What is it?
Oftentimes, a complex issue or phenomenon can best be described by giving multiple examples of its existence, rather than by creating an all-encompassing definition. So it is with the "gap." In the title insurance business, the "gap" can appear under varying circumstances, can be handled in a variety of ways, and can have a variety of implications, including claims. In each case, the "gap" basically consists of a difference in time between the date through which the last examination of title is made and the date of record notice (by filing or recording) of the insured's deed or mortgage. This, essentially, is the "gap."
What forms can it take?
The following represent a good cross-section of the many faces the gap can assume:
1) The county recorder's office records instruments approximately one month after they are filed or presented to the recorder. The courthouse examination at time of filing does not include those previously filed instruments not yet recorded. (In many states an instrument is record notice from filing or presentation to the recorder; in some states the instrument is not record notice until later recorded by the recorder.) This is a gap.
2) The title company's plant is currently posted seven business days prior to today. This is a gap.
3) The title company closes and files for record without down dating, extending or continuing its prior search of records. This is a gap.
4) The title company closes the real estate transaction and disburses, but fails to file the instruments for two weeks. This is a gap.
5) The title company secures execution of the documents on a loan subject to right of rescission, but does not continue the examination when the mortgage is filed for record after the three day right of rescission expires. This is a gap.
How big is this gap?
The gap between the date of filing or recording of instruments and the date through which a current examination will be made varies widely. In some locations, the examination customarily is done through time of recording, with no gap in the time between the examination and Date of Policy, or is done to within a few hours of the current filing. Most common is a gap of anywhere from a few days to about two or three weeks, if the title is down dated or continued until time of closing or filing. In several counties sprinkled throughout the U.S., the gap ranges from two to eight months. For example, in the area around Atlanta the gap can be up to four months. In Minnesota, the switch to imaging has been followed by an increase in the gap of up to four months.
How can we cover this gap?
The ALTA® Commitment Form - 1966 and the ALTA® Commitment Form 1982 - are subject to defects, liens, encumbrances, and other matters created, first appearing in the public records or attaching subsequent to the effective date of the commitment. Considered alone, the commitments do not provide liability for gap issues, if the effective date of the commitment is the date through which the title examination is effective.
However, the title company may assume liability for the gap in a number of ways:
The Short Form Residential Loan Policy (10/17/92) and the Residential Loan Certificate to the Master Residential Loan Policy (10/17/92) define the Date of Policy as a stated date (settlement) or date or recording of the insured mortgage, whichever is later. It is not uncommon to insure over the gap with these forms.
The ALTA® Homeowner's Policy of Title Insurance (10/17/98) defines the Policy Date as the time of recording of the vesting deed if the insured acquires title by instrument recorded after the stated Policy Date. This form contemplates insurance of any gap.
The title company may issue its ALTA® owner's or loan policy, effective as of date of settlement, with the Date of Policy language shown on the Short Form Residential Loan Policy. This may be used as a means of providing gap coverage, without delaying delivery of the policy to secure recording information.
Closing instructions (e.g. the lender's instructions, escrow instructions, or the sales contract) received by the title insurance agent, will not allow additional exceptions if the title company closes and disburses. The lender's closing instructions may, for example, require that the requirements on the commitment (or binder or preliminary report) be satisfied before requesting funding authorization or disbursing. Given these instructions, the title insurer may be obligated to issue its policy without exception to matters in the "gap," if the title insurer has issued a closing protection letter to that lender. Likewise, if the title insurance agent closes, disburses, and collects the title insurance premium, the title insurer may be obligated to issue a title policy without additional exception, because of the evident agreement to issue without additional exception.
The title company may "mark-up" the commitment, such as in a New York style or table funding closing, at which time the provisions relating to subsequently recorded or attaching matters would be deleted.
The title company may be required to provide gap coverage by regulation. In Colorado, for instance, gap coverage must be given if the title insurance agent is responsible for closing the real estate transaction and filing the instruments for record. In New York, the mandatory endorsement to the policies provides gap coverage.
The title company may issue a gap endorsement at closing, to insure against intervening matters. This is periodically done on commercial transactions.
The title company may by custom simply insure the gap by issuing its policy, without a search through date of recording.
Are there claims because of the gap?
Title claims can and do occur because of documents that sneak into this gap period. The borrowers may have a judgment or tax lien filed against them, the sellers may get a home equity loan, or the builder may grant an easement on the land. In the minority of states with a "notice" recording system, it also is possible that the insured's instrument may not have priority over a later unrecorded deed or mortgage executed before the insured's instrument is filed or recorded, even though the insured's instrument is filed or recorded first. Historically, however, gap claims have not been a major cause of losses.
What can be done to reduce the risk of the gap?
Where there is a gap, practices vary, depending on the state, size of transaction, and parties. In some locations, the risk is virtually eliminated or reduced by doing a continuation of title shortly before the closing.
In other jurisdictions, a continuation may be done at or about time of filing or recording. If the closing is subject to right of rescission, practices will vary; some will do an additional continuation at time of funding, and some will not. Generally, title will be continued once before the closing, at least where the commitment was not issued recently before the scheduled closing. In some cases, title companies also require gap affidavits and indemnities, but in other cases, the title companies simply assume the risk. However, this practice varies from state to state.
Being aware of how your local practices (both internal to your company and in your recorder's office) can alert you to risks associated with gap issues. Such awareness can promote improved practices designed to reduce such risks or at least understand that a risk is being taken.
James L. Gosdin is Senior Vice-President and Senior Underwriting Counsel for Stew-art Title Guaranty Company. He received his bachelor"s degree from the University of Texas and his Doctor of Jurisprudence degree with honors from the University of Texas School of Law. Jim is a member of the American Land Title Association® Forms Committee and is chair of the ALTA® Liaison Committee with the National Association of Insurance Commissioners. Jim may be reached via email at firstname.lastname@example.org .