Summary in Title News, May 2016, Volume 96, Number 5, Page 28.