Part Two – Title Insurance Commitment
In the prior part of this discussion, our real estate lawyers reviewed the history of ownership of real property in the United States and briefly defined the title insurance concept. Here we will dig more deeply into the nuts and bolts of title insurance.
Title Insurance Process
Let us assume that seller and buyer of real property (be it residential, commercial, or farm/ranch land) have entered into a contract to transfer title to the property. This event triggers the starting point for the entire title insurance process.
In Colorado, title insurance agents (akin to any insurance agent) vie for the business of residential, commercial and farm/ranch sellers, buyers, and lenders. Just to be clear however, the agent is NOT the insurer. The title insurance is issued by the insurer based upon the information delivered to it by its agent.
At any time, there may be a dozen or more agents that offer access to title insurance policies. Thus, the first order of business is to select a title insurance agent; and as with any professionals, this choice should be made based on the longevity of the agent in the business, its professional reputation, and similar factors. Though there may be dozens of agents to choose from, most business in Colorado is done by a handful of large, well-respected and long-lived companies. One can contact the Colorado Commissioner of Insurance to check on such factors, or he or she can talk with one’s real estate agent, or attorney to get a bead on the best companies to use.
Once the agent is chosen, the first order of business is to deliver the fully executed contract. The title agent may review the contract for obvious problems – in which case the agent will contact the contract parties to discuss – but most often the contract will be delivered directly to the insurance company personnel that will write the policy (often called the “underwriter”).
The underwriter’s first orders of business will be to review the contract for any special matters relating to the title and to access the abstract. He or she will review the abstract to determine any defects to the title that would make its transfer to the buyer impossible, to then create of list of requirements that must be fulfilled by the buyer, seller, or both as conditions to issuing an insurance policy, and finally to call out all of the matters that the insurer will not insure (the missing or encumbered sticks from the bundle). Once completed, the underwriter will issue a “title commitment”. As its name suggests, a title commitment is the written document by which the insurer agrees to issue the title insurance, subject to the formal list of “Requirements” and “Exceptions”.
The commitment usually arrives by email. The advantage of receiving an email copy is that most title companies embed hyperlinks to any document that is identified in the commitment. For instance, the commitment may state that delivery of title to the current owner was accomplished by a warranty deed which is available for immediate review by hitting the hyperlink.
The first page of the commitment (often called the “transmittal” page) will contain the name of the insurer, its file number, and the contact information for the title insurance agent. It will also have a list of folks to whom the commitment has been sent. This is known as the “distribution” or “contact” list and is the end of the transmittal. Following it are the several sections of the commitment some of which are identified as “Schedules”. All of the Schedules contain important information.
The first line of this Schedule will call out the “Commitment Number”. This long string of alphanumeric characters identifies your specific deal. This and all of the remaining Schedules will have paragraph numbers and sub-paragraph letters. The numbered paragraphs are as follows:
- The “Effective Date”. This is the date on which the title commitment was issued. The commitment will then reflect everything that has occurred with the title prior to that date. Several commitments may be issued to reflect the fact that Requirements or Exceptions have been altered. The issuance of a new commitment, most often moves up the Effective Date.
- A statement of the type of policy that is to issue. There always will be an “Owners Policy” (usually identified as the “ALTA Owners Policy” – where ALTA stands for “American Land Title Association”) which will be issued to the buyer – who after the closing will be the owner – and, if there is a lender, then an additional policy often called the “ALTA Loan Policy” will also be issued. Each policy statement will usually be followed with the actual name of the owner and the lender and will have a dollar figure that represents the amount that the policy will insure.
- This paragraph will call out the type of title that is to be issued. Though this is a complex area of the law, for simplicity we can assume that the buyer is getting all of the real estate (except for the Schedule B-2 “Exceptions”) which means in most cases that the title will be “Fee Simple”. This is legalese and means that the owner will own the greatest interest in the real property that is available – he or she will have the greatest number of sticks from the bundle.
- This will identify the then-current owner of the property – the seller.
- This will call out the legal description and will quote the premiums to be paid to the insurer.
That will be the conclusion of Schedule A.
Schedule B is divided into 2 sections “B-1 Requirements” and “B-2 Exceptions”
The B-1 Requirements are the demands made by the title insurer on the buyer and seller all of which must be satisfied (or removed) prior to closing. Such requirements may include:
- payment of the insurance premiums prior to the issuance of the policy;
- payment by the buyer at closing of the entire purchase price for the land;
- the removal by seller of any liens against the property. As previously discussed, most such liens are a deed of trust (securing the seller’s lender), a creditor’s lien, or in some cases a tax lien. As a title company is involved, the title company will use the proceeds from the sale (that is the purchase price paid by the buyer) to pay-off such liens. In that way, the title company is assured that the lien is removed and that title can issue free and clear of the same;
- if one or both of the parties is a business entity, then the title company will call for proof that the business entity is entitled to sell or buy the property;
- the statement that the seller must delivery the title to the buyer. Title in Colorado is transferred by a “deed”, and the title company will insure that the deed has been properly executed and filed with the proper Clerk and Recorder prior to the issuance of the policy.
- if a lender is part of the deal, the delivery by the buyer of a new deed of trust which will secure the property to the buyer’s lender;
- the requirement that the property be surveyed or that an “improvement location certificate” (ILC) be issued. A full survey not only identifies the perimeter of the property, the corners of the property, and other exact boundaries, but also identifies all recorded encumbrances and any obviously visible structures, drives, barns, ponds, containment ponds and the like. Some of these may encroach on the subject property or another contiguous landowner may have part of his or her property encroach on the subject property. The survey should identify all of these encroachments.
When however, the real property is part of a large development, or is within an area that has been in “blocks” and “lots”, then usually an ILC will be all that is required. An ILC is still prepared by a surveyor, but instead of identifying all of the above, it simply identifies the perimeter of the property (though not exactly) and identifies any encroachments that may exist and that may reduce (or increase) the size, use – and value – of the property. It is not a survey, but is usually sufficient for the title company to satisfy the survey Requirement;
- an affidavit from both buyer and seller that each has done nothing to the property to cause a lien to be placed on the property from the Effective Date to and including the date of closing.
Following the B-1 section is the list of exceptions (exclusions) from title insurance coverage – the B-2 Exceptions.
You may remember that the exceptions to a title are those sticks that have been removed from the bundle through an earlier transfer or that have been encumbered in such a way that the owner loses the right to free use of that property. In Colorado for instance, it seems that most all of the land in the state has been stripped of its mining rights. When the land was first “patented” (that being the first time that the property was transferred from the federal or state government to individual ownership), the railroads purchased all of the so-called “surface” and “subsurface” mining rights. In those days, they were hoping to find coal and precious metals. The railroads (and others) have maintained all such rights such that a sale in Colorado of land will often exclude (in title insurance language – will “except”) from ownership these rights.
Virtually all residential title commitments will have the so-called “pre-printed” or “standard” exceptions that were drafted by the ALTA or by the state. They exempt from title coverage the following (in no particular order):
- Any facts, rights, interests or claims on or against the property not recorded in the public records.
- Any easements, liens or encumbrances, or claims against the property not properly recorded.
- Any encroachments, encumbrances, violation, variation, or adverse circumstance affecting the Title that would be disclosed either by a complete ALTA survey, or as discussed above, a properly created ILC.
- Any lien (or right to a lien) the property because of goods or services delivered to the property but which were not paid for.
- Defects, liens, encumbrances, adverse claims or other matters that first appear in the Public Records or that attach subsequent to the effective date but prior to the date the proposed Insured acquires of record for the value the estate or interest or mortgage thereon covered by this Commitment.
- Real estate taxes – which are always a lien on the property.
- “Rights of parties in possession” not shown by public record. Such persons include tenants.
Some of the Standard Exceptions can be removed. For instance, a survey or ILC approved by the title company will cause the removal of subsection (c). Further, the delivery by the buyer and seller of the affidavits described earlier, will cause the removal of subsection (d). It is also standard procedure for the insurer to review the public records just before the closing to insure that no additional liens or encumbrances have been filed against the property. Often, and in conjunction with the above-described affidavits, the insurer may also agree to remove subsection (e). Further, in most residential deals in Colorado, the contract calls for so-called “extended coverage” which is insurance to cover some of these exceptions.
Following the Standard Exceptions will be the exceptions that are specific to the particular piece of property. Such Exceptions identify such matters as the loss of surface and subsurface mineral rights, the existence of recorded easements, the affect of covenants, conditions and reservations (CC&R) or homeowners association controlling documents, and similar matters. These exceptions mostly cannot be insured. There is no harm however, and it is always advisable to ask the title agent whether any “Endorsements” exist that would “insure over” such Exceptions. An insurance Endorsement is an add-on to the policy that specifically insures any loss resulting from (hence “insures over”) a known Exception. For example the buyer has available an Endorsement called the “Extended Coverage Endorsement” or just “Extended Coverage”. This is discussed above. Similarly, so-called “Gap Insurance” (which covers the owner for any recordings made between the Effective Date of the commitment and the effective date of the policy) is standard in Colorado.
The Schedules stop at B-2. The commitment however continues with the “small print”. As has been said: “the large print giveth – the small print taketh away”. Thus, it behooves all parties to the transaction, seller, buyer, and lender, to read the remainder of the title commitment to clearly understand what exactly the title policy will cover and what it will not cover.
Whew! Title Insurance can be a confusing topic, even when a real estate law expert summarizes it a succinctly as possible, which we have tried our best to do for you today. If you are still wondering if title insurance applies to your situation, please contact us today either by email or by phone. We can be reached at either 1-888-780-0910 or 303-790-4103. We look forward to helping you with any real estate law questions you may have.