Real Estate Strategies Update – A General Overview of Extended Title Insurance Coverage
There are many risks associated with the acquisition of real property. Risks include the existence of liens on the property, the person or entity conveying the property not actually having authority to convey the property, previously granted use restrictions, errors in the legal description, and boundary descriptions that are inconsistent with areas actually being used or thought to be the boundaries of the property. The acquirer relies on the conveying party to disclose any issues, and for an examination of the public records to disclose everything. However, errors and oversights occur, and in some instances there are prior agreements that are not recorded, or are not correctly recorded, among the public records. To minimize the risks that may occur due to errors, oversights, and risks associated with unknown agreements, acquirers purchase title insurance.
Title insurance is a contract that obligates the insurer to indemnify the purchaser of the insurance (the “insured”) from loss incurred due to loss of use and enjoyment of the property occasioned by the existence of liens, defects and encumbrances that are not identified as being excluded from coverage. A standard coverage title policy will contain special and standard exceptions. Special exceptions are property specific and arise from matters discovered in an examination of public records (recorded liens, easements, leases, life estates, restrictions, etc.); the title policy, unless addressed with an endorsement, will exclude from coverage any loss occasioned by someone exercising a right pursuant to an identified easement, lease or other instrument. The standard exceptions contained in title policies are (1) unfiled mechanic’s and materialmen’s liens (the “M/L Exception”); (2) rights of claims of parties in possession of the property (or portion thereof) (the “Possession Exception”); (3) easements or claims of easements not shown in the public records (the “Easement Exception”); (4) any encroachment, encumbrance, violation, variation, or adverse circumstance that would be disclosed by an accurate and complete land survey of the property (the “Survey Exception”); and (5) taxes or assessments (the “Tax Exception”). Title policies that include standard exceptions exempt from coverage losses arising from unknown issues (e.g., someone claiming the right to drive through the middle of the property based on an unrecorded document or past actions that are not revealed by an examination of the public records), are the issues that the insured wants to be insured against.
To address these unknown risks, the insured, when purchasing title insurance, should consider obtaining an extended coverage title policy that minimizes the exceptions from coverage and offers affirmative coverage. Such coverage insures the insured against loss occasioned by defects ascertainable, but undiscovered or unreported, by an examination of the public records (e.g., land records, tax bills, and court records, etc.), and from defects that are not ascertainable from the public records (e.g., parties in possession, unfiled mechanic’s liens, encroachments, boundary line issues, and other matters that would be disclosed by an accurate survey).
The most basic extended coverage policy is one in which the standard exceptions have been removed or modified to take exception only for matters arising in the future. To get the standard exceptions removed or modified, the purchaser of title insurance will need to meet criteria established by the insurer for each standard exception. Generally, the insurer requires the following actions and information prior to its issuance of a title insurance policy without the standard exceptions:
- In order for the M/L Exception to be removed, an indemnifying affidavit must be delivered to the insurer (signed by all existing or prior owners that owned the property during the period of time that a mechanic’s or materialmen’s lien could arise from) stating that (a) no work has occurred on, and no materials have been supplied in connection with, the property in the period of time that would permit a contractor or supplier to file a lien against the property, or (b) work has occurred during the designated period and that all bills have been paid in connection therewith.
- In order for the Possession Exception to be removed, the current owner of the property must execute an affidavit attesting that no one other than the current owner is in possession of the property, and that the current owner has no knowledge of any facts that would give rise to someone claiming to have title to, or the right to possess, the property. If the insurer has reason to believe others have been in possession of the property, the insurer may require termination agreements to be signed by such prior occupants, or the insurer will take special exception to the specific issues identified.
- In order for the Easement Exception to be removed, the current owner must deliver an affidavit attesting that its enjoyment of the property has been undisturbed, and that the current owner has no knowledge of any facts that would give rise to a claim of an easement over and across the property. If the insurer has reason to believe an unrecorded easement may exist on the property, based on old plats or other information, the insurer may require termination agreements or quitclaim deeds to be signed by the possible easement holders, and/or the insurer may take special exception for the rights of others to an easement as shown on a specifically identified plat.
- In order for the Survey Exception to be removed, a recent survey of the property will need to be prepared, and it will need to contain a surveyor’s certificate that states (a) the surveyor has examined the property, (b) the survey depicts all buildings, structures, fences, improvements and encroachments, and (c) the property description is a complete and accurate description.
- In regards to the Tax Exception, such exception will not be removed by the insurer, but, upon evidence (a review of the taxing records, and payment of taxes at closing) that all property taxes and assessments due and owing have been paid, the insurer will modify the exception to exclude from coverage losses arising from taxes and assessments not yet due and owing.
Beyond the basic extended coverage created by the removal of the standard exceptions, additional coverage against certain risks can be obtained with the addition of endorsements to the title policy. Endorsements modify the provisions of the title policy to provide coverage over specific risks.
There are dozens of standard endorsements. The most common standard endorsements issued in connection with commercial property are the Access Endorsement, Same As Survey Endorsement, Comprehensive Endorsement, Tax Parcel Endorsement, Contiguity Endorsement (if the property is comprised of multiple parcels), and Zoning Endorsement, all of which afford the insured with coverage for loss arising in connection with matters related to whether the specific property can be used as planned. The Access Endorsement, which will only be issued if a surveyor certifies to the insurer that the property does have a means of access, affords coverage to the insured if it is later determined that the property does not have access to a specifically identified street. The Same As Survey Endorsement, which requires a certified survey, protects the insured against losses resulting from inaccuracies in the survey obtained and relied upon. The Comprehensive Endorsement provides coverage from losses due to violations of recorded covenants and restrictions, and from encroachments of existing improvements across the boundary lines of the property. The Tax Parcel Endorsement insures against losses arising from any inaccuracy with the tax parcel identification number identified in the title policy as being applicable to the property. The Contiguity Endorsement, which requires a review of a survey, provides coverage from losses due to a subsequent determination that multiple parcels comprising the property are not contiguous to one another (i.e., there are gaps between the parcels, and such areas are owned by someone else). The Zoning Endorsement, if the improvements on the property are completed at the time the policy is issued, protects against losses suffered as a result of a court order or judgment that the improvements are in violation of the applicable zoning laws and ordinances. The alternative Zoning Endorsement, if the improvements are not yet constructed, insures against losses resulting from a determination that the contemplated use of the property is not permitted by the property’s identified zoning classification (e.g., the insurer and insured believe the property’s zoning classification permits an apartment building, and it is later determined that the zoning classification does not permit an apartment building).
In addition to the standard endorsements, an insurer has the ability to create non-standard, transaction-specific endorsements to address identified risks that may give rise to loss of use and/or title. For example, if the survey reveals that the property’s existing building encroaches across the property line by a few inches, the insured will want to have an endorsement to the policy that provides coverage against loss or damage suffered as a result of the forced removal of the building. Other examples include affirmative coverage endorsements that protect the insured against loss specifically due to (a) an illegible signature on an old document in the chain of title, (b) a vague or indefinite description of an easement burdening or benefitting the property, and (c) a quitclaim deed in the chain of title that, due to a drafting error, is ambiguous and may not effectively release all of the rights intended to be quitclaimed.
Whether or not a specific standard or non-standard, transaction-specific endorsement should and can be obtained depends on the facts and circumstances of a particular transaction. The extended coverage afforded by endorsements shifts the risk of unknown defects to the insurer, and, because of the risk to the insurer, the ability to obtain extended coverage with endorsements is subject to the insurer’s underwriting criteria, and may require the payment of a higher premium. Compliance with underwriting criteria can take time. For example, the Zoning Endorsement, in either form, requires the payment of an additional premium and the delivery to the insurer of a “zoning letter” issued by the locality stating the property’s zoning classification, the permitted uses under the zoning classification, and whether or not, as of the date of the letter, the property is in compliance with applicable zoning laws and ordinances. It can take several weeks to obtain a zoning letter. Accordingly, it is advisable to identify what endorsements are necessary and desired as soon as possible, and request such endorsements from the insurer well in advance of the date that a title policy needs be in place and effective. This will allow time for the insurer and insured to agree on the most comprehensive and affordable extended coverage title policy that can be obtained to minimize the insured’s risk of loss when acquiring property.
Amy L. Harman is a partner with the firm’s Real Estate Strategies, Lender Representation, and Title Insurance and Title Resolution Practice Groups. She practices out of the Norfolk office where she focuses primarily on commercial real estate development, leasing and finance transactions.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2021.