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New Homeowner’s and Expanded Coverage Policies

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January/February 2002 - Volume 81 Number 1

By Clifford L. Morgan

The title industry’s new Homeowner’s and Expanded Coverage Residential Loan Policies provide coverages that—for the first time in our industry’s history—the regular consumer can relate to. That is very important. These policies, as adopted by ALTA®, were designed only for residential one-to-four family homes. The Homeowner’s Policy was adopted on October 17, 1998. The Expanded Coverage Residential Loan Policy was adopted at the ALTA® 2001 Annual Convention last October.

Many of our customers don’t understand title insurance, and therefore they don’t appreciate it. Likewise, they don’t understand the real estate settlement process and how it relates to title insurance. Most homeowners will only go through the settlement process a few times in their lifetime. There are questions that arise about the relevance of title insurance, usually due to ignorance or changes taking place in the world. In either case it is important for our industry to continue to innovate and educate so there is no question about the true value we add to the real estate community.

When I speak to groups I ask the question, "How many of you have had your house catch on fire?" I have never had more than three or four people even in large groups of two to three hundred raise their hands. Most of the time nobody in the group has ever experienced such a frightening event. Why do those that have not had this experience continue to buy fire insurance when virtually no one has had their home catch on fire? It is because they can relate to the danger and the damage fire can cause. Even though it isn’t likely they will ever experience such a loss they don’t want to run the economic risk of loss if it does happen to them. They can relate to the coverage. It is real to them.

This should be the same attitude consumers have about title insurance. They should be able to relate to the coverage. The coverages should describe events, economic risk, and legal defense problems the common person on the street fears and wants to transfer to an insurance company.

This is why it is a good thing for our industry, in my opinion, that ALTA® has developed the new Homeowner’s and Expanded Coverage Residential Loan Policies. We want to have products that our customers demand just as they do fire insurance. We want policies for homeowners that provide coverages relevant in today’s world. No home purchaser should even consider buying their home without also demanding the Homeowner’s Title Insurance Policy.

These policies provide all the protection of ALTA®’s other title policies, plus many other valuable and relevant coverages. Historically, our policies have been viewed as covering only those losses arising from defects in title existing at the time the policy is issued. That is good coverage but consumers and their lenders need more for residential properties. They need coverage for future events affecting their title which they haven’t caused or created and have no real way to protect against.

We have seen many prime time television news reports of attempts to steal someone else’s home or put a mortgage on it. These televised reports cover properties from Canada to Mexico and California to Connecticut and many places in between. None of the owners in these reports had the ALTA® Homeowner ’s Policy so they were not protected from the forgery and fraud pertaining to their title. Why? Because the problem didn’t exist when they purchased their home. It happened later. These new policies cover many such post policy title problems, which are not covered by the other available policies.

Both the Homeowner’s and the Lender’s Expanded Coverage policies provide new and very exciting coverages. These coverages should result in homeowners wanting their own policy of title insurance on every home they purchase. Below is a brief description of just some of the problems covered by these new policies:

a. Post-policy forgery or impersonation leaving you with no record title or with mortgages on your home you never made.
b. Someone claiming that during your ownership a prescriptive negative easement, such as a view easement, has been created over your land, limiting your use.
c. Neighbors building encroaching structures onto your land after you purchase it.
d. Anybody after you purchase your home recording a deed, mortgage, or other document that by mistake describes your property instead of the land intended, thereby leaving you with a clouded title and expenses and a hassle to get it corrected.
e. Lack of actual physical access for both vehicles and pedestrians to and from your home. (Other policies only provide coverage for lack of a legal right of access.)
f. Pre-existing violations of CC&Rs which someone is trying to force you to correct or remove. This coverage applies even if the CC&Rs are excepted from coverage in schedule B.
g. Subdivision law violations of previous owner. (In some areas the title is void if the subdivision laws have been violated. In others you cannot obtain building permits to make the desired improvements.)
h. Building permit violations of previous owners. (This is very valuable to the unwary purchaser because it is virtually impossible to know whether all portions of the home you want to purchase were constructed with a building permit.)
i. Zoning law or regulation violations of previous owners which the insured is forced to remedy or remove.
j. Encroachments of existing structures onto neighboring property or onto easements affecting your home. (There is even coverage for boundary wall or fence encroachments.)
k. The residence with the address shown in the policy not being located on the land described.

A few of these coverages are subject to deductibles and caps on the indemnity benefit that may be less than the stated Amount of Insurance. While this is new for title insurers, it is commonplace in the rest of the insurance industry. Additionally, the Homeowner’s Policy gives coverage for renting a substitute residence if the insured can’t use his/her home due to a covered claim. This policy also automatically increases in Policy Amount 10% per year for the first 5 years so coverage is increased to a maximum of 150% of the original Policy Amount (usually the purchase price). This provides the consumer with automatic inflation protection as well as increased value due to improvements.

One of the great benefits of the Homeowner’s Policy is it solves a problem inherent in other forms. Other policies terminate when you transfer your title except as to warranty liability. This has been problematic for owners and estate planning professionals. If you purchase a policy when you buy your home and subsequently place the title in your trust for estate planning purposes, you may have very well lost your title insurance coverage. Not so with ALTA® ’s new Homeowner’s Policy.

The Expanded Coverage Lender’s Policy has enhanced coverages similar to the Homeowner’s Policy but does not have deductibles or limits on the indemnity benefit less than the Policy Amount. This loan policy does not provide the substitute rental benefit, for obvious reasons, and is supplemented with coverages that apply only to lenders just as the other ALTA® loan policies.

Some of the additional benefits of the Expanded Residential Loan Policy not part of the owner’s policy are:

a.  An automatic increase in the amount of insurance to 125% of the amount stated in Schedule A. This would, among other things, cover negative amortization loans.
b. Automatic revolving credit advance coverage.
c. Automatic coverage for advances made and different interest rates charged based upon a post-policy modification to the insured mortgage if the mortgage so allows.
d. Environmental protection lien coverage.
e. Coverage for failure of the land to have the address shown in the policy and be improved with a residential structure.
f. Usury coverage for violations of the state’s laws where the land is located.

Unlike the 1992 ALTA® Loan Policy, this policy has an insuring clause relating to survey matters thereby eliminating any question of whether or not survey coverage is provided. It is provided and in a very broad manner.

This loan policy also automatically includes various endorsement coverages such as the ATLA 4, 5, 6, 6.2, 8.1, and 9. This is a tremendous benefit from a practical level for both the insurer, issuing agent, and the insured. You don’t have to check a box or attach the above-mentioned endorsements to the policy. The coverage already is there. This eliminates the potential for mistakes and unnecessary phone calls.

These are excellent new ALTA® products and we can all be proud of the coverages and benefits given. It is very important for those who are looking to increase their market share to offer the new Homeowner’s Policy. We need to take aim at the 31% of home purchasers that don’t buy owner’s policies. Explain the benefit of these tremendous new coverages to your clients and customers and watch your business grow!

Clifford L. Morgan is senior vice president and underwriting director for First American Title Insurance Company in Santa Ana, CA, and a member of ALTA®’s Title Insurance Forms Committee. He can be reached at: cmorgan@firstam.com or 714-647-4405.



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