Most sophisticated real estate professionals understand that before real property is acquired, a review of the condition of title is an essential part of the due diligence process. But the nuances of title insurance coverage are often not understood.

In most cases, a prospective buyer of real estate will receive a preliminary title report or title commitment from a title insurer affiliated with the escrow agent for the transaction. That document typically includes the legal description for the property, a statement about the proposed form of title insurance policy, the exceptions to the title insurance coverage that the title insurer offers, a statement of the conditions that must be met before policy issuance, as well as boilerplate exclusions and limitations on covered risks.

Many buyers do not understand that there are different forms of title insurance policies or that the insurance coverage may vary widely between them. For example, a 2021 ALTA Owner’s Policy of Title Insurance, a form developed by the American Land Title Association (“ALTA Policy”), is frequently used to insure title to commercial property. The ALTA Policy includes a list of 10 “insuring clauses” which may protect the buyer – the insured – against loss or damage that occur as a result of title problems that exist as of the date when the policy is issued (typically the date when escrow closes). Briefly explained, the insuring clauses allow for coverage when, for example:

• Title is vested other than as stated in the policy, i.e., someone other than the buyer actually owns the property, or the buyer’s interest in the property is different than what is insured;
• The title is defective for reasons that include a forged deed, seller incapacity or incompetency, an improperly recorded conveyance, or a lien encumbers the property;
• Title is unmarketable;
• There is no right of access to/from the property;
• There is a violation or enforcement of law – including building and zoning violations – if an “Enforcement Notice” relates to the use or occupancy of the property, the character or location of improvements on the land, subdivision, or environmental remediation/protection;
• A jurisdiction enforces its police power against the property (e.g., forfeiture or eminent domain), to the extent described in an Enforcement Notice;
• There are other defects in title or vesting, including those which result from the seller’s title being acquired through a fraudulent conveyance or preferential transfer in violation of bankruptcy or other law; and
• Other covered title defects occur between the date when the policy is issued and the date when the document that conveys the property is recorded.

When an ALTA Policy is selected, the buyer has the option to purchase a variety of extended coverage endorsements. Some commonly requested endorsements provide coverage for zoning matters, environmental protection liens, access and/or utility access, contiguity (where the property consists of multiple parcels), subdivision, and encroachments. If the buyer’s acquisition of the property is financed, the lender typically requires the buyer to fund the cost of policy of title insurance to protect the lender’s security interest in the property. A lender’s policy covers similar risks to an owner’s policy, and may contain its own set of extended coverage endorsements.

The 2021 ALTA Homeowner’s Policy of Title Insurance is generally available to individuals (i.e., “natural persons”) who purchase a residential property, and includes coverage that is considerably more broad than that of the ALTA Owner’s Policy. The CLTA Standard Coverage Policy of Title Insurance, a form developed by the California Land Title Association, in contrast, offers less coverage than that offered by the ALTA Owner’s Policy.

In all cases, the language of the insuring clauses dictates the specifics about what the policy does and does not insure as do the conditions and exclusions from coverage. For example, title insurance policies do not cover matters that are “created, suffered, assumed, or agreed to” by the insured, or which are known to the insured and not disclosed to the title insurer prior to policy issuance.

A key point of misunderstanding about title insurance is that the list of exceptions that are identified in a preliminary title report or title insurance policy is not a representation about the condition of title. The preliminary title report is simply an offer to insure property, and the terms and conditions on which the title insurer is willing to do so. Cal. Ins. Code § 12340.11. When a party seeks complete information about the condition of title, it should inquire about obtaining a Condition of Title Report from a title insurer. It should also investigate other sources of information that may impact title to a property, such as court records for the jurisdiction where the property is located.

A prospective buyer of real property should carefully consider what form of title insurance policy will fit its needs and the kinds of title risks for which it requires insurance. Each policy form offers different kinds of coverage, as do the various optional endorsements. A qualified real estate attorney may be of assistance to a buyer completing a pre-acquisition title review and selecting the most appropriate form of title policy.

Authored by Reuben, Junius & Rose, LLP Partner, Corie A. Edwards.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.