I have represented title insurance companies and their insureds for well over a decade. The difference for clients between having valid title insurance and not having valid title insurance has amounted to hundreds of thousands of dollars in fees and costs defending lawsuits filed by their neighbors.
Some of the issues I have handled that have been covered by title insurance include: (1) a claim that there was a forgery in the chain of title 20 years before my clients purchased the property and thus they did not have valid title (after I took the plaintiff’s deposition, his attorney promptly dismissed the case); (2) a claim that a neighbor had adversely terminated a deeded exclusive easement for landscaping, recreation and fencing, and that the exclusive easement violated the Subdivision Map Act (we established at trial, with the judgment upheld on appeal, that the easement did not violate the subdivision Map Act, and the easement had not been terminated); and (3) a claim that although my client had been using a roadway on his neighbor’s property for over decade, my client had no valid easement and thus no access at all to his property (this case is still pending).
If a dispute arises with a neighbor, the expense of litigating such claims without insurance can be crushing. Having a valid title insurance policy can mean having the financial resources available to defend the ownership of your property or access to your property. Here are two key points to keep in mind both for yourselves and for your clients:
1. It Is Imperative That The Insured Keeps The Title Insurance Policy In A Safe Place.
Title insurers do not necessarily maintain records for very long. A senior claims counsel at Chicago Title Insurance Company recently advised me that they only keep their title files for seven years (although I have also been advised that partial policies, schedules A and B, may be kept on micro film or on a computer server). Given that title insurance claims can arise decades after the policy has been issued, this document retention practice could seriously impact insureds who do not keep careful track of their policies.
If a claim arises, you have to make sure that you have the actual title insurance policy or a copy of the original policy. The preliminary report, which one typically obtains in the course of escrow to identify encumbrances on the property, is not the title insurance policy. It is not an abstract of title and it does not constitute a warranty or guarantee that there are no unidentified encumbrances. You cannot sue the title insurer for negligence in failing to identify an encumbrance in the preliminary report. (Siegel v. Fidelity Nat. Title Ins. Co. (1996) 46 Cal.App.4th 1181, 1190–1191; but see Lee v. Fidelity Nat. Title Ins. Co. (2010) 188 Cal.App.4th 583, 596 [preliminary report can frame the insured’s expectations of coverage provided in the title insurance policy].)
It is the title insurance policy itself, and the insured and excluded items listed in the policy, that define the insurer’s obligations. (Glavinich v. Commonwealth Land Title Ins. Co. (1984) 163 Cal.App.3d 263, 270.) Keep the original of the policy in a safe deposit box or, if you do not have a safe deposit box, keep a copy at your office. You could also scan your title insurance policy (along with other important documents) and save them to a disc for offsite storage. If your only copy is at home and you have a fire, you may be out of luck.
If you require access to your property over another person’s property and you have lost your original policy, you might consider obtaining another title insurance policy. Once a dispute arises, it will be too late. You may not have had any problems with your neighbor for decades, but all it takes is for your neighbor to sell their property and the situation may change completely.
2. If The Insured Transfers The Property To Another Legal Entity Or A Trust, With Certain Policies You Must Obtain An Endorsement That Continues Coverage.
Ten years ago, I wrote an article in the Santa Barbara Lawyer Magazine concerning a case I handled for First American Title Insurance Company. In that case, the plaintiffs were a husband and wife. They had obtained a title insurance policy from First American when they purchased their property and they were the named insureds in their individual capacities. For tax reasons, after they bought the property, their attorney told them that they should transfer the property to a partnership. The only members of the partnership were the husband and wife. The attorney did not mention anything to them about title insurance.
After plaintiffs transferred the property, they had an issue with the City of Santa Barbara concerning the City’s plans to install a sidewalk on the front of their property. The result of the City’s plan was that plaintiffs had to move their entire house, at enormous cost, to the rear of the property. The City’s right to place sidewalks on the front of the property was not referenced as an exception in their title policy, so they submitted a claim. First American denied the claim because: (1) by transferring the property to the partnership, they had terminated their coverage; and (2) there were other, more general exclusions that applied. Plaintiffs then sued for breach of contract and bad faith, asking millions of dollars in damages.
The issue of policy termination by transfer arises because under the terms of the title insurance policy, the insurance is only available to the named insured and those who succeed by operation of law (e.g. heirs if the insured dies). If there is a voluntary transfer or sale, coverage does not follow. This generally is understood when a property is sold in an arms’ length transaction; the buyer gets title insurance in connection with the escrow. It becomes a problem when the insured makes a voluntary transfer to a related entity such as a partnership or trust.
In the case I handled for First American, the trial court granted summary judgment on the issue of policy termination, as well as on the general exclusions. The court of appeal upheld the judgment in an unpublished decision, specifically holding that transfer to the partnership terminated coverage. At the time, there were no published California appellate decisions on the issue. However, there has since been a published decision that makes clear that, with respect to certain title insurance policies, transferring the insured property terminates coverage for the named insured: Kwok v. Transnational Title Ins. Co. (2009) 170 Cal.App.4th 1562.
The insured in Kwok was an LLC. Its members dissolved the LLC and transferred title to themselves as trustees of a revocable family trust. Even though coverage would have continued if they had simply kept the property in their individual names (because they then would have been successors by operation of law), when they transferred the property to themselves as trustees of the family trust, coverage terminated. Under a number statutory or regulatory provisions, transfer of real property to a family trust is a legal non-event. However, in the context of title insurance such a transfer can be fatal to coverage.
Kwok expressly held that when the plaintiffs transferred the insured property into a revocable trust, the transfer terminated policy coverage. (Id. at 1571 [“Under the terms of the policy, appellants could only become insureds by operation of law. The transfer of property by an insured into a family trust is a voluntary act and not one that arises by operation of law.”].)
The lesson is that if there is a voluntary transfer of title, the insured needs to make sure that title insurance continues. Kwok involved a CLTA Standard Title Insurance Policy, which had a narrow definition of the named insured. However, there are certain title insurance policies, such as the ALTA policies that have a broader definition of “insured” which includes a transfer to an entity wholly owned by the insured or a trust for which the insured is the settlor for estate planning purposes. Coverage under those policies will continue after a property is transferred to a revocable trust.
For those policies with the narrower definition of “insured,” it is necessary to obtain a 107.9 endorsement, which adds the new vestee as an additional named insured, for a cost in the area of $100. The endorsement costs far less than the cost of a new policy. A new policy would be based on the current market value of the property, which the title insurance company would have to determine. Of course, if a dispute arises before the endorsement is issued, there will be no coverage for the claim; at that point the insured will lament the failure to spend a $100 and obtain a timely endorsement. Here is the form of the 107.9 endorsement:
CLTA Form 107.9-06 (03-09-07) – Additional Insured
ALTA – Owner or Lender
Attached to Policy No.
BLANK TITLE INSURANCE COMPANY
The policy is amended by adding as a named Insured therein _____________
This endorsement does not extend the coverage of the policy to any later date than Date of Policy, nor does it impose any liability on the Company for loss or damage resulting from (1) failure of such added Insured to acquire an insurable estate or interest in the Land, or (2) any defect, lien or encumbrance attaching by reason of the acquisition of an estate or interest in the Land by such added Insured.
This endorsement is issued as part of the policy. Except as it expressly states, it does not (i) modify any of the terms and provisions of the policy, (ii) modify any prior endorsements, (iii) extend the Date of Policy, or (iv) increase the Amount of Insurance. To the extent a provision of the policy or a previous endorsement is inconsistent with an express provision of this endorsement, this endorsement controls. Otherwise, this endorsement is subject to all of the terms and provisions of the policy and of any prior endorsements.
BLANK TITLE INSURANCE COMPANY
CLTA Form 107.9-06 (03-09-07)
ALTA – Owner or Lender
So, keep your title insurance policies safe and accessible and make sure that you do not voluntarily terminate their coverage. Valid, provable policies can make an enormous difference when a neighbor seeks to terminate your access or a relative of the person who sold you the property claims that they are the true owner.