By Clifford L. MorganThe recently adopted owner’s policy, loan policy, and several counterpart endorsements provide much better coverage for the insured than the prior versions. Learn what has changed and why the new forms are better for your customers.
This past June the ALTA® Board of Governors adopted a new owner’s policy and a loan policy (known as the 2006 policies) as replacements for the 1992 ALTA® owner’s and loan policies. In addition, ALTA® has adopted new counterpart endorsements for each of the existing ALTA® endorsements that can be issued with the 2006 policies. This was necessary because of definitional additions and textual changes to the new policies.
You may be asking why we need new policies. You may believe the 1992 policies work fine and are not that old. So why were changes made? The reason for creating the new policies was primarily to update them to address the title insurance needs of the present-day marketplace. The 1992 policies were really drafted more than 20 years ago, and accordingly are much older than they appear. Also, there are types of transactions and known issues we deal with today that either did not exist 20 years ago or were not recognized.
The provisions of the 1992 policies were stated in general and broad terms, contrary to more current industry practices, as evidenced by the recently adopted Homeowner’s and Expanded Coverage loan policies for residential one-to-four family transactions. This is especially true with the insuring clauses (now called Covered Risks). The 1992 policy only had four insuring clauses for the owner’s policy and eight for the loan policy. The 2006 policy forms have 10 and 14 Covered Risks respectively for the owner’s and loan policies. The Covered Risks for the 2006 policies are much more descriptive of what is covered, with the coverage more clearly and specifically stated for better understanding, and they are listed in a more logical order. This allows the insured to more easily know when coverage applies. It also allows regulators, politicians, and the news media to better understand what is covered by a policy of title insurance. It is not good when the language of the policy is not clear.
I serve as the chair of the ALTA® Title Insurance Forms Committee, and in looking at updating the forms, we believed we should try to increase coverage where it made sense to do so. Title insurance companies are now generally much larger than 20 years ago, and accordingly an individual company generally can assume greater risks without jeopardizing the company’s financial stability. The 2006 policies insure every risk the 1992 policy forms insured, plus they cover many things the 1992 forms did not. Therefore, it is expected that proposed insureds, or their counsel, will always request the 2006 policies instead of the 1992 or any earlier versions.
Easy Comparison Chart
The Committee prepared a comparison chart of the coverage provided by the 2006 policies versus the 1992 versions, along with a comparison of changes to the Conditions. This chart can be found in the Forms & Standards Section of the ALTA® Web site at www.alta.org. Without going into the detail contained in the comparison chart, the following discussion is a listing of what I consider to be some of the more important changes made with the 2006 policies.
You will find an example of the more clearly stated coverage in Covered Risk 2.(a) where the policy expressly addresses coverage for
"A defect in Title caused by
New Covered Risks
Covered Risks 5, 6, and 7 are new. They provide coverage for the violation or enforcement of any law, ordinance, permit, or governmental regulation; an enforcement action based on the exercise of governmental policy power; and the exercise of the rights of eminent domain if a notice of such is recorded in the Public Records at Date of Policy. It was believed that the 1992 policies provided this coverage because of the exception contained in each of exclusions 1 and 2. However, there have been court decisions that have found to the contrary, in that there was no insuring clause covering these risks. Some courts found that unless there is an insuring clause covering the risk, the court would not need to look further into the policy language to try to find coverage by some exception to an exclusion. Because these matters are now clearly set out as Covered Risks, title companies will not be able to take the position that various recorded documents relating to these issues (such as a recorded “Notice of Substandard Building”) do not affect title and therefore are not covered.
The 2006 policies contain a new specific Covered Risk for fraudulent or preferential transfers (“creditors’ rights”) occurring prior to the transaction creating the interest being insured by the policy. In other words, this policy covers this risk for transactions in the “back title.” You will find this coverage in Covered Risk 9 of the owner’s policy and Covered Risk 10 of the loan policy. This creditors’ rights risk also is covered by the broad insuring clauses of the 1992 policy, but again it is not immediately apparent without further legal analysis. There is still a creditors’ rights exclusion contained in the 2006 policies for fraudulent or preferential transfers arising out of the insured transaction, just as there is in the 1992 policies.
One of the more important new Covered Risks contained in the 2006 policies is the gap insurance provided by Covered Risk 10 in the owner’s policy and Covered Risk 14 in the loan policy. The gap insurance provided by these policies will not be as meaningful in escrow state jurisdictions such as California and other western states for most transactions, but it does provide very meaningful coverage for defects, liens or encumbrances created or attaching, or filed or recorded in the Public Records between the Date of Policy (date of closing) and the date of recording where the closing occurs prior to recording and not as a result of the recording. Even in the western states where as a general rule recording constitutes closing, there are some commercial real estate transactions where the closing occurs before recording, making this Covered Risk very meaningful. While this coverage adds real risk to the insurer, it is a risk we have been providing by endorsement in many states for many years for numerous transactions.
The 2006 policies have eliminated some of the problems insureds have experienced with the 1992 and earlier version policies. For an owner, the 2006 owner’s policy eliminates:
For a lender the 2006 loan policy eliminates:
As for the special endorsements adopted by ALTA® just for the 2006 policies, they will quickly be recognized by the ALTA® form numbering system. An “.06” has been added to the end of the ALTA® identifying form number. For example, the ALTA® Form 6 Endorsement that would be appropriate to be issued with a 2006 loan policy is the ALTA® Form 6.06 endorsement. An ALTA® Form 3 Endorsement appropriate for the 2006 policy would be the 3.06 endorsement, and so on. The substance of all these .06 endorsements is the same as the regularly numbered endorsement to which it corresponds, even though the language may have been slightly modified to match the 2006 policy defined terms or other provisions. The corresponding regularly numbered ALTA® endorsements that were designed to be issued to the 1992 and earlier version policies should not be issued to a 2006 policy. It is important to both the title insurer and the insured that the .06 endorsements be issued with the 2006 policies in order for the desired coverage to be provided.
I am proud of the work the Title Insurance Forms Committee has done over the last three years on these products. These policies provide much better coverage for the insured than the prior versions, and it is my hope that everyone in the industry will work hard to get them introduced into the marketplace as soon as possible. All of us can take pride in the fact we have a much better product for our customers.
|Clifford L. Morgan is senior vice president/new product development for First American Title Insurance Company in Santa Ana, CA, and chair of the ALTA® Title Insurance Forms Committee. He can be reached at 714-800-5423.|