THE ALTA 2006 POLICIES AND ENDORSEMENTS

After several years of discussion and drafting, ALTA released its 2006 Owners and Loan Policy forms on June 17, 2006. The 2006 forms will ultimately supersede and replace the 1992 forms as the “standard” ALTA Policy forms. ALTA has provided a one-year window during which the new forms can be implemented; ALTA will then formally “decertify” the 1992 forms on June 17, 2007. Secondary mortgage market participants are expected to require the 2006 policy format for approved mortgage loans. FreddieMac recently announced that it will accept only loan policies written on the ALTA 2006 Loan Policy form for mortgages originated on or after June 17, 2007. (See FreddieMac Bulletin 2007-2 at the following link: http://www.freddiemac.com/sell/guide/bulletins/pdf/bll072.pdf).

The 2006 policy forms do not represent a radical change in coverage. Most of the changes are for clarification purposes, i.e., certain coverages, believed to have been provided under the 1992 policy forms, have now been expressly provided for in the 2006 policy forms. However, there are a few noteworthy improvements in coverage that make the 2006 ALTA forms clearly superior to their 1992 counterparts. The discussion that follows focuses on the most significant differences between the 1992 and 2006 ALTA forms.

The Insuring Provisions

The insuring provisions, now called “Covered Risks,” have been revised for clarity and expanded for both the 2006 Owner’s and Loan forms. The basic coverage under the policies has not been diminished; the traditional coverage against loss caused by: title being vested other than as stated; defects, liens and encumbrances; unmarketability of title and lack of a right of access are still present in the 2006 policies as Covered Risks 1, 2, 3 and 4.

The coverage against defects, liens and encumbrances has been clarified to expressly include matters that were only presumed to be covered under the 1992 ALTA policy. Covered Risk 2(a) now includes coverage against loss caused by forgeries, fraud, lack of capacity and/or authority and failures in the insured title documents and/or recording of the same. Covered Risk 2(a) also includes coverage for failure of the insured deed or mortgage to be effective or properly recorded utilizing electronic means, if applicable in that jurisdiction.

Loss caused by taxes and assessments due or payable and that are unpaid as of policy date are now expressly covered in 2(b).

Loss caused by an encroachment or any other “violation, variation or adverse circumstance affecting title” that would be disclosed by “an accurate and complete land survey” are now expressly covered in 2(c). This coverage is found in both the Owner’s and Loan policies. However, it is likely that most title insurers will continue to include a survey exception in the Owner’s Policy, unless the purchaser obtains a boundary survey. (The traditional “location drawing,” often obtained in connection with residential transactions, is usually sufficient for purposes of deleting the survey exception from the Loan policy, but not the Owner’s policy.)

Several exclusions from coverage found in the ALTA 1992 policy forms, contained partial “implied” coverages in favor of the Insured. These “implied coverages” have been recast as Covered Risks in the 2006 ALTA policy forms. This change was brought about due to judicial interpretations holding that coverage in favor of the insured must be found in an insuring provision, not as a carve-out in an exclusion from coverage.

The former exclusion from coverage as to laws or government regulations found in Exclusion 1(a) of the 1992 form (which included coverage when notice of enforcement actions or title defects caused by violations of laws and government regulations were recorded in the public records) has been appropriately recast, in part, as a Covered Risk 5 in the 2006 policy form. Covered Risk 5 now expressly insures against the violation of, or enforcement of, such laws and government regulations relating to the land, “if a notice, describing any part of the Land, is recorded in the Public Records setting forth the violation or intention to enforce, but only to the extent of the violation or enforcement referred to in that notice.”

Likewise, the former exclusions from coverage found as Exclusions 1(b) and 2 of the 1992 policy as to police power and eminent domain have been recast, in part, as Covered Risks 6, 7 and 8. Covered Risk 6 insures against loss caused by an “enforcement action based on the exercise of a government police power…if a notice of the enforcement action, describing any part of the Land, is recorded in the Public Records, but only to the extent of the enforcement referred to in that notice.” Covered Risk 7 insures against loss caused by the "exercise of the rights of eminent domain, if a notice of the exercise, describing any part of the Land, is recorded in the Public Records." Prior exclusion 2 is also further tracked by new Covered Risk 8 which provides coverage against loss caused by “(a)ny taking by a governmental body that has occurred and is binding on the rights of a purchaser for value without Knowledge."

The former exclusions for creditors rights, found in paragraph 4 of the 1992 Owner's policy and 7 in the 1992 Loan policy have also been recast to provide the coverage previously carved-out from those exclusions in the 1992 policy forms. Covered Risk 9(b) in the 2006 Owner's policy and 13(b) in the 2006 Loan policy, now insure against loss should the insured deed or mortgage constitute a preferential transfer under bankruptcy or similar state insolvency laws, by reason of the failure of the deed or mortgage’s recording in the public records to be timely or to impart notice “to a purchaser for value or a judgment or lien creditor.” Thus creditors’ rights coverage is expressly provided to the extent that the problem giving rise to the creditors’ right claim arises out of the mis-recording or late recording of the title documents.

As a further clarification of the 1992 policy provisions, Covered Risks 9(a) in the 2006 Owner's policy and 13(a) in the 2006 Loan policy now expressly insure against loss, should any prior conveyance in the chain of title be determined to constitute a fraudulent or preferential transfer under bankruptcy or similar state insolvency laws.

"Gap" coverage has now been automatically provided as Covered Risks 10 and 13 in the 2006 Owner’s and Loan policies. Those paragraphs provide coverage against loss with respect to defects, liens or encumbrances or any other matter included as a Covered Risk "that has been created or attached or has been filed or recorded in the Public Records subsequent to Date of Policy, and prior to the recording” of the insured deed or mortgage. However, liens for taxes and assessments are expressly excluded from “gap” coverage in both policies. (This would preclude coverage for unpaid taxes where, for example, the deed was transferred for taxation purposes during the present fiscal year but not recorded in the Land Records until the following fiscal year – a fairly common occurrence for transactions closing in late June).

The 2006 Loan policy has eliminated the general exclusion for mechanics liens previously found in the 1992 Loan policy. Covered Risk 11 of the 2006 Loan policy now provides coverage for the priority of loan advances made under the insured mortgage over mechanics liens arising from improvements or work related to the Land, if the improvement or work is contracted for or commenced on or before the Date of Policy, or is contracted for, commenced or continued after Date of Policy, if the advance is an obligatory construction loan advance. (This requirement would not present an issue in Maryland where Section 7-102(b) of the Real Property Article provides for priority of all advances, irrespective of whether the advance is characterized as obligatory or voluntary).

Exclusions

The Exclusions from coverage found in the 2006 Owner’s and Loan policies have been simplified due to the recasting of portions of those Exclusions as Covered Risks. However, except as previously noted, the traditional Exclusions from coverage found in the 1992 policy forms have been continued in the 2006 forms.

Other Significant Changes

The definition of “Insured” under the ALTA 2006 Policy has been re-tooled, substantially. As in the case of the ALTA 1992 Policy, the definition includes heirs, devisees, survivors, personal representatives, or next of kin as well as successors to an Insured by dissolution, merger, consolidation, distribution, or reorganization. Additionally, the definition of the insured in the 2006 Policy now includes a successor by conversion of insured to another entity. The definition of the insured in the ALTA 2006 policy also includes certain transferees/grantees, should the insured grantor transfer title by deed to such grantee for no consideration. The grantee will be considered an insured: (1) if the insured grantor wholly owns the grantee, (2) if the grantee wholly owns the grantor, or (3) if the grantee is wholly owned by an entity affiliated with the insured grantor, (provided the affiliated entity and insured grantor are both wholly-owned by the same person or entity). The ALTA 2006 Owner’s also defines the insured to include the trustee or beneficiary of the insured’s written estate planning trust, provided the insured grantor transfers title to such trustee for no consideration.

The “Coinsurance” clause found in the ALTA 1992 Owner’s Policy has been deleted from the ALTA 2006 Owner’s Policy. This represents a significant change in direction for the title insurance industry. Title insurers’ filed rates do not allow for owner's coverage in an amount less than the value of the property because, naturally, loss of title to a valuable property is a more expensive title insurance claim than loss of title to a less valuable property. The Coinsurance clause found in the 1992 ALTA policy policed this requirement by providing a formula for reducing the insured’s coverage in the event of a claim in instances where the insured under-insured, initially, or where the value of the insured land rose significantly following closing. In essence, in those cases the insured became a “co-insurer” with the title insurer. Deleting the Coinsurance provision from the Owner’s policy prevents the inadvertent penalizing of an insured solely because of market conditions outside the control of the insured. However, insurers’ filed rates will still continue to require coverage commensurate with the value of the land.

The 2006 Policy form also provides relief for the insured in instances where the insurer elects to clear or cure the title through litigation. If an insurer deals with a claim by attempting to correct or establish the title, but fails, the amount of insurance is automatically increased by 10% and insured has the right to determine the amount of loss as of either date the claim was made or date claim is settled. This provision helps to compensate the insured for losses caused by the time spent by the insurer in unsuccessfully attempting to clear title and for valuation changes in the marketplace during such time period.

Other significant changes found in the 2006 policy forms can be outlined as follows:
The definition of “indebtedness” in the Loan policy now includes principal, interest, advances under construction loans, payments made for taxes and to protect the property, foreclosure costs and “prepayment premiums, exit fees and other similar fees or penalties allowed by law.” (But the definition does not increase amount of insurance over the face amount of the policy nor expressly insure the priority of such advances). The Arbitration option is increased to when amount of insurance is less than $2M instead of $1M. ALTA Arbitration rules apply.

The Apportionment clause has been deleted from the Owner’s policy. This means that the entire amount of insurance is available in the event of a claim relating to only one of several insured parcels rather, than insurance coverage being limited on a pro-rata basis. The Liability Non-Cumulative provision has been deleted from Loan policy, only. The 1992 Loan policy provided that in the event that the insured lender acquired the property subject to any prior mortgage or mortgages, any payment made by the insurer under any policy insuring such prior mortgage would reduce the lender’s insurance coverage under the Loan policy.

Proof of loss is not required unless insurer asks for same.

The Reduction of Insurance provision has been deleted from the 2006 Loan policy. This provision in the 1992 Policy had been interpreted by some to state that payment, in whole or in part, of the mortgage debt reduced the amount of insurance coverage. The deletion clarifies that such is not the case and means that the clarifying “Last Dollar” endorsement is no longer necessary.

Endorsements to the policies will now always control as to coverage of a given matter over general policy terms.

The ALTA 2006 Endorsements

ALTA also revised the Commitment form, issued several new endorsements, and revised the existing endorsements to coordinate with the 2006 policy forms. All of the existing Endorsement forms have been modified to correspond to the ALTA 2006 policy forms. Such changes are not of a substantive nature. The new versions include the “-06” suffix following the usual form number.

ALTA also introduced the following forms or variations of existing forms for 2006:

ALTA 7.1-06 Manufactured Housing – Conversion; Loan and ALTA 7.2-06 Manufactured Housing – Conversion; Owners. These forms provide coverage regarding lack of a personal property security interest against the improvements, ability to foreclose against land and improvements in one action, and that the owner of the land and improvements are the same person. (Maryland presently lacks the statutory framework that would allow coverage under these endorsements.)

ALTA 19-06 Contiguity – Multiple Parcels and ALTA 19.1-06 Contiguity-Single Parcel. These Endorsements provide coverage as to contiguity among multiple parcels (19-06) and contiguity between the insured land and another designated parcel (19.1-06).

ALTA 20-06 First Loss-Multiple Parcel Transactions. This Endorsement provides coverage to a lender with a lien on multiple parcels; in the event of a title claim, the Lender will not be required to foreclose on its collateral to establish its actual loss.

ALTA 21-06 Creditors’ Rights. Provides coverage against loss should the insured transaction (or a prior transaction) be deemed a fraudulent or preferential transfer.

ALTA 22-06 Location and ALTA 22.1-06 Location and Map. The ALTA 22-06 provides coverage that the insured land contains a certain type of improvements (e.g., a residence) having a specified street address. The ALTA 22.2-06 provides the same coverage found in ALTA 22-06 but also includes coverage that “the map…attached to this policy…correctly show(s) the location and dimension of the Land according to the Public Records.” Attaching a boundary survey to a title insurance policy is not a customary practice in Maryland residential transactions where little reliance can be placed on the “location drawings” that are often obtained. However, ALTA 22.1-06 could be used in commercial real estate transactions where a certified boundary survey is obtained.

Conclusion

Title insurers and agents are now implementing the use of the 2006 ALTA forms. The improvements and clarification in coverage will eventually render the 1992 ALTA forms obsolete.