by Richard G. Carlston and Sunny J. Knight
Despite ALTA®’s recent success against the Radian mortgage impairment product, the title industry is still battling to protect the title insurance mono-line statutes.
Mortgage Impairment: the Deception Continues
The title industry, spearheaded by ALTA®, has actively opposed the issuance of mortgage impairment products by nontitle insurers. To date, ALTA® has achieved some noteworthy successes. But, in achieving these successes, ALTA® has discovered the myriad of ways that nontitle insurers are attempting to disguise their products so that regulators will not be able to identify the fact that the products either constitute title insurance or include title insurance. With this discovery, ALTA®, in conjunction with the state land title associations, has undertaken an extensive education process for state regulators designed to show them how these slights of hand are being accomplished. This will allow those state regulators who have been deceived by these nontitle insurers to recognize the semantic deceptions, block future filings, review previous approvals, and take appropriate corrective action to revoke any such inadvertent approvals.
This article addresses the basic legal issues presented by the issuance of mortgage impairment products by nontitle insurers and discusses _ALTA®’s response to the proliferation of such products. It further outlines the operative provisions and the _current status of a range of mortgage impairment products.
P&C Companies are Attempting to Issue Title Insurance
Title insurance is monoline insurance. This means that the right to insure risks related to title is assigned exclusively to licensed title insurers, and any insurer that transacts other nontitle lines of insurance is prohibited from insuring title risks. The California monoline statute is illustrative. It provides:
An insurer which anywhere in the United States transacts any class of insurance other than title insurance is not eligible for the issuance of a certificate of authority to transact title insurance in this State nor for the renewal thereof.
Mortgage impairment products insure title insurance risks. Regardless of the semantics employed or the descriptive title adopted, the nature of an insurance product is determined by the risk insured. Mortgage impairment products insure against the risk of loss arising out of undisclosed liens senior to the insured mortgage, in other words, the priority of the insured lien. This is a title insurance risk; therefore, this type of coverage can only be offered by a licensed title insurer. The issuance of such products by property and casualty insurers is prohibited by both state licensing requirements and monoline restrictions.
The Evolution on the Marketplace
The first mortgage impairment products entered the marketplace over a decade ago as nontitle insurers saw the opportunity to insert themselves into the title insurance marketplace. Starting generally with alleged non-insurance warranty products, this trend has spread to property and casualty insurers and a mortgage guaranty insurer. These companies surreptitiously began issuing lien priority insurance through the creative use of deceptive terminology and semantic games intended to mask the true nature of their products. For example, they changed the descriptive term for the risk insured. For almost 100 years, the risk of loss arising out of undisclosed liens senior to the insured mortgage has been referred to as lien priority insurance, the insurance of the priority of the mortgage. Recognizing that they could not use the term “lien priority” in their policies to describe the insured risk, these companies, now primarily property and casualty insurers, have renamed the risk mortgage impairment insurance. Despite this creative semantic game, however, the risk insured remains the lien’s priority. More recently, Radian Guaranty, Inc. began describing the risk as undisclosed lien insurance, as it sought to blur the monoline statutes applicable to title insurance with the monoline statute applicable to mortgage guaranty insurance with its Radian Lien Protection (RLP) policy.
While departments of insurance across the country have attempted to be diligent in identifying and rejecting mortgage impairment products as disguised title insurance, in many instances, because of the semantic ploys used by these nontitle insurers, these policies slip by without drawing the attention of regulators. However, despite that glitch, 30 states have rejected one or more mortgage impairment products.
ALTA® is working diligently to address the proliferation of these mortgage impairment products, to prevent them from entering the marketplace and to have those products that have slipped by regulators reviewed and removed from the marketplace. It is addressing the issue on the regulatory front by identifying new products, educating regulators (both directly by state and through the National Association of Insurance Commissioners (NAIC) Title Insurance Working Group), and acting as a resource for those regulators when questions arise. ALTA® is also addressing the issue on the legal front both by directly heading up litigation challenging mortgage impairment products and by providing assistance to others doing the same. ALTA® has been, and will continue to be, at the forefront of this effort.
The Products and their Status
1. The Radian Lien Protection Policy
Radian began offering the RLP in 2001 as a pooled mortgage guaranty policy. The RLP is a disguised title insurance policy, providing lien priority insurance under the guise of “undisclosed lien” insurance. The RLP, when issued by Radian, was designed to insure refinanced first mortgages. Its corollary, issued by Radian’s subsidiary, was designed to insure refinanced junior mortgages.
The RLP combines two different lines of insurance, making it a bundled product. The principal coverage is for “Undisclosed Liens.” The RLP limits this coverage to 50 basis points or 0.5% of the aggregate total principal amount of loans in the mortgage pool. The RLP bundles a nominal amount of traditional pooled mortgage guaranty insurance to this title insurance. The mortgage guaranty insurance is limited to 0.01% of the aggregate total principal amount of loans in the mortgage pool. Accordingly, it is apparent from these coverage limits that the dominant purpose of the RLP is to provide lien priority title insurance.
2. State Rejections of the RLP
That the RLP illegally provides title insurance has been recognized by multiple departments of insurance. The states of Texas, Florida, Connecticut, New Mexico, California and Pennsylvania, the latter two discussed below, have each expressly rejected filings of the RLP on the ground that the RLP includes title insurance.
The state of North Carolina issued a general bulletin concluding that mortgage impairment/lien priority insurance constitutes title insurance and has confirmed that the restrictions set forth in that bulletin apply to the RLP.
The Attorney General of the state of Alabama issued an opinion concluding that mortgage impairment insurance constitutes title insurance and can only be issued by title insurers.
3. California Cease and Desist Order
On June 19, 2002, the California Department of Insurance issued a cease and desist order against Radian and its affiliates based on the fact that the RLP violates both the mortgage guaranty monoline statute and the title insurance monoline statute.
Radian demanded an administrative hearing to contest the cease and desist order. After a three-day hearing, the administrative law judge issued his proposed decision on December 31, 2002, upholding the order.
On April 15, 2003, the newly elected California Insurance Commissioner John Garamendi rejected the proposed decision but retained the cease and desist order pending his own review of the matter. Commissioner Garamendi issued his final decision and order sustaining the cease and desist order on July 14, 2003. The Commissioner’s decision expressly provides that “[t]he Radian Lien Protection Policy constitutes title insurance pursuant to California Insurance Code Section 12340.1.”
In response, Radian sought a writ of mandamus in the San Francisco Superior Court to set aside Commissioner Garamendi’s decision. Both ALTA® and MICA (Mortgage Insurance Companies of America) submitted amicus briefs in opposition to Radian’s petition. Arguments were heard on December 3, 2003, and Radian’s petition was denied by the trial court on January 2, 2004. Radian has appealed the trial court decision.
The state of Pennsylvania, which is Radian’s domicile, has issued a letter stating that Radian cannot offer the RLP until it is properly licensed. While the letter is relatively abbreviated, what is clear is that Radian is licensed in Pennsylvania to issue mortgage guaranty insurance. It is not licensed to issue title insurance. Pennsylvania did not take formal action against Radian because it ceased issuing the RLP in light of the California cease and desist order. (The CA cease and desist order has nationwide application. If Radian transacts title insurance anywhere in the nation, CA may rescind Radian’s Certificate of Authority to issue mortgage guaranty insurance in CA. In light of this, Radian has advised the CA DOI that it has suspended its advertising and issuance of the RLP nationwide.
4. NAIC Legal Opinion
The NAIC Title Insurance Working Group has undertaken to study the question of who can issue mortgage impairment insurance. In so doing, it has focused directly on the RLP. In reviewing the RLP, the Working Group solicited and received a legal opinion from NAIC counsel confirming that the RLP constitutes title insurance. The opinion concludes that “under the pertinent NAIC Model Acts the RLP product is in fact title insurance as the primary risk being insured is the risk of an ‘undisclosed lien’ which risk is one that has occurred in the past and is covered by monoline title insurance.” This legal memorandum has been publicly released by the NAIC Working Group. Given the foregoing, we currently believe that the RLP has been withdrawn from the marketplace. However, companies should remain vigilant in the marketplace for any signs of this product.
Property And Casualty Mortgage Impairment Products
During the process of educating various states about the RLP, ALTA® recognized the need to assist states in identifying title insurance products masquerading as mortgage impairment products, given the clever semantics and policy structuring that these products employ to hide their true nature. Accordingly, ALTA® is now actively engaged in these educational efforts as it tries to remove all these illegal products from the marketplace.
Mortgage impairment products, which with the removal of the RLP are now offered by property and casualty insurers, can generally be classified into two distinct categories: 1) products whose coverage provisions define the coverage to be mortgage impairment title insurance (standard mortgage impairment products), and 2) bundled products where the title insurance coverage has been packaged with other types of insurance, most commonly errors and omissions insurance (E&O mortgage impairment products).
Standard Mortgage Impairment Products
Standard mortgage impairment products attempt to disguise title insurance coverage by renaming it mortgage impairment insurance. Like virtually all mortgage impairment products, they provide coverage for the risk of loss associated with undisclosed liens senior to the insured mortgage. ALTA® recently highlighted two active examples of this type of policy, The Travelers’ Home Equity Protector and BancInsure’s Lenders Performance Bond, in a presentation to the spring meeting of the NAIC Working Group on March 14, 2004. It is also discussing these products with regulators from various states. To the extent any companies are aware of these products being used in any state, this information should be provided to ALTA® to ensure that ALTA® has the opportunity to educate the regulators of that state.
1. The Travelers’ Home Equity Protector
The Traveler’s Home Equity Protector purports to eliminate the lender’s need for a title search through its marketing because it provides mortgage impairment insurance. The policy provides as follows:
Coverage is extended under this policy to loss incurred by the Assured during the Coverage Period due to impairment of the Assured’s Second Position Mortgage Interest due to the default of the borrower wherein the foreclosure and sale where permitted by Law, does not provide an amount sufficient to satisfy the Assured’s Second Position Mortgage Interest.
The policy further provides that: The Mortgage Interest must have been impaired due to a previously unknown Mortgage Interest or lien held by one who is not liable on the Assured’s Second Position Mortgage.
Regardless of how it is labeled, this policy provides lien priority insurance and violates title insurance mono-line statutes as well as the licensing laws of all states in which it is being offered. This policy is a typical example of a standard mortgage impairment product.
2. BancInsure’s Lenders Performance Bond.
Like the Travelers’ product, BancInsure’s Lenders Performance Bond purports to eliminate the lender’s need for a title search by providing protection against undisclosed liens. The BancInsure product, couched in a bond format, provides:
Subject to the terms of this bond, we, the Principle and Surety, are firmly bound to the Obligee in the above penal sum [not to exceed $100,000 per schedule loan] ¼.
Payment under the bond is conditioned on the existence of an undisclosed senior lien, specifically that:
The priority of the Obligee’s second mortgage interest following foreclosure and sale of the property has been impaired, because of the existence of an encumbrance not known or disclosed to the Obligee as required by the loan application.
Again, despite the product’s format, it provides lien priority title insurance. Accordingly, the Lenders Performance Bond is another clear example of a standard mortgage impairment product.
E&O Mortgage Impairment Products
The second category of mortgage impairment products typically offered by property and casualty insurers are policies that attempt to disguise title insurance by bundling it with errors and omissions coverage. ALTA® highlighted two active examples of this type of policy, Great American’s Form 5701 and Fidelity & Deposit’s Mortgage Lending Activities Protection Policy, in a presentation to the winter meeting of the NAIC Working Group on December 7, 2003. ALTA® has discussed these products with several state regulators.
1. Great American’s Form 5701
Great American’s Form 5701 provides coverage for loss due to the existence of undisclosed liens senior to the insured mortgage. Other than a few of its exclusions from coverage, the basic policy appears to be a relatively vanilla errors and omissions policy. The form provides coverage for “all sums incurred by the insured in damages as a result of an incident, and all liabilities contractually assumed by the Insured under a mortgage agreement as a result of an incident.” An “incident” under the policy “means an act, error, omission, personal injury or breach of duty by the Insured in their mortgage lending activities.” In short, the policies cover errors and omissions by the insured in carrying out its mortgage lending activities.
But, title insurance coverage is added to Form 5701 through a series of endorsements that can be issued. Through these endorsements, the definition of mortgage lending activities is amended to insure lien priority and vesting, both title insurance risks. Through these endorsements, Great American is impermissibly bundling title insurance coverage with errors and omissions insurance. This policy poses a central challenge to the title industry not only because it includes title insurance but also because it can insure any mortgage on any property. Whereas, many mortgage impairment policies are limited to residential junior mortgages or home equity lines of credit, this policy is not. Through endorsements it can apply to both commercial and residential properties. Through endorsements, it can apply to first mortgages and junior mortgages. Indeed, these same endorsements extend its application to mortgages issued during the purchase transaction. Accordingly, if permitted, this policy will effectively obliterate the title insurance mono-line provisions. Great American has a sister policy to Form 5701, its Form 5701c. Unlike the Form 5701, which bundles title insurance through endorsement this policy includes title insurance in the body of the policy through the definition of the term “mortgage lending activities,” which unambiguously covers risks associated with vesting and unknown senior liens.
2. Fidelity & Deposit/Zurich Financial Services
The Fidelity & Deposit/Zurich Financial Services Group’s Mortgage Lending Activities Protection Policy is another example of an E&O mortgage impairment product.
The insuring agreement in the Mortgage Lending Activities Protection Policy provides that “ ¼the Insurer agrees to indemnify the Insured for Loss resulting from a Mortgage Lending Wrongful Act in connection with its Mortgage Lending Activities.” Like the Great American policies, this product purports to cover errors and omissions by the insured in carrying out its mortgage lending activities but constitutes a bundled product with disguised title insurance coverage.
In this policy, one can’t tell that the policy includes title insurance from the insuring clauses. Instead, one can only recognize the nature of this policy through its exclusions. For example, exclusion (j) to the policy excludes the following losses:(j) for any Mortgage whose priority is not lower than its priority position when recorded. This exclusion does not apply to Mortgages whose priority position is the same as or higher than when recorded because of the satisfaction of a lien.
In other words, only mortgages that have suffered a loss of priority are covered under this policy. All other mortgages are excluded. Clearly, this is a title insurance policy.
Much Still to be Done ALTA®, in conjunction with state land title associations, is continuing its efforts to identify mortgage impairment policies and educate regulators regarding the dangers posed by the acceptance of such products. ALTA® needs your help in monitoring your marketplace to determine which mortgage impairment products, if any, are being offered in your marketplace. If you identify any, please advise ALTA® so that it can take appropriate actions.
Richard G. Carlston is a shareholder with the firm of Miller, Starr & Regalia in Walnut Creek, CA, and represents ALTA® in various matters.Rich serves on the ALTA® Claims Committee and Title Counsel Committee. He can be reached at RGC@MSandR.com or (925) 935-9400.
Sunny J. Knight is an associate with the firm of Miller, Starr & Regalia. _ She can be reached at SJK@MSandR.com or (925) 935-9400.