THE 2006 REVISIONS TO THE ALTA TITLE INSURANCE POLICY

     Good news has recently emerged out of the title industry.  The American Land Title Association Board of Governors has adopted significant revisions to its basic model title insurance policy form.  The revised ALTA 2006 title insurance policy constitutes a significant upgrade of the basic policy template that has been relied upon in the vast majority of real estate transactions occurring in this country for well over a decade.  The 2006 policy form is much clearer in its terms, logical in its format and, expresses a meaningful expansion of available coverage and benefits.  ALTA has, through the issuance of the new policy, provided a tool that is responsive to the demands and expectations of the contemporary real estate market consistent with the increased pace and sophistication of modern real estate transactional practice.

     It is not surprising that the ALTA policy currently in use, revised and adopted in 1992, has been met with considerable criticism since its inception.  In recent years, it has become apparent that provisions needed to be redrafted so as to comport with the demand of consumers as well as interpretations of judges in a number of litigated cases.

     One major defect of the 1992 policy, for example, has been a lack of clarity with respect to the extent and type of coverage provided under its terms.  Though certain basic coverages provided in the 1992 policy are expressed in clear and explicit language, other coverages are said to be “inferred” through various “exceptions” to exclusions written into the policy.   These exceptions, otherwise known as “carve outs”, found their way into the ALTA policy in response to the objection of the market to particular exclusions.  Item No. 1(a) of the “Exclusions from Coverage”, for example, excludes coverage under the policy for loss based upon the exercise of governmental enforcement of zoning laws and certain other laws affecting the use and enjoyment of the land

     “except to the extent that a notice of the exercise thereof or a notice of a defect, lien or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy.” (emphasis added)

     Where notice has been duly recorded, coverage would be said to be founded upon the exception (“carve out”) to the governmental regulatory exclusion and, therefore, would be considered to be “covered” under the terms of the policy.

     The question of whether specific coverage could be properly inferred through the tangled web of policy exclusions and exceptions often had to be resolved through litigation.  The judicial principal that has emerged out of relevant case law is that policy coverage must be set forth in the insuring clauses of a policy and may not be inferred through policy exclusions and exceptions.  The 2006 ALTA policy form is consistent with this precept:  coverage is clearly and positively expressed within the insuring provisions of the policy and each insuring provision is neatly paired with a particular exclusion that is consistent with that coverage.  Exceptions to exclusions are no longer relied upon as a source of coverage.

     In addition, broad categories of coverage set forth in the policy have, generally, been clarified to include certain specific situations. The traditional “defect in title” category of owner coverage now explicitly includes, for example, “a document executed under a falsified, expired, or otherwise invalid power of attorney.” Coverage is modernized so as to extend to a “failure to perform those acts necessary to create a document by electronic means authorized by law.” Note that the policy provides that risks specified as covered under the terms of the policy and are among, but do not comprise the exclusive, risks that are covered.

     Owner coverage has also been enhanced. For example, the definition of the “Insured” named in Schedule A now includes, explicitly, the trustee or beneficiary of a trust created by the named insured for estate planning purposes, certain successors to an insured by way of dissolution, conversion and other processes, and certain grantees in transactions between related entities. In addition, the owner policy now provides coverage with respect to most matters appearing within the time “gap” between the date of the policy and the recording of the deed or other instrument of title. Though this particular time gap is not the same title “gap” that has recently been of concern in Maryland, the change is significant in other jurisdictions wherein different practices prevail with respect to the dating of the policy.

     Lender coverage has also been clarified so as to include certain specific situations. As in the owner’s policy, traditional coverage for loss due to “any defect in or encumbrance on the title” now explicitly includes failure to create or record documents by electronic means. In addition, absent a specific survey exception, the policy provides coverage for loss due to encroachment, encumbrance, violation or other adverse circumstance affecting title that would be disclosed by an accurate survey of the land. The term “encroachment” has been expanded to include, in addition to encroachment onto the land of existing improvements, encroachment of an existing improvement located on the land onto adjoining land. Moreover, the loan policy has been enhanced through the expansion of the term “indebtedness” so as to include, in addition to principal, certain construction loan advances, interest, prepayment premiums, expenses of foreclosure, taxes, insurance and reasonable expenditures to prevent deterioration of improvements. (Note: though these items may be included within the measure of loss, the policy does not necessarily insure the validity, enforceability or priority of the insured mortgage as security with respect to these advances)

     Furthermore, claims administration under the terms of the new policy has been changed significantly.  If an insurer seeks to prosecute or defend a claim and is unsuccessful in establishing the title or the lien, the amount of insurance under the policy is increased by ten percent.  The insured claimant would then have the choice of determining loss as of the date the claim was made or as of the date the claim is settled and paid.  Note that an insured is no longer automatically required to submit a proof of loss statement but is required to submit a proof of loss statement only to the extent such a statement is actually needed by the insurer to administer the claim.

Other significant changes include the following:

•                     A creditor’s rights provision has been incorporated as a covered risk and includes coverage with respect to certain transactions occurring prior to the creation of the insured interest.
   

•                     The term “indebtedness” under the 2006 Loan policy has been broadened to include, in addition to principal, certain construction loan advances, interest, prepayment premiums, expenses of foreclosure, taxes, insurance and reasonable expenditures to prevent deterioration of improvements.  (Note:  though these items may be included within the measure of loss, the policy does not necessarily insure the validity, enforceability or priority of the insured mortgage as security with respect to these advances)
   

•                     Enhanced mechanics lien coverage has been incorporated into the 2006 policy and the mechanics lien exclusion appearing in the 1992 policy has been deleted.
   

•                     With respect to the new Loan policy, payments made toward payoff of a mortgage will reduce the amount of the indebtedness but will not result in a reduction of the amount insurance.  For this reason, there is no longer a “last dollar” insurance coverage issue and there is no longer a need that the insured acquire a “last dollar” endorsement.
   

•                     The threshold level at which an insured or insurer can require arbitration has been increased to $2,000,000.
   

•                     The “Apportionment” provision set forth in the 1992 Owner’s policy has been deleted.  The deletion of this provision allows the total amount of insurance set forth in a policy, as opposed to a pro rata portion of that amount, to be applied toward loss incurred with respect to a single parcel where the policy covers multiple parcels not used as single site.
   

•                     The “Liability Noncumulative” provision set forth in the 1992 Lender’s policy has been deleted.  The effect of this provision had been to allow the insurer to reduce the amount to be paid on a claim by the amount already paid by that insurer on a policy insuring a prior mortgage on the land.
   

•                     The “Co-insurance” provision set forth in the 1992 Owner’s policy has been deleted.  That provision allowed an insurer to reduce its liability where the amount of insurance expressed in the policy fell below a certain percentage of the value of the insured estate.  The provision served to limit insurer liability where, for example, the value of the property increased due to subsequent improvement of the property by the insured.

     In addition to the revisions affecting the title policy, existing title insurance endorsements have been redrafted and several new endorsements have been adopted.  It should be noted that a complete set of pre-2006 endorsements will continue to be made available along with the set issued for use with the 2006 policy form.

     Only a portion of the many changes that were incorporated into the 2006 ALTA policy has been highlighted in this article.  It is suggested, however, that the 2006 ALTA policy is a product that is responsive to the concerns and needs of insurers, lenders and investors and, moreover, reflects careful balancing of considerations rooted in insurance law, business risk and the demands of the modern real estate market. The 2006 policy is a progressive product that addresses market concerns through a familiar collection of schedules and exhibits containing, however, terms and provisions that are focused, innovative and effective.

Walter Weinschenk
LandAmerica Commercial Services