Chapter 22: Title insurance

What is title insurance?

-Form of indemnity insurance - issued by: title insurance company -which holds harmless: 1.) named insureds against monetary loss caused by an encumbrance not listed in Schedule B of the policy and 2.) not known by the insured when the policy was issued.

What is a binder (aka commitment to issue)?

-written commitment of title insurer -to issue: title insurance policy in the future - usually acquired by buyer intending to resell described property

A policy of title insurance is broken down into 6 operative sections, including (6):

1. the risks of loss covered, called insuring clauses, which are based on a completely unencumbered title at the time of transfer 2.) the risks of loss not covered, comprised of encumbrances arising after the transfer or known to or brought about by the insured, called exclusions, which are a boilerplate set of title conditions 3. identification of the insured, the property, the vesting, the dollar amount of the coverage, the premium paid and the recording, called Schedule A 4. the recorded interests, i.e., any encumbrances affecting title and any observable on-site activities which are listed as risks agreed to and assumed by the insured and not covered by the policy, called exceptions, which are itemized for all types of coverage in Schedule B 5. the procedures, called conditions, for claims made by the named insured and for settlement by the insurance company on the occurrence of a money loss due to any encumbrance on title which is not an exclusion or exception to the coverage granted by the insuring clauses; and 6. any endorsements for additional coverage or removal of exclusions or pre-printed exceptions from the policy

Encumbrances on title which might diminish the property's market value include (7):

1.) CC&Rs, such as use restrictions running with the land 2.) trust deeds or other security devices 3.) reservation of a right of way 4.) easement 5.) encroachment 6.) lease; and 7.) pending condemnation action

Several types of title coverage are available, including (4):

1.) a CLTA standard policy; 2.) an ALTA owner's extended coverage policy; 3.) an ALTA-R policy; and 4.) an ALTA homeowner's policy.

For example, the agent of an equity purchase (EP) investor advises their client regarding inclusion in the EP agreement of a provision for title coverage in the form of either (3):

1.) a California Land Title Association (CLTA) policy; 2.) an American Land Title Association (ALTA) policy; or 3.) a title insurance binder.

Coverage under the broadly worded insuring clause of a policy of title insurance indemnifies the named insured for risks of loss related to the title due to (4):

1.) anyone making a claim against title to the real estate interest 2.) the title being unmarketable for sale or as security for financing 3.) any encumbrance on the title; and 4.) lack of recorded access to and from the described property

Title insurance policies are issued on one of several general forms used by the entire title insurance industry in California. The policies are issued to (3):

1.) buyers of real estate 2.) tenants acquiring long-term leases; and 3.) lenders originating mortgages secured by real estate

Physical conditions are existing uses visible on the property by observation, such as (4):

1.) canals 2.) highways 3.) irrigation ditches; and 4.) levees

Also covered by the ALTA homeowner's policy are losses incurred due to many other risks which may exist at the time of closing, including (9):

1.) correction of any pre-existing violation of a CC&R 2.) inability to obtain a building permit or to sell, lease or use the property as security for a mortgage due to a pre-existing violation of a subdivision law or regulation 3.) removal or remedy of any existing structure on the property when it was built without obtaining a building permit, excluding a boundary wall or fence; 4.) damage to existing structures due to the exercise of a right to maintain or use an easement; 5.) damage to improvements due to mineral or water extraction 6.) enforcement of a discriminatory CC&R; 7.) assessment of a supplemental real estate tax due to construction or a change of ownership or use occurring before closing; 8.) incorrect property address stated in the policy; and 9.) map attached to the policy showing the incorrect location of the property.

Chapter 22 Learning Objectives (5):

1.) explain how policy of title insurance indemnifies a person who acquires an interest in real estate against a monetary loss caused by an undisclosed encumbrance on title 2.) differentiate btwn various types of title insurance policies, endorsements and binders available 3.) comprehend 6 operative sections of title insurance policy 4.) understand dollar limitations placed on coverage provided under title policy exclusions 5.) implement insurer's process for settling a claim.

Almost all losses due to reduction in value of real estate below the policy limits arise out of an encumbrance. An encumbrance is any condition which affects the ownership interest of the insured, whether the interest insured is a (4):

1.) fee 2.) leasehold 3.) life estate; or 4.) the security interest of a lender

In addition to the risks covered by the ALTA owner's and ALTA-R policies, the homeowner's policy covers several risks to ownership which may arise after closing, including (5):

1.) forging of the buyer's signature on a deed in an attempt to sell or encumber the buyer's property; 2.) construction on an adjoining parcel of a structure which encroaches onto the buyer's property, excluding a boundary wall or fence; 3.) recording of a document which prevents the buyer from obtaining a secured mortgage or selling the property; 4.) claims of adverse possession or easement by prescription against the buyer's property; and 5.) claims by others of a right in the buyer's property arising out of a lease, contract or option unrecorded and unknown to the buyer at the time of closing.

A policy of title insurance is contract issued by a title insurance company agreeing to reimburse or hold harmless an insured person who acquires an interest in real estate against a monetary loss caused by an encumbrance on title that (2):

1.) is not listed in title insurance policy as an exception to coverage; and 2.) insured policy holder was unaware of when policy was issued

A title insurance company issuing a policy of title insurance has 2 underwriting options when its title search reveals an encumbrance affecting title (2):

1.) list the encumbrance in a preliminary title report (prelim), requiring the parties to either eliminate it or accept it as an exception to coverage in the policy of title insurance to be issued; or 2.) insure against the encumbrance by writing over the encumbrance — i.e., not listing it as an exception — and assuming any risk of monetary loss connected to it.

The coverage, exclusions and exceptions in the ALTA-R policy are similar to the ALTA owner's policy. In addition, the ALTA-R policy covers losses due to (2):

1.) mechanic's liens incurred by someone other than the buyer; and 2.) inability of the buyer to occupy the property when the residence violates the CC&Rs listed in the Schedule B exceptions in the policy or existing zoning.

All policies of title insurance on Schedule A set forth (5):

1.) property interest the insured acquired 2.) legal description of the insured property 3.) date and time coverage began 4.) premium paid for the policy; and 5.) maximum total dollar amount to be paid for all claims settled

The pre-printed standard exceptions in Schedule B of the CLTA standard policy eliminate coverage for losses incurred by the buyer due to (5):

1.) taxes or assessments not shown in the records of the county recorder, the county tax collector or any other agency which levies taxes on real property; 2.) unrecorded rights held by others which would have been discovered by the buyer on an inspection of the property or inquiry of persons in possession; 3.) easements or encumbrances which are not recorded and indexed by the county recorder; 4.) unrecorded encroachments or boundary line disputes which a survey discloses; and 5.) recorded or unrecorded, unpatented mining claims or water rights.

An ALTA policy includes a set of pre-printed exceptions setting forth risks assumed by the insured buyer, tenant or lender, including (4):

1.) taxes, assessments, liens, CC&Rs, or any other interests, claims or encumbrances which have not been recorded with the county recorder or tax collector on the date of closing 2.) any unrecorded and observable on-site activity which includes conflicts regarding boundary lines, encroachments or any other facts which a survey discloses 3.) unpatented mining claims; and 4.) all water rights

As the ALTA owner's policy covers off-record matters not covered under the CLTA standard policy, prior to issuance of a policy, the title company may require (2):

1.) the parcel to be surveyed; and 2.) those in possession of the property to be interviewed or estopped.

Before an ALTA homeowner's policy is issued by a title insurer, two requirements need to be met (2):

1.) the property needs to be improved with a one-to-four unit family residence; and 2.) buyer needs to be a natural person, not an entity such as a corporation, limited liability company (LLC) or partnership.

Additionally, the CLTA standard policy (as well as the ALTA policy) protects the insured against:

1.) the unmarketability of title or the inability to use it as security for financing 2.) lack of ingress and egress rights to the property; and 3.) losses due to the ownership being vested in someone other than the buyer.

All title insurance policies contain a general exclusions section. The exclusions section eliminates from coverage those losses incurred by the insured buyer, tenant or lender due to (6)

1.) use ordinances or zoning laws 2.) unrecorded claims known to the insured, but not to the title company 3.) encumbrances or adverse claims created after the date of the policy 4.) claims arising out of bankruptcy or due to a fraudulent conveyance to the insured 5.) police power and eminent domain; and 6.) post-closing events caused by the insured

Chapter 22 Key Terms (11):

11.) title insurance 1.) abstract of title 2.) binder 3.) encumbrance 4.) exception 5.) exclusion 6.) joint protection (JP) policy 7.) preliminary title report (prelim) 8.) proof-of-loss statement 9.) Schedule A 10.) Schedule B

What is an encumbrance?

A claim or lien on title to a parcel of real estate, such as property taxes, assessment bonds, trust deeds, easements and covenants, conditions and restrictions (CC&Rs).

What is a preliminary title report (prelim)?

A report constituting a revocable offer by a title insurer to issue a policy of title insurance, used by a buyer and escrow for an initial review of the vesting and encumbrances recorded and affecting title to a property

What is a abstract of title?

A representation issued by a title company as a guarantee to the named person, not an insurance policy, listing all recorded conveyances and encumbrances affecting title to the described real estate.

A binder provides the buyer w/ title insurance coverage until?

At buyer's request, a policy is issued to a new buyer on resale of property or to a lender on refinance.

Endorsements cover losses incurred due to violations of:

CC&Rs: • damage from extraction of water or minerals: • mechanic's liens: • encroachments (conditions covered in an American Land Title Association Residential (ALTA-R) policy); and • the effects of inflation.

What is Schedule B?

Exceptions from coverage, both standard and itemized, by the title insurance policy.

What is Schedule A?

Identification of the property interest insured, the legal description of the insured property, the date and time coverage began, the premium paid for the policy and the total dollar amount to be paid for all claims settled.

_________ on property are not encumbrances since they do not affect title. Accordingly, title insurance policies do not insure against open and notorious physical conditions which exist on the property.

Physical conditions

True or False? Title insurance policies are issued on one of several general forms used by the entire title insurance industry in California.

True

A title insurance policy is NOT an __________ which warrants or guarantees the nonexistence of title encumbrances not listed as exceptions. Instead of receiving a guarantee of title conditions, the named insured on policy is indemnified up to the policy's dollar limits against a monetary loss caused by a title condition (encumbrance) not listed as an exception or exclusion in the policy.

abstract of title

A _____ (aka ________) is a: -written commitment of title insurer -to issue: title insurance policy in the future - usually acquired by buyer intending to resell described property

binder (aka commitment to issue)

Any right or interest in real estate held by someone other than the owner is considered an encumbrance when it?

diminishes the value of the real estate.

Almost all losses due to reduction in value of real estate below the policy limits arise out of an ______________

encumbrance.

Thus, a policy of title insurance is a form of _________ policy of title insurance is a NOT form of ________________

indemnity insurance guarantee of title conditions.

Under a binder, a title insurance policy is issued in the name of ___________? When?

substitute buyer on close of the resale escrow - w/in 2 years of buyer being issued the binder.

A buyer acquiring property they intend to resell w/in 2 years after their purchase, usually an EP investor or other flipper, provides for seller to pay for a _________ on closing.

title insurance binder

The CLTA standard policy (as well as the ALTA policy) contains general exclusions to coverage which bar recovery by the buyer or joint protection carryback seller for losses due to:

zoning laws, ordinances or regulations restricting or regulating the occupancy, use or enjoyment of the land; • the character, dimensions or location of any improvement erected on the property; • a change in ownership or a parceling or combining of the described property by the insured buyer; • police power, eminent domain or violations of environmental protection laws, unless a notice or encumbrance resulting from the violation was recorded with the county recorder before closing; • encumbrances known to the insured buyer or lender which are not recorded or disclosed to the title company; • encumbrances which do not result in a monetary loss; • encumbrances which are created or become encumbrances after issuance of the policy; • encumbrances resulting from the buyer's payment of insufficient consideration for the property or delivery of improper security to the lender also insured under the policy; and • the unenforceability of the insured lender's trust deed lien due to the lender's failure to comply with laws regarding usury, consumer credit protection, truth-in-lending, bankruptcy or insolvency.