Holding The Undisputed Title (Insurance)

September 2015

Owning title to property gives you the right to exclude all others from using or possessing the property. Title insurance is obtained in nearly all California real estate purchase and sale transactions to protect buyers against losses or damages incurred if the title to the property is found to be unmarketable after the purchase. In the policy, the title insurance company insures the state of title existing as of the date of the policy and will indemnify the buyer against losses caused if title to the property turns out to be different than what was insured by the policy. Below are five aspects of title insurance that you should know before purchasing a policy.

Preliminary Report is Solely an Offer to Insure the Property.

The title insurance company responds to an application for title insurance by providing a preliminary report, which informs the prospective buyer of the manner in which the title insurer is willing to insure title to the property if it issues a policy. The report will generally include the interest insured, the vesting of the property, the legal description of the property, the company’s standard preprinted exclusions and exceptions to coverage, and specific matters affecting the property against which the insurer is not willing to insure (if any). This will enable the prospective buyer to assess the extent of risks in purchasing the property. However, the preliminary report only constitutes an offer to issue a policy on the terms contained in the report—it does not represent or warrant the title of the property and therefore, a buyer should not rely on the report to determine the state of title to the property. Prior to the issuance of a policy, the buyer, seller, or either party’s counsel may attempt to eliminate some or all of the specific matters and exclusions contained in the preliminary report.

Title Insurance is an Indemnity not a Representation or Warranty.

Similar to the preliminary report, a title insurance policy is not a representation or warranty of the title to the property. Therefore, in the event that a defect to title exists and such defect is covered under the policy, the insurance company will not be liable for damages in contract or tort liability. Instead, the title insurance company agrees to indemnify, hold harmless, and reimburse the buyer for losses caused by such defects to title, incorrectness of searches relating to the title of the property, and liens or encumbrances that may affect title. The scope of the coverage of this indemnification is discussed below.

The Value of the Property Itself is not Covered.

As noted by the Supreme Court of California in Hocking v. Title Ins. & Trust Co., “One can hold perfect title to land that is valueless; one can have marketable title to land while the land itself is unmarketable.” (1951) 37 C2d 644, 651. The Court’s holding provides that certain matters (such as physical conditions of the property) may restrict the use of the property or otherwise adversely affect the value or the purchase price, however, these matters will not affect the title to the property. In Hocking, the plaintiff purchased two unimproved lots in a subdivision that did not meet the city’s requirements to receive building permits to construct on the lots. The plaintiff asserted that the title to the lots was unmarketable and made a claim under her title insurance policy. The Court held that even though the plaintiff could not use her lots as she anticipated, only her intended value of the property was affected. Due to the fact that the plaintiff possessed fee simple title to the property, she had no valid claim under her title insurance policy.

Scope of Coverage.

Unlike policies of property insurance and liability insurance that protect against losses for a set period of time following the issuance of a policy, title insurance covers the insured throughout the period of ownership of the property without a specified expiration date. Further, most title insurance policies will continue to protect the insured from liabilities that occur after the insured has sold or otherwise conveyed the property. If the insured sells the property and gives a warranty of the title’s condition based upon the title as insured under the policy, then the title insurance company may be liable to the new purchaser of the property, or the insured may have a cause of action for indemnity against the title insurance company. Therefore the term of the title insurance policy, unlike other forms of insurance, is indefinite and claims may be made many years after the policy was issued. Another difference between the types of insurance is that property and liability insurance provide coverage for events occurring subsequent to the issuance of the policy. A title insurance policy, on the other hand, will generally only indemnify the owner for events that occurred prior to the issuance of the policy. In most cases if an event altering or affecting title to the property occurs after the policy has been issued, the insurer will have no duty to indemnify the title insurance company.

The standard title insurance policy is the California Land Title Association (CLTA) Standard Coverage Policy. CLTA coverage insures against defects which existed within the public record at the time of issuance of the policy. Potential defects which were not disclosed in the public record on the date of issuance are excluded from standard CLTA coverage and the title company will not be responsible for insuring against defects to title caused by “off the record occurrences.” An example of an “off the record occurrence” is a person’s legal claim to ownership of title to the property obtained through adverse possession, a doctrine by which a person acquires title to property through appropriating another’s right to ownership because of open possession of the property for a statutorily determined period of time, which is contrary to the current title holder’s rights.

Expanding Coverage.

If a buyer wants to protect itself against defects which are in the public record as well as against “off the record occurrences,” then in lieu of purchasing a CLTA policy, he or she should purchase a survey of the property as well as an American Land Title Association (ALTA) Extended Coverage Policy. It is recommended that a survey is purchased in conjunction with an ALTA extended policy because the exceptions to this policy exclude “off the record occurrences” that would have been discoverable if the buyer had obtained a survey. If the buyer complies with the above, then the ALTA extended policy will indemnify the buyer for “off the record occurrences” such as adverse possessions, prescriptive easements, and building encroachments that existed as of the date of issuance of the title policy and that were not revealed by the survey.

Endorsements may also be available from title insurance companies to insure against some of the more common title problems that are not generally covered under a title insurance policy. An endorsement modifies the boilerplate terms of the policy by altering or increasing the insurance coverage to insure against specific risks identified by the parties. The language of the endorsement will prevail over the more general language in the body of the policy that excludes the coverage under the policy. For example, endorsements can provide that the title insurance company will indemnify the buyer against covenants or easements on dominant or servient tenements, encroachments, lack of street access, or options to the property that existed at the time of issuance of the policy but were not discovered by the title insurance company. While some endorsements are free to the buyer, others may come at an additional (sometimes significant) cost and should be taken into account when deciding whether to purchase the property.