TITLE INSURANCE COMMITMENTS – NUTS AND BOLTS
By: Ronald D. Jung and Robyn Kube
This article has been adapted from its original version to remove and edit references to examples that are not available in this version of the article.
I. CONTRACT TITLE CONTINGENCY
A crucial element of nearly all real estate transactions is the transfer of proper and clear title. Most contracts call for a warranty of title by the seller of some kind. Section 13 of the Contract to Buy and Sell Real Estate (Residential) form, approved by the Colorado Real Estate Commission, requires the transfer of title to be free and clear of all encumbrances except those listed in Section 13. Section 13.1 incorporates those exceptions in the record title. (A copy of the approved Colorado Real Estate Commission form, Contract to Buy and Sell Real Estate – (Residential), may be obtained from the CREC website).
Although not the only means to protect the parties to a real estate transaction, title insurance and settlement services by title companies have become the acceptable and standard practice in the industry. Section 8 of the standard form contract obligates the seller to provide a commitment for an owner’s title insurance policy and then allows a specified time period for due diligence review of the title commitment by the prospective buyer. This discussion is designed to alert you to the aspects of a title commitment which should be considered when advising a prospective purchaser and by the seller in resolving potential issues.
It is imperative to review the title commitment for issues pertaining to the identified exceptions and requirements, as well as any off-record title issues, which may be disclosed. Once a buyer objects to title issues, it is also imperative that the seller be able to appropriately review the issues in order to address any objections and close the transaction. Similar to other due diligence provisions in the standard form contract, a failure to timely object to a title issue results in the buyer waiving the right to terminate the contract for that reason. There may still be other remedies, but they can be complicated. The failure to come to an agreement or resolve title issues, on or before the title resolution deadline, results in termination of the contract unless the buyer withdraws the written notice of title objection. (Contract, Section 8.4.1).
II. SOURCE OF OWNERSHIP REQUIREMENT FOR TITLE COMMITMENT
C.R.S. § 38-35-109 requires that all deeds, powers of attorney, agreements or other instruments in writing conveying, encumbering or affecting the title of the real property, may be recorded in the office of the county clerk and recorder in the county where such real property is located. No unrecorded instrument shall be valid against any person unless that person has actual notice of the document that is unrecorded. This is a race notice statute.
A title insurance company must conduct an examination of recorded title and relies on the above statute in providing an insurance commitment. C.R.S. § 10-11-106 provides that no policy of title insurance shall be written unless and until the title insurance company has caused a reasonable examination of the title to be conducted and a determination of insurability of title in accordance with sound underwriting practices for title insurance companies to be made. Section § 10-11-106(1).
III. COMMITMENT FOR TITLE INSURANCE
A commitment for title insurance is not a title insurance policy and provides no title insurance unless a policy is issued. The title commitment contemplates insurance to be issued at a later date subject to the satisfaction of the requirements stated in the commitment and the exceptions in coverage as defined.
A title insurance commitment is an offer to provide title insurance that is accepted by satisfying the requirements. A commitment is typically limited by time and normally expires 90 days after the date of issuance. Title companies may be willing to extend the date of expiration of the commitment.
IV. REVIEW OF COMMITMENT
Virtually all title insurance commitments are based on forms developed by the American Land Title Association (ALTA) and are referred to as ALTA Commitment Form 06/17/06, (a copy of such form may be purchased from the American Land Title Association website). Commitments generally are issued for owners’ or lenders’ policies, although title insurance for leasehold interests is also available.
A title insurance commitment contains the following sections or clauses:
- Commitment offer;
- Commitment for title insurance, Schedule A;
- Commitment for title insurance, Schedule B;
Schedule A of the commitment sets forth necessary information relating to the transaction, including the date of the commitment, descriptions of proposed policies, insurance amounts, the name(s) of insureds, the name(s) of the current owner, a description of the estate that is to be insured, the legal description, and a file number.
Schedule B, Section 1 of the commitment lists the requirements the title company requires to be performed prior to the issuance of a title policy. Generally, these include execution of a transfer deed and releases of deeds of trusts or other liens against the property.
Schedule B, Section 2 of the commitment provides what is perhaps the most important element of the title commitment. The first five or six exceptions listed are generally found in all title insurance commitments and are typically referred to as “preprinted” or “standard” exceptions. What follows is a list of all documents recorded in the applicable clerk and recorder’s office which the title company has determined affect title to the property. The documents so identified, and the effect of those documents, will be excepted from title insurance coverage unless removed or modified. The reviewing attorney should always request for copies of the underlying title documents and review those in detail. Section 8.2 of the approved contract allows the buyer to object to any of the matters revealed by the title insurance commitment, while Section 8.1.3 permits the parties to agree to insure over the standard exceptions. This author highly recommends obtaining extended coverage over the standard exceptions. It is generally not that costly and provides a major benefit.
V. INSURING CLAUSE
The ALTA commitment form references and incorporates that the title insurance company will provide a sample of the policy form upon request. It is advisable to request a copy of the full policy because its terms are incorporated in the commitment. The insuring clause is not set forth in the commitment form, but generally identifies ten areas as being covered. In essence, coverage is provided if title is vested in someone other than as stated in Schedule A, for defects or encumbrances on the title, which do not appear generally as an exception, unmarketable title or no right of access to and from the land. There has been extensive litigation under all of these areas of coverage and there are five additional areas of coverage to be considered, which is beyond the scope of this article.
VI. EXCLUSIONS, CONDITIONS AND STIPULATIONS
The commitment form does set forth five conditions to the commitment. However, as with the insuring clause, there are additional exclusions from coverage and conditions which are set forth in the policy and not in the commitment. Therefore, again it is advisable to obtain a copy of the proposed policy and to review those terms with your clients. It is unlikely that these terms are negotiable.
VII. SCHEDULES A AND B
The majority of a buyer’s attorney’s work with a title commitment involves reviewing, and possibly modifying, Schedules A and B. Schedule A should be reviewed for accuracy since it will disclose the material terms of the insurance policy to be issued. The requirements set forth in Schedule B, Section 1 should be carefully reviewed because one or more of the requirements may present a substantial hurdle that must be overcome before closing. For instance, the requirements may describe the need for an additional party to execute a transfer deed to allow the closing to occur. Compliance with the identified requirements is generally mandatory, unless the title company can be persuaded to remove them.
Schedule B, Section 2 lists exceptions to title which will not be covered by the title insurance policy. The types of matters that may be identified as exceptions are numerous. They may include judgment liens, easements, encroachments, mineral leases, matters revealed by survey information, and many other unexpected encumbrances. The scope of this lecture does not include resolving title defects as that issue is considerable. However, counsel should determine whether steps can be taken to remove exceptions.
Some examples of exceptions that may be removed from the Schedule B exceptions are:
- Unpatented Mining Claims. Recently, a new standard exception has been included in title commitments for unpatented mining claims, reservations or exceptions in patents or acts authorizing the issuance thereof, minerals of whatsoever kind, subsurface and surface substances, in, on, under and that may be produced from the land, together with all rights, privileges and immunities related thereto, whether or not the matter is excepted, are shown by the public records or listed in Schedule B. This is often included with the exception for water rights. I have had success including all but the water rights exception in an objection letter stating that it is overly broad, vague and contrary to Title Insurance Regulation 3-5-1. Title Insurance Regulation 3-5-1 is a consumer protection rule promulgated by the Colorado Division of Insurance.
- Removing expired mineral leases. C.R.S. § 38-42-106 may provide some remedy but requires additional research by the attorney.
- Reservation of rights for other properties. It is advisable to inspect a plat or legal description of reservations set forth by other recorded documents to insure that the subject property is included within those legal descriptions. I have had several instances where exceptions can be removed because the legal description does not include the subject property.
- Endorsements. Lastly, there are numerous endorsements which can be purchased to insure against potential damages arising as a result of an excepted interest. For instance, there are endorsements to insure over a mineral lease exception, Endorsement Form 110.2. There are endorsements to protect surface improvements that are damaged as a result of a mineral interest. Endorsement Forms 100.29 and 100.31. It is imperative to investigate what endorsements are appropriate to recommend to your clients.