by Clifford L. Morgan
Last October ALTA® adopted 12 new commercial endorsements as ALTA® forms. This was a very significant undertaking by the ALTA® Title Insurance Forms Committee and something that will help to standardize the availability of certain special coverages throughout the industry. With the adoption of these forms by ALTA®, the number of officially recognized endorsements by ALTA® increased by over 50 percent. That is a good sign of forward progress on an industry level.
Why Adopt New Forms?
There are many different types of “custom” non-ALTA® endorsements issued by different insurers providing similar coverages on the same basic subjects. Some are issued on a regular basis. Once a particular type of endorsement coverage becomes very common in the national marketplace, it is important for the industry, through ALTA®, to look at the possibility of standardization. By doing so, both the insured and the insurer benefit. It helps our customers and their counsel to know what types of endorsement coverages are available and allows them to rely on the coverage being the same regardless of which company issues the policy and endorsement. Less time is spent by the parties negotiating the language so the insured can obtain the same or similar coverage obtained in another transaction. Also the parties can rely upon judicial interpretation of the language as decisions are rendered and have a reasonable degree of certainty on what coverage is provided by the form. Certainty in insurance coverage is very important to both the insured and the insurer. Very subtle language differences in endorsements can result in major changes in coverage. This can be either good or bad depending upon the original intentions of the parties, whether the language change accomplished both parties goals, and, if not, whose interest is being unwittingly adversely affected. Therefore care must be taken when drafting endorsements or modifying those already available in standardized form. Even though it is sometimes important to modify the language of an endorsement in order to have the coverage fit the transaction and the desires of the insured, it is very important to have well-considered language and coverage available through standardized forms that can be used in most situations without modification.
While it was originally the thought that these endorsements would most usually be issued with policies insuring interests in commercial real estate deals, many of them can also be issued in residential transactions. Only the future will tell just how they are used.
Why So Many?
Each of these forms has a particular purpose and fits into a special set of circumstances. The risks covered pertain to revolving credit/line of credit, nonimputation, mezzanine loan, access, separate tax parcel and contiguity issues, some or all of which may be present in a given transaction. Some of the forms have brackets around certain provisions. This means the bracketed portion is optional. It can be included or excluded by the issuing company and still be recognized as an official ALTA® form. Many ALTA® forms as adopted, including ALTA® policy forms, have some bracketed clauses or provisions. Clearly one recognizes that when the form is agreed to be issued, an election must be made by the issuing company whether to include or exclude the bracketed portion.
The Forms Committee took great care in drafting these endorsements. To the degree possible, the same words, defined terms, and style used in the policy to which the endorsement may be attached are utilized in order to lessen the chance of a court finding a special meaning where none is intended. For example, the word “land” in the policy is defined to exclude areas not specifically described and does not include any interest in abutting streets, roads, avenues, alleys, lanes, ways, or waterways. If instead of using the word land we were to use words like “property” or “parcel” in the endorsement, could a court reasonably decide we must have intended to cover the insured's interest in any of the abutting streets, roads, alleys, etc.? A court might reason that if the title insurer intended to cover the same area or real estate as defined in the policy by the term “land,” the insurer could have or should have used the defined term. If we don't want to open that door, then we should use the same terminology used in the policy to the degree possible, and that is what we have tried to do. Anyone drafting endorsements should be mindful of the possible ramifications of the words used and their possible meaning when read with the policy.
Each of these endorsements was drafted with a general purpose in mind, but clearly there are many specific types of transactions or circumstances where each can be used to meet the needs of the insured. If you want to look at the endorsements as you read the descriptions and some of the possible uses of each, visit ALTA®'s Web site and look under “Standards/Forms.” Following are brief descriptions of the general purpose of the endorsement identified.
ENDORSEMENT FORM 14
(Future Advance-Priority) to a Loan Policy
This is a revolving line of credit or credit line endorsement. It provides coverage to a lender for loss the lender might sustain in the event a future advance by that lender does not have the same priority as the original mortgage as though the advance had been made at the time the mortgage was made. It also covers the lender's loss if each advance does not create a valid and enforceable lien on the title secured by the insured mortgage. There is even coverage for loss sustained resulting from invalidity or unenforceability of the insured mortgage because of re-advances and repayments of the mortgage, lack of an outstanding indebtedness before any advance, and failure of the lender to comply with the requirements of state law to secure the advances. It also includes ALTA® Form 6 endorsement coverage. This endorsement is needed because, among other things, the ALTA® 1992 Loan Policy was drafted to cover only loans fully funded at the date of policy, other than construction loans. It is intended to be used for loan transactions where future advances are contemplated under the terms of the loan documents, and in the view of the insurer the loan terms obligate the lender to make advances at the request of the borrower as long as the borrower is not in default. This is what some would call an “obligatory advance program” revolving credit endorsement. If under the law of the jurisdiction where the land is located any future advance made by a lender, obligatory or optional, will take priority over any intervening lien, then this endorsement could be issued. The coverage of this endorsement even extends to advances made by the insured lender even after a federal tax lien has been filed in the public records as defined in the policy, as long as the advance is not made more than 45 days after the notice of the federal tax lien has been filed. This form has an optional exclusion shown as bracket paragraph 4.f, which carves out coverage for loss due to mechanics' liens.
ENDORSEMENT FORM 14.1
(Future Advance-Knowledge) to a Loan Policy
This is a revolving line of credit or credit line endorsement very similar to the Form 14. However, this form was designed to be used for loan programs under which the loan documents contemplate future advances but the lender has the option of not making an advance for any reason. Some would consider this an optional advance loan program revolving credit endorsement. The coverage is identical to the Form 14 except under this endorsement there is an additional exclusion from coverage shown as paragraph 4.d. that excludes coverage for loss due to intervening liens of which the lender has actual knowledge at the time of making an advance. Therefore, as long as the insured lender does not have actual knowledge of an intervening lien, the coverage is identical to the Form 14.
ENDORSEMENT FORM 14.2
(Future Advance-Letter of Credit) to a Loan Policy
This endorsement was designed to be issued when the insured mortgage secures repayment of future advances made under a letter of credit, surety agreement (bond), or reimbursement agreement. Its coverage is broader in certain respects than the other two Form 14 series endorsements. It contains neither exclusions for advances made after a petition in bankruptcy or after filing a notice of a federal tax lien nor the ALTA® Form 6 endorsement coverage. It also has a bracketed paragraph shown as 3.d. addressing mechanics' lien coverage in the same manner as the other two Form 14 series endorsements. It could be underwritten similarly to the Form 14.
ENDORSEMENT FORM 15
(Nonimputation-Full Equity Transfer) to an Owner's Policy
This endorsement is designed to be issued with a new Owner's Policy that insures the existing entity that owns the land. It can be very important coverage in a situation where the owning entity is losing all of its partners, members, or shareholders (prior equity holders) and gaining new equity holders in a sale of the entity. The buyers of the entity want the new policy and this endorsement so they are covered for loss if the entity does not in fact own the land or, the title is different than represented and insured. The new equity holders do not want to be stuck with the prior unknown acts of the entity or knowledge of its prior equity holders that have not been disclosed. Some would call this “nonimputation coverage,” but the reality is that in the situation described, this endorsement puts the incoming equity holders in a similar position to a bona fide purchaser without knowledge in a real estate purchase. This is so even though they are not purchasing real estate but rather the personal property interest of the equity ownership of the entity that owns the real estate. Another situation where this endorsement works well is a transaction that is not a “full equity transfer” but rather a deal where an entity is taking title to some land and one of the equity holders of the entity is contributing the land to the entity in exchange for an equity interest in the entity. The entity purchases title insurance on the land and later finds out that the prior owner (contributing partner, member, or shareholder) created or knew about a title defect at the time the land was contributed to the entity but did not disclose it. Without this endorsement an insurer may deny liability for any loss based upon the fact that the title defect is one that was created, suffered, assumed, or agreed to, or known about by the insured but not disclosed to the insurer. This denial of coverage would be based upon the fact that at the time the policy was issued, one of the equity holders of the insured entity (the equity holder contributing the land) had knowledge of or otherwise created or agreed to the title problem. The insurer could assert that this information was imputed by law to the insured entity. Therefore it is as though the insured entity had the knowledge or had created the problem. With this endorsement the insured entity would not lose its coverage for the title defect just because of the prior knowledge, acts, or inaction of the contributing equity holder.
ENDORSEMENT FORM 15.1
(Nonimputation-Additional Insured) to an Owner's Policy
This endorsement was designed to serve a similar function as the Form 15 but under different facts. It is to be issued to an existing Owner's Policy insuring the owning entity. The circumstance giving rise to the need for this endorsement could be that after the policy was issued, someone is coming in as a new partner, member, or shareholder (new equity holder) of the insured entity. The new equity holder wants to be added as an insured under the existing Owner's Policy but does not want to be liable for the pre-existing knowledge, acts, or inaction of the entity and its other partners, members, or shareholders (existing equity holders) that have not been disclosed to the new equity holder. This endorsement will at least partially accomplish that goal. By issuing this endorsement, the new equity holder will be added as an insured but only as to the time period up to the original date of the policy. It does not cover knowledge, action, or inaction of the entity and its existing equity holders acquired or occurring subsequent to the date of the policy and prior to the date this endorsement is issued. In order to cover that time period, the title would need to be updated and the policy endorsed to show a new date of policy. Also this endorsement has a signature block for the insured entity to indicate its consent to the addition of another insured. The reason for this is the reduction of insurance provision in Section 10 of the Conditions and Stipulations of the policy that reduces the amount of insurance remaining after payment of a claim by an amount equal to the indemnity payment made in settlement of the claim. Therefore if the insurer has a claim under the policy by reason of this endorsement, it is possible that the additional insured could get paid leaving the insured entity with a reduced amount of insurance because the coverage under the policy would be reduced by the amount of the payment made to the additional insured. If the original insured entity does not consent to have the additional insured added to the policy, the insurer could be faced with an argument from the original insured entity that the payment to the additional insured does not operate to reduce the amount of insurance benefit remaining for them. It is also possible this consent signature block could prove problematic in transaction closings if it is overlooked and not signed. The endorsement contains a clause that limits the coverage to the extent of the percentage interest in the insured entity acquired by the additional insured.
ENDORSEMENT FORM 15.2
(Nonimputation-Partial Equity Transfer) to an Owner's Policy
This endorsement was designed to serve a similar purpose as the other two Form 15 series endorsements but under different facts. It could be issued with a new Owner's Policy in a transaction where an incoming partner, member, or shareholder (new equity holder) is purchasing an equity interest in the entity that holds title to the land. The new equity holder is requesting its own Owner's Policy and may want this endorsement because the new equity holder doesn't want to be liable for the undisclosed pre-existing knowledge, acts, or inaction of the entity and its other partners, members, or shareholders (existing equity holders). By issuing this endorsement with the new policy to the new equity holder, the insurer could not deny a claim made by the new equity holder solely on the grounds that the knowledge, action, or inaction of the owning entity as to the undisclosed matter affecting title is to be imputed to the insured new equity holder.
ENDORSEMENT FORM 16
(Mezzanine Financing) to an Owner's Policy
This endorsement was designed to be issued to either an existing Owner's Policy or a new Owner's Policy showing title vested in an entity and naming that entity as the insured. This endorsement would typically be requested in a transaction where an entity owns the land and is borrowing money. The entity may be giving a mortgage on the land and providing a loan title insurance policy for the mortgage. There is also a mezzanine loan being given either by the same lender making the real estate loan or a totally different lender. The mezzanine loan is made to the partners, members, or shareholders (equity holders) of the owning entity in exchange for a pledge of the equity holder's interest in the entity. Since the real value of the equity holder's interest in the entity is based upon the ownership by that entity of the real estate, the mezzanine lender wants to make sure there is an Owner's Policy in place and that the mezzanine lender is somehow protected. The mezzanine lender does not have an insurable interest in the real estate owned by the entity so it really wouldn't be acceptable to issue an owners policy to the mezzanine lender. Likewise, the mezzanine is not being granted a mortgage on the real estate owned by the entity to secure repayment of the mezzanine loan, and the entity is not the borrower so a Loan Policy isn't the right thing either. Since the entity has or is obtaining an owner's policy, the mezzanine lender would request this endorsement be issued to the Owner's Policy. The same insurer that issued or is issuing the Owner's Policy should issue this endorsement. The effect of issuing this endorsement is to assign to the mezzanine lender the right to receive payments otherwise payable to the insured under the policy. The mezzanine lender is not an insured, and it stands to receive only payments that would otherwise go to the insured in settlement of a claim. That way, if there is a title problem with the land the entity owns and the title insurer were to decide to settle the claim by making a payment to its insured, it would instead make that payment to the mezzanine lender. Therefore the mezzanine lender would not have to worry so much about the value of the equity holders' interest in the entity being reduced because the value of the land owned by the entity has been reduced by the title defect. The mezzanine lender should also obtain a UCC title insurance policy with appropriate endorsements from one of the title insurers that offers that product so it is insured against loss if the equity holders do not own the equity in the entity and the mezzanine lender's security interest in the equity has not attached, been perfected, or have the priority as insured. This endorsement does not provide that protection. The insurer's liability under the owner's title insurance policy to which this endorsement is attached is greater under certain circumstances than had the endorsement not been issued because this endorsement contains “nonimputation coverage” and “fairway coverage” that would not typically be part of the owners coverage.
This endorsement also has a signature block for the insured to consent to issuing this endorsement, thereby having assigned to the mezzanine lender some or all of the benefits the insured would otherwise receive for payment of loss. This poses the same issue we discussed regarding the Form 15.1 endorsement. Care should be taken to deal with the issues raised if the consent block is not signed by the insured. This endorsement attached to the Owner's Title Insurance Policy for the land, together with a UCC title insurance policy covering the ownership of and security interest in the equity holder's interest in the entity, is something that all mezzanine lenders and their counsel will need to have well- rounded coverage.
ENDORSEMENT FORM 17
(Access and Entry) to either an Owner's or Loan Policy
This endorsement provides much greater access coverage than that provided by any ALTA® policy. The ALTA® 1992 Owner's and Loan Policies give protection only for “lack of a right of access to and from the land.” They do not provide protection if there isn't actual access. This form provides coverage for loss if the insured doesn't have both actual vehicular and pedestrian access to and from a specifically identified street or road and if the street is not physically open and publicly maintained. Additionally this endorsement provides coverage for loss if the insured has no right to use the existing curb cuts or entries off of the street onto the land. This is much better coverage than the other custom non-ALTA® endorsements that have been in the marketplace for years. Our customers should welcome this coverage. When this endorsement is issued, special underwriting may be required.
ENDORSEMENT FORM 18
(Single Tax Parcel) to either an Owner's or Loan Policy
Many of our commercial real estate customers and their attorneys want some form of coverage that the land described in the policy is a single and separate tax parcel and not part of a larger parcel of land. The Form 18 endorsement provides that coverage. It should be relatively easy to issue from an underwriting perspective.
ENDORSEMENT FORM 18.1
(Multiple Tax Parcel) to either an Owner's or Loan Policy
This form provides similar coverage to the Form 18 but deals with a situation where there are multiple tax parcels included within the legal description of the land. This endorsement protects the insured against loss if the land specifically identified is not assessed for real estate tax purposes under the tax identification numbers listed in the endorsement or if those tax numbers include any other land other than what is identified. This coverage should be relatively easy to underwrite.
ENDORSEMENT FORM 19
(Contiguity-Multiple Parcel) to either an Owner's or Loan Policy
When the land described in the policy is made up of several separately described parcels that appear to have somewhat contiguous boundaries, the insured and its counsel are quite often concerned about whether the parcels are contiguous and, if so, what boundary of a given parcel is contiguous to what boundary of another. They also are concerned that there may be strips, gaps, or gores between the respective contiguous boundaries. This endorsement insures against loss if the boundaries described in the endorsement are not contiguous as described and if there are any strips, gaps, or gores separating the contiguous boundaries described in the endorsement. Many of the forms that have been in the industry for many years do not adequately describe the coverage sought or given. Whether a survey will be required to give this coverage is something that each underwriter will have to determine based upon the facts of each case and their underwriting standards.
ENDORSEMENT FORM 19.1
(Contiguity-Single Parcel) to either an Owner's or Loan Policy
This endorsement serves a similar purpose as the Form 19. However it is issued only when there is a single parcel described in the policy and the insured wants coverage that the land described in the policy is contiguous to some other land that is not described or insured in the policy. There could be many reasons why the insured is concerned about the contiguity of the insured land to another parcel. It could be the insured already owns the other parcel and wants to make sure there is coverage if the parcels are not in fact contiguous since they are doing an assemblage over time for a subsequent larger development. In any event it would be necessary for the endorsement to describe the adjacent uninsured parcel and describe what boundary of the insured land is contiguous to what boundary of the uninsured parcel described in this endorsement. This endorsement also provides coverage if there are any strips, gaps, or gores separating the two parcels along the contiguous boundaries described.
While the creation and adoption of these new forms will help move our industry forward, our task is not yet completed. The Forms Committee is also working on some other endorsements as well as policy revisions, which hopefully will be completed and approved for adoption by the ALTA® Board of Governors in the near future. There is another access endorsement dealing with access to a public street over a private easement described in the policy. Yet another deals with first-loss issues. We are also working on mobile home issues and the ALTA® Form 7 endorsement, which may need changes or additions. We are also working on a major revision to the ALTA® 1992 Loan Policy, which will serve to update it and give even better coverage to our insureds.
It is very important for the industry to keep moving forward with the development of new and innovative forms. As the needs and demands of our customers change with time, we must continue to be responsive to those needs.
Clifford L. Morgan is senior vice president, underwriting/new product development for First American Title Insurance Company, Santa Ana, CA. He is chair of the ALTA® Title Insurance Forms Committee. He can be reached at: firstname.lastname@example.org