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Title News - September/October, 2006

September/October, 2006 - Volume 85 Number 5

Inside the Industry
ALTA® Adopts New Policies

By Clifford L. Morgan

The 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.

Important Changes
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

1. forgery, fraud, undue influence, duress, incompetency, incapacity, or impersonation;
2. failure of any person or Entity to have authorized a transfer or conveyance;
3. a document affecting Title not properly created, executed, witnessed, sealed, acknowledged, notarized, or delivered;
4. failure to perform those acts necessary to create a document by electronic means authorized by law;
5. a document executed under a falsified, expired, or otherwise invalid power of attorney;
6. a document not properly filed, recorded, or indexed in the Public Records including failure to perform those acts by electronic means authorized by law; or
7. a defective judicial or administrative proceeding."

Even though all of these expressly mentioned matters are also covered by the broad language of the 1992 policies, that fact is not immediately clear to the reader without further legal analysis. The language in the new policies is clearer and easier to interpret.
In the 2006 policies we expressly address the issue of electronic documentation and recordings. We now give coverage with respect to this concern, with six references to electronic documents/recordings in the loan policy and two references in the owner’s policy.
The 2006 policies also contain a specific Covered Risk for survey matters. You will find this in Covered Risk 2.(c). This coverage is not expressly stated in the 1992 policies or earlier versions. There have been some court decisions that have held that the prior version policies do not give survey coverage by their printed terms even when the “survey exception” is deleted. By adding this Covered Risk, it is clear that survey coverage is provided when no survey exception is taken in Schedule B of the policy.

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.

Problems Eliminated
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:

1. Insured individuals unknowingly losing coverage if they conveyed their insured property to a family trust for their own estate planning purposes without getting a new policy or an endorsement to their existing policy adding the trust or trustees as an insured. With the 2006 policy, no new policy or endorsement is needed to provide coverage for the trustees or beneficiaries of the trust because of changes to the definition of “Insured” in subsection 1.(d)(i)(D)(4) of the Conditions.
2. The insured not having the amount of coverage it thought it had when improvements were made to the land after the purchase because of the coinsurance provision set out in subsection 7.(b) of the Conditions and Stipulations of the 1992 owner’s policy. The coinsurance provision has been eliminated in its entirety.
3. The insured needing a “fairway” endorsement in order to continue coverage when a partnership or limited liability company (LLC) that owns property is reorganized to substitute some or all new partners or members for the existing partners or members. With the 2006 policy, the “fairway” endorsement is not necessary because of changes to the definition of “Insured” in subsection 1.(d)(i)(B) of the Conditions.
4. The insured not having the amount of coverage it thought it had for a particular claim because of the apportionment provision in Section 8 of the Conditions and Stipulations of the 1992 owner’s policy. That section applied in circumstances where the title insurer had issued a single policy insuring two or more parcels not used as a single site and a claim was made affecting only one of the parcels. The effect of this section was that the insurer was allowed to apportion the coverage pro-rata as to the value on Date of Policy of each separate parcel to the whole, resulting in the insured not having sufficient coverage for the claim. The “Apportionment” clause has been eliminated in its entirety.

For a lender the 2006 loan policy eliminates:

1. Lenders needing to obtain a “last dollar” endorsement in order to maintain coverage until their loan is paid off for certain loan transactions where the amount of the loan exceeds the amount of insurance shown in Schedule A of the policy. This situation occurs when the value of the real property collateral is less than the total loan amount and the remaining portion of the loan is either “unsecured” or secured by personal property collateral. Under these circumstances, a lender will understandably purchase a policy with an amount of insurance equal to the value of the real estate only, rather than the full amount of the loan. As the loan is paid down, subsection 9.(b) of the Conditions and Stipulations of the 1992 loan policy causes the amount of policy liability to be reduced dollar for dollar, with the liability eventually decreasing to zero---even though the lender may still be owed a considerable sum of money and the “insured mortgage” remains as security for the remaining debt. With the 2006 loan policy this situation is avoided because the language from subsection 9.(b) of the Conditions and Stipulations of the 1992 loan policy is eliminated.
2. Lenders who make second loans unknowingly losing coverage because of the “Liability Noncumulative” provisions of Section 10 of the Conditions and Stipulations of the 1992 loan policy simply because a prior mortgage holder, who makes a claim on its policy of title insurance issued by the same title insurer, gets paid. The “Liability Noncumulative” clause has been eliminated in its entirety.

With respect to endorsements, issuing procedures have been simplified for both the insured lender and the insurer because the 2006 loan policy incorporates endorsements customarily issued to lenders into Schedule A of the policy. When the box is checked next to one of the listed endorsements, the coverage applies without needing to physically attach the endorsement form to the policy. As long as your offices and agents remember to check the appropriate boxes, this should greatly assist in eliminating the long-standing production problem of the title industry of failing to attach the endorsements required by the lender.
Many sections in the Conditions for both the owner’s and loan policies have been modified to make the claims submission process less onerous and confusing. The 2006 policies include a provision which imposes a penalty against the insurer that applies when the insurer chooses to litigate and is unsuccessful in establishing the title as insured. In this situation, the Amount of Insurance automatically increases by 10 percent, and the insured may elect the date on which the loss is to be measured as either the date the claim was made or the date the claim was settled.
As a final comment on the 2006 policies, some of the defined terms such as “Insured” and “Unmarketable Title” have been broadened for the benefit of the insured. Also, we defined some previously undefined terms used in the 1992 policies to now benefit the insured. An example of such a definition is the term “Indebtedness” as used in the loan policy. Indebtedness is now defined so that many of the elements of loans that would not have necessarily been included in this term under prior policy forms are specifically included in the 2006 policy. All of these changes substantially broaden the coverage of the 2006 policies.
ALTA® also adopted a Short Form Residential Loan Policy for one-to-four family residential transactions that incorporates the provisions of the 2006 loan policy.

Endorsement Updates
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.

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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.

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