Title Insurance Jun 10, 2021
By: Craig Watrous
Title insurance is an important component of any commercial property transaction – or at least it should be. This post explains what title insurance is, what it covers, how it works, and why commercial property buyers should put a good policy in place for their next real estate purchase.
1. What is a title insurance policy, and what does it do?
A title insurance policy insures the ownership (the title) to a particular piece of commercial real estate. Just as important are the exceptions to title listed in the policy. These exceptions alert the Buyer to title issues (encumbrances) affecting the property. The title insurance company, in exchange for a fee, will provide the buyer with an insurance policy that insures the title to a specific piece of real estate, subject to the exceptions listed in the policy. If it turns out that the actual title to the real estate is not as its stated in the policy, then the buyer may be able to make an insurance claim back against the insurance company for the damages that it suffers. For example, if it turns out there is a valid easement claimed by a neighboring property owner which wasn’t disclosed in the insurance policy – that may give rise to an insurance claim because it may reduce the buyer’s ability to use or develop the property.
2. Why is title insurance used?
There can be a multitude of title issues with a piece of commercial real estate. To name a few, public and private easements, encroachments, incorrect property boundaries, tax liens, governmental restrictions, utility easements, city restrictions, HOA covenants, mechanic’s liens, lis pendens and others. Title insurance provides evidence of what has been recorded on a piece of real estate and its respective chain of title. Title insurance provides the buyer of a commercial property with proof that the property they are hoping to acquire is actually marketable and any recorded restrictions that may affect its usage. In essence, it confirms that you are buying what you think you are buying. If a lender is involved in the transaction, they will absolutely require title insurance, because it’s necessary to verify and protect the collateral (the property) for their loan. In a cash transaction, a Buyer should still get title insurance to cover their own investment. In the grand scheme of things title insurance is reasonably priced.
3. What is a title insurance commitment?
A title insurance commitment is essentially a draft example of the title insurance policy an insurer is willing to issue once certain requirements are met in connection with the purchase. A commitment functions as a promise by the title insurance company to issue a policy once its requirements are satisfied. They are usually valid for 45-90 days. After that time period, if not renewed, it may expire, and a new commitment would have to be ordered. The purchase and sale transaction should be structured so that the policy will be issued in compliance with the commitment, meaning that it should be a condition to closing that the title policy be issued. A well drafted purchase and sale contract will allow the Buyer to walk from the deal if the title policy can’t be issued.
Keep in mind that a title insurance commitment is not an insurance policy. A policy doesn’t exist until it is actually issued by the title company and the premium paid. Normally, particularly if the closing is being handled by the title company as the escrow agent, the title policy is issued at the closing once the premium is paid. In addition to the premium, there will also be other requirements that the title company requires prior to issuing the policy. These can be varied, but include such things as indemnifications from the seller, the requirement to get a survey, affidavits, corporate documents and certifications from the buyer and seller. If these requirements aren’t met, then the commitment may be revise or a policy may not be issued at all.
4. What will a title insurance commitment show?
Ordering a title commitment is the first step in getting title insurance on a piece of commercial property. The commitment contains a legal description of the property, the name of the proposed insured (the buyer), and the coverage amounts and limits of the policy that will be issued. It identifies the current owner of the property, and any encumbrances that exist on the property as stated above. The encumbrances can include several different things, each an interest in the property – like a utility easement or a pending lawsuit (a lis pendens), a mechanic’s lien or a deed of trust from a bank. Each of these encumbrances may have some effect on the usage of the property. The commitment also shows the chain of title going back in time. It contains a list of requirements that are a condition to the issuance of a title policy. They also contain a statement of any standard and nonstandard exceptions to title that exist and for which no insurance coverage will be provided. For an additional fee some of these exceptions can be removed and insured over. The price for these endorsements varies by property and on risk.
5. What are the standard exclusions and exceptions from coverage?
Here are examples of some standard exceptions:
- Any facts, rights, interests, or claims thereof, not shown by the Public Records but that could be ascertained by an inspection of the Land or that may be asserted by persons in possession of the Land.
- Easements, liens, or encumbrances, or claims thereof, not shown by the Public Records.
- Any encroachment, encumbrance, violation, variation, or adverse circumstance affecting the Title that would be disclosed by an accurate and complete land survey of the Land and not shown by the Public Records.
- Any lien, or right to a lien, for services, labor or material heretofore or hereafter furnished, imposed by law, and not shown by the Public Records.
- Defects, liens, encumbrances, adverse claims, or other matters, if any, created, first appearing in the public records or attaching subsequent to the effective date hereof but prior to the date of the proposed insured acquires of record for value the estate or interest or mortgage thereon covered by this Commitment.
- (a) Taxes or assessments that are not shown as existing liens by the records of any taxing authority that levies taxes or assessments on real property or by the Public Records; (b) proceedings by a public agency that may result in taxes or assessments, or notices of such proceedings, whether or not shown by the records of such agency or by the Public Records.
- (a) Unpatented mining claims; (b) reservations or exceptions in patents or in Acts authorizing the issuance thereof; (c) water rights, claims or title to water.
In addition, matters known by the insured, not known to the title insurer, and not disclosed by the public records are excluded, as are those resulting in no loss to the insured. Anything arising after the date of the policy or resulting in a loss that would not have been sustained if value had been paid for the property, are also excluded from coverage.
Additionally, claims of parties in possession of the property, unrecorded endorsements, mineral claims and the like, mechanics’ or construction liens not of record, dower or homestead rights, boundary disputes, survey matters, and building and use restrictions not appearing in the chain of title are excepted from coverage in a standard title insurance policy.
6. Insuring the “gap”
The “gap” is the time period between when the date of the commitment and the actual date of the closing. This could be weeks or days, but the commitment date captures a moment in time regarding the title to the property. The insurance coverage issued is normally based on the date of the commitment vs. the actual closing date. Significant changes in title to the property could occur between the date the commitment is issued and the date the transaction in question actually takes place. For example, during this period, the property could be sold by quitclaim deed, or re-mortgaged or a tax, mechanics’, or construction lien could be placed on the property. It is extremely important that a title insurance commitment be updated to the exact time of the closing so the title policy issued will neither be obsolete nor contain any surprises for the parties involved. This is called covering the “gap.” Usually in a well-organized transaction, the commitment will be updated multiple times during due diligence and then right before closing.
7. Who generally pays the title insurance premium – the seller or the buyer?
This is something which is negotiated between the seller and buyer. Traditionally, the seller pays the title insurance premium due for the buyer’s standard policy. Often the buyer will pay the premium applicable to any lender’s policy required by his or her mortgage. Also, the buyer will normally pay for any additional endorsement it wants over the standard policy.
8. Is a title insurance policy a guarantee that the title is perfect?
No, in fact it’s pretty rare for commercial properties in urban areas to have perfect title, especially in older or densely populated areas. A title insurance company will often include in its policy exceptions to coverage dealing with matter affecting title that its search of public records has disclosed. Also, as discussed below, there are a number of standard exclusions and exceptions to coverage. In addition, although title insurance companies generally review title carefully and genuinely believe it to be in the state described in their policy, they also sometimes insure over risks that they consider to be insignificant or unlikely to cause a problem. Title companies also occasionally make mistakes. That’s the whole point of the insurance, if a mistake is made by the title company, then the owner can make a valid claim on the insurance policy and recover monetary damages.
9. Against what risks does a standard owner’s title insurance policy generally insure? What additional risks are covered by a lender’s policy?
A standard owner’s policy covers:
– Failure of title to the property;
– Defects in or liens or encumbrances against title to the property;
– Lack of a right of access to and from the property; and
-Unmarketability of title to the property.
A standard lender’s policy may add coverage pertaining to the lien of the insured mortgage (a deed of trust); the priority of any lien or encumbrance over the lien of the insured mortgage; and certain mechanics’ or construction liens.
10. What other sorts of endorsements are available to enhance the coverage provided by a title insurance policy?
A variety of special coverage is available through endorsements to a title insurance policy. Some endorsements are given without charge; others require an additional premium. Title insurance companies may also provide endorsements to cover access, encroachments, covenants, restrictions, setback lines, and options to purchase (like a right of first refusal). Special custom endorsements can be negotiated in special circumstances. A good real estate attorney can advise you on the types of endorsement you may want to add. Other commonly used endorsements include letter of credit endorsements (when the obligation of the customer to reimburse the lender for future draws on the letter of credit is secured by a mortgage) and zoning endorsements (that insure the property’s zoning classification). It is increasingly common for the standard exceptions to be removed at a nominal cost (sometimes even free) once certain title requirements are met. Practical tip – always pay to remove the standard exceptions, these are often where title issues and disputes come up.
11. How does an owner or lender file a claim under a title insurance policy?
The claims procedure is specifically spelled out in the policy. If a claim ever is made, it’s vital to follow the claims procedure in the policy. If it isn’t followed, there is a potential that the claim may be rejected.
Mallon Lonnquist Morris & Watrous, PLLC, is a business and real estate law firm based in Denver, Colorado. Craig T. Watrous is a Colorado real estate and title insurance attorney at MLMW. Craig regularly represents clients on both sides of commercial property transactions, both in contracting and disputes. Craig can be reached at firstname.lastname@example.org and (303) 722-2165.