Introduction to Title Insurance
By David M. Tkacik, Esq.
I. Brief History of Title Insurance
Contrasted with casualty or hazard insurance, title insurance is a relatively modern invention, and, surprisingly, uniquely American. American Title Insurance is said to have evolved from colonial innovations from the English system of real property. Whereas English real property law made passing title to real property difficult through restrictions based on rights held by first born sons and fee tails which spanned generations, American colonies needed a more flexible system to make land readily transferable. The Colonies were the first to develop deed registration laws, requiring deeds to be recorded in order to be effective. As more land was sold and changed hands this way, title examination became increasingly more important.
In 1868 the Pennsylvania Supreme Court issued the seminal case of Watson v. Muirhead, 57 Pa. 161 (1868) that would be the catalyst for creation of the first title insurance company. Prior to this case, the transfer of title was accomplished primarily by “conveyancers” who handled all aspects of the transaction. The conveyancer conducted the title search, determined ownership rights of the seller as well as any other rights and liens connected with the property. In that case, Muirhead was a conveyancer who chose not to disclose a recorded judgment to a buyer after consulting with his attorney. The PA Supreme Court found that Muirhead had acted in good faith and thus was not liable in negligence to Watson, the purchaser. Wastson was left with no recourse and had to satisfy the liens. This and similar cases are credited with the creation of the first title insurance company in 1876 in Philadelphia, which is today known as Commonwealth Land Title Insurance Company. Today, title insurance is required by virtually all mortgage lenders in the United States. By contrast, title insurance has existed in Europe only since the mid-90s to early 2000s.
II. What is Title Insurance?
Title insurance is defined as a contract of indemnity against loss or damage arising out of defects in or liens upon the title to real property. Title insurance promises to reimburse and provide legal defense for losses due to covered defects in ownership rights as to the insured property. There are two major types of policies – owner’s policies and lender’s policies. Owner’s policies insure title for a purchaser or owner and remain in effect as long as the owner or the owner’s heirs own the property. Lender’s policies remain in effect as long as the lender or their assigns own the loan. Other policies can insure minerals, leasehold interests, easements and other interests. Title insurance covers against a title searcher’s failure to discover recorded matters, and also matters which would not be discoverable from the record, such as forgeries. Defects may include old mortgages that were never satisfied, restrictions, easements not caught by the title searcher, fraudulent deeds, missing heirs, encroachments, etc.
Under the recent Consumer Financial Protection Bureau (CFPB) Loan Estimate and Closing Disclosure Owner’s policies must be labeled as “optional.” However, the additional cost of owner’s coverage where lender’s coverage exists is usually only a fraction more, attributed to the higher value of the property compared to the amount of the loan. Owners should understand that the lender’s policy does not cover them and the additional expense is slight compared to risk.
Title agencies are agents of the title company. They accept applications for title insurance, order the title search, prepare title commitments, conduct the closings, and issue the title insurance policies. The title insurance premium is an all-inclusive fee in Pennsylvania and an agent cannot charge an additional fee to the buyer for closing services.
III. Policy Form Structure
The commonly used form in Pennsylvania for a title insurance policy is called an ALTA (American Land Title Association) form. This means that the form contains the uniform language developed by the American Land Title Association, a trade association for the title insurance industry. In Pennsylvania, the ALTA form is further modified by the Title Insurance Rating Bureau of Pennsylvania (TIRBOP), a non-profit corporation licensed by the PA Insurance Department. The most recent revision by TIRBOP to the ALTA forms occurred on June 17, 2006.
Generally, every title policy in Pennsylvania contains the following basic components, with the first three components being referred to as the policy “jacket”:
Exclusions from Coverage
Conditions (the contractual relationship between the insurer and the insured and definitions, limitations on liability, and arbitration provisions, and methods of reporting a claim)
Schedule A (basic information about the name of the insured, type of estate insured, and legal description)
Schedule B (exceptions to coverage or matters being insured)
Schedule C (metes and bounds legal description)
TIRBOP publishes a Title Insurance Rate Manual containing schedules of rates, general rules, approved forms, and provisions that are binding upon all members and subscribers of TIRBOP. As of the most recent amendment to the TIRBOP manual on April 1, 2015, there were sixteen member underwriters.
IV. Title Commitment
The title commitment is the title insurance company’s written promise to issue a policy or policies in favor of the insured upon compliance with certain requirements. The commitment discloses the status of the title as found by the title searcher. Here you will find whether there are any recorded mortgages, judgments, liens, oil and gas leases or easements. The industry standard has been to perform a title search going back 60 years. Counsel reviewing the title commitment needs to determine what must occur in order to complete the settlement. This includes the payment of mortgages and taxes as well as curing any other defects noted in order to insure the property.
A standard title commitment will not suffice as an, oil, gas, and mineral rights search. For an oil, gas, and mineral rights search, the search should extend back to at least 1850.
Schedule A contains the effective date of the policy. Initially this date will be the date of the title commitment but should be changed to the date of settlement after a bring down search is performed just prior to closing. Schedule A also contains the amount of the policy. An owner’s policy is typically the amount of the purchase price; however, the owner can purchase more coverage. This typically occurs when the owner is planning to make immediate improvements to the property.
Schedule B is divided into two sections. The first section contains the requirements that must be met for this specific transaction and for all insured transactions:
Pay the agreed amounts for the interest in the Land and/or the mortgage to be Insured.
Pay us the premiums, fees and charges for the policy.
Documents satisfactory to us creating the interest in the Land and/or mortgage to be Insured
Other legal proceedings, such as ejectment actions, mechanics liens, bankruptcies, etc.
Exception to unfiled mechanics liens
Town, County, and School Taxes and water and sewer rents for the prior three years.
Real estate taxes and municipal claims
Homeowners association dues, if any
Real estate taxes
Last time property was insured
The name of anyone not referred to in the commitment who will get an interest in the Land or who will make a loan on the Land
Original government issued photo ID for all parties
Proof that there is no pending divorce action
Proof there are no overdue support obligations of record
Notice of settlement
The company may make other requirements or exceptions
Schedule B Section Two contains exceptions to coverage, including:
Rights or claims by parties in possession or under terms of any unrecorded lease or agreement(s) of sale
Easements or claims of easements, not shown by the Public Records
Any variation in location of lines or dimensions or other matters which an accurate survey would disclose
Accuracy of area content
Possible rollback taxes and other damages in event of a breach of conditions of preferential assessment
Title to that part of the premises lying in the bed and right of way of all roads, driveways and alleyways
V. Covered Risks
A copy of the ALTA standard provisions for the owner’s and lender’s policies, sometimes called the “boilerplate” language or “jacket,” are contained in these materials. The Covered Risks section is subject to the Exclusions from Coverage (contained in the jacket), the exceptions from coverage (contained in Schedule B), and the Conditions (also contained in the jacket).
Covered Risks in ALTA Loan policy:
Vesting in someone other than as stated in Schedule A
Defect of lien, encumbrance on title
Fraud and technical problems with documents covered
Real estate taxes or assessments due and payable but unpaid
Lack of legal right of access to and from Land
Though actual access is not covered
Violation or enforcement of any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) if a notice is recorded
Enforcement action by police power, not covered by #5, if a notice is recorded
Exercise of the rights of Eminent domain if a notice is recorded
Any governmental taking that is binding on a BFP w/o knowledge
Invalidity or unenforceability of lien of the insured Mortgage
Fraud and technical problems with documents covered
Lack of priority of the lien of the Insured Mortgage over any other lien or encumbrance.
Lack of priority of the lien of the Insured Mortgage for advances of loan proceeds over mechanic’s liens and street assessments
Invalidity, unenforceability and lack of priority of assignment
Invalidity, unenforeability, lack of priority, or avoidance due to creditors’ rights laws or fraudulent or preferential transfer under federal bankruptcy law
Gap coverage – anything in Covered Risks 1 through 13 created, attached or recorded in the Public Records after the policy date (i.e., the date of settlement) but before the recording of the Insured Mortgage.
Covered Risks in the ALTA Owner’s Policy
1-8 above from the Loan policy are the same in the Owner’s policy
Title being vested other than as stated in Schedule A or being defective due to creditors’ rights laws or fraudulent or preferential transfer under federal bankruptcy law
Gap coverage -- anything in Covered Risks 1 through 9 created, attached, filed, or recorded in the Public Records after the policy date (i.e., the date of settlement) but before the recording of the deed or instrument of transfer.
VI. Exclusions from Coverage
Exclusions in the Owner’s Policy
1. (a) Any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting, or relating to
(i) the occupancy, use, or enjoyment of the Land;
(ii) the character, dimensions, or location of any improvement erected on the Land;
(iii) the subdivision of land; or
(iv) environmental protection;
or the effect of any violation of these laws, ordinances, or governmental regulations. This Exclusion 1(a) does not modify or limit the coverage provided under Covered Risk 5.
(b) Any governmental police power. This Exclusion 1(b) does not modify or limit the coverage provided under Covered Risk 6.
2. Rights of eminent domain. This Exclusion does not modify or limit the coverage provided under Covered Risk
3. Defects, liens, encumbrances, adverse claims, or other matters
(a) created, suffered, assumed, or agreed to by the Insured Claimant;
(b) not Known to the Company, not recorded in the Public Records at Date of Policy, but Known to the Insured Claimant and not disclosed in writing to the Company by the Insured Claimant prior to the date the Insured Claimant became an Insured under this policy;
(c) resulting in no loss or damage to the Insured Claimant;
(d) attaching or created subsequent to Date of Policy (however, this does not modify or limit the coverage provided under Covered Risk 9 and 10); or
(e) resulting in loss or damage that would not have been sustained if the Insured Claimant had paid value for the Title.
4. Any claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction vesting the Title as shown in Schedule A, is
(a) a fraudulent conveyance or fraudulent transfer; or
(b) a preferential transfer for any reason not stated in Covered Risk 9 of this policy.
5. Any lien on the Title for real estate taxes or assessments imposed by governmental authority and created or attaching between Date of Policy and the date of recording of the deed or other instrument of transfer in the Public Records that vests Title as shown in Schedule A.
Note that Owner’s Policy Exclusion 5 does not mention that this exclusion does not modify or limit the gap coverage in Covered Risk 10 of the Owner’s Policy.
Exclusions in the Loan Policy
1 and 2 of the Owner’s Policy are the same as those in the Loan Policy. The third provision is identical except for subparagraphs (d) and (e).
4. Unenforceability of the lien of the Insured Mortgage because of the inability or failure of an Insured to comply with applicable doing-business laws of the state where the Land is situated.
5. Invalidity or unenforceability in whole or in part of the lien of the Insured Mortgage that arises out of the transaction evidenced by the Insured Mortgage and is based upon usury or any consumer credit protection or truth-in-lending law.
6. Any claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction creating the lien of the Insured Mortgage, is
(a) a fraudulent conveyance or fraudulent transfer, or
(b) a preferential transfer for any reason not stated in Covered Risk 13(b) of this policy.
7. Any lien on the Title for real estate taxes or assessments imposed by governmental authority and created or attaching between Date of Policy and the date of recording of the Insured Mortgage in the Public Records. This Exclusion does not modify or limit the coverage provided under Covered Risk 11(b).
The Conditions section of the policy contains the nuts and bolts of the insurance contract. In this section you will find the definitions of terms, how to notify the title insurance company in the event of a claim, how liability is to be determined, and the obligation to defend.
A. Marketable Title
The Conditions section defines “unmarketable title” as “title affected by an alleged or apparent matter that would permit a prospective purchaser or lessee of the Title or lender on the Title or a prospective purchaser of the Insured Mortgage to be released from the obligation to purchase, lease, or lend if there is a contractual condition requiring the delivery of marketable title.” Thus this definition is defined in terms of what “marketable title” is.
Unlike some states, Pennsylvania does not have a “Marketable Title” act. Pennsylvania case law has often looked to other states on this topic and has defined marketable title as “one that is free from liens and encumbrances and ‘which a reasonable purchaser, well informed as to the facts and their legal bearings, willing and ready to perform his contract, would, in the exercise of that prudence which businessmen ordinarily bring to bear upon such transactions, be willing to accept and ought to accept.’” Barter v. Palmerton Area School Dist., 581 A.2d 652, 654 (Pa. Super. 1990) (citing 77 Am. Jur. 2d Vendor and Purchaser, § 131 (1975). A title is considered “unmarketable” if it is such that the grantee may be exposed to the hazard of a lawsuit. LaCourse v. Kiesel, 77 A.2d 877 (Pa. Super. 1951). However, “where there is no color of outstanding title which might prove substantial, and there is no reasonable doubt either at law or in fact concerning the title, the mere possibility of some future litigation concerning it does not prevent the title from being good and marketable.” Rice v. Shank, 115 A.2d 210 (Pa. 1955). If the only defect in the title is very remote and improbable, the title is marketable. Siddall v. Painter, 84 Pa. D. & C. 591, 594 (Delaware Co. 1953) (citing Norwegian Evangelical Church v. Millhauser, 169 N.E. 134 (NY 1929). In almost all instances, marketable title is equivalent to insurable title at regular rates by a reputable title insurance company. The defect must be to the title of the real estate, not defects in the physical condition.
David M. Tkacik, Esq. is the managing attorney for Tkacik Law Office and also a real estate broker. You may contact him at 412-414-9644 or DTkacik@TkacikLawOffice.com