Wednesday, December 24, 2008

perfect title versus insurable title

We've chatted before about automation in title searching and I think you know that I tried the First American Eagle Search/Fast Web system for awhile and decided I don't like that kind of search.  I'm a hands on kinda examiner.  I want a full search and all the raw data to review for myself.  Anyway....

Recently I recieved a call from an insured owner who we closed while using the automated search product.  He was trying to sell his property and the buyer's title agent had found a life estate.  I checked our file and we hadn't dealt with the matter because it wasn't disclosed in the automated search product.  Nevertheless, I told him I knew First Am would indemnify his buyer's title insurer so he didn't have anything to worry about.

I contacted the title agent, got a copy of the title commitment and faxed a request to First Am for indemnification.  The attorney from First Am called me with a question or two, grumbled about whether or not to issue the indemnification, why I don't know, but conceded to doing so.

As a follow up, I had a copy of the deed in question pulled and reviewed and I checked the Social Security Death Index and found that the party vested with the life estate had died in 1997.  That meant that any potential inheritance tax risk had nine years remaining.  I also considered the facts and came to the conclusion that the life estate was probably the only asset of the deceased.  No estate had been filed and so the risk as I considered it was minimal and so the issuance of indeminity, giving insurance to the buyer, would be customary, reasonable and a good solution.

Then I got word that the buyer's attorney wasn't happy with indeminity.  I chatted with the title agent who said they, the title company, would accept indemnification but the buyer and the buyer's attorney wanted the problem fixed.

I called the insured owner and asked if he had an attorney because in my mind, his attorney needed to advocate on his behalf based upon the terms of the sales agreement.  Our insured owner asked about filing a claim with the title company.  I said that he could file a claim , however, he hadn't suffered a loss related to the life estate.   His problem was one of marketable title.  I called his attorney.  Never got a call back.  I called the buyer's attorney and discussed the concept of "perfect" title versus marketable title and insurable title.

Consider if you will, perfect health versus insurable health.  If you want to buy life insurance, the insurance underwriter will examine your lifestyle, current state of health, etc. and make a determination whether or not to issue the policy.  They will NOT expect you to have perfect health, rather they are assessing the level of risk and determining if they wish to insure.  Get it?

Title insurance underwriting is the same.  We don't find perfection in title.  We don't expect it.  We look for insurable title and that's what marketability is based upon.

I explained to the attorney that, while the insured buyer is welcome to file a claim, it is unlikely that the title company will pay inheritance tax when no lien has been filed by the Department of Revenue.  Insuring against the potential lien is customary and reasonable.  He agreed, said he would explain that to his buyer and asked me to shoot him an e-mail with that explanation and that I did.

I heard nothing further from the title agent, the buyer's attorney and never heard from the insured owner's attorney so I presumed case closed.  Then the other day I received a mysterious hard to understand voice mail which when I listened carefully, I'm pretty sure it was our insured owner.  He said the deal fell thru and I owed him $55,000 and his attorney would be contacting me.

I'll report back if I ever hear from these folks again, but I'm posting this for a few reasons.  First, realize that perfection in title is an unreasonable expectation and so attorneys and buyers must embrace the concept of marketable and insurable title.  Second, attorneys representing consumers must communicate with all parties and they have a duty to control their clients.  That means that the attorney for our insured owner should have been actively engaged in the resolution and advocating on behalf of his client based upon the terms of the agreement of sale which called for marketable title, not perfect title.  Further, if they wished to pursue a resolution from the title company beyond the offered indemnification, they could and should have done so.

I have a feeling that somewhere, earlier in the transaction, when the title was reviewed, someone blew the life estate issue WAY out of proportion and created an insurmountable fear in the buyer.  Title agents and attorney need always to remember that consumers rely upon us to help them grasp the realities of real property.

I know this post is getting really long and I don't like to write or even READ long posts but here's another case just to drive this point home.  We just closed a purchase transaction of vacant land, several acres, in a rural setting.  The buyer freaked out because we reported that mineral rights had been reserved by a prior owner.  He wanted absolute insurance that surface operations would not take place on the land.  The deal almost fell thru until we got him to understand that unless he purchased property in a highly and closely developed area, this risk was present in virtually all parcels of land.  A core risk you take purchasing large parcels in our market is that someone may own the mineral rights and they may use them.  Commercial developers will pay for the necessary mineral rights searches and surveys, however, residential purchasers rarely do.  This buyer, once he grasped that reality, he decided to accept the risk.  We have this conversation over and over with out of town mortgage lenders who freak out over mineral rights.

So, to stop this beating of the issue, let's just remember that title to real property is not expected to be perfect, just insurable, which means reasonable risk.


Anonymous said...

I've been thinking about this one since you posted it, and I have to disagree. I've always understood marketable title and insurable title to be two different things. I.e., just because the title is insurable doesn't necessarily mean that it's marketable. Or, to put it another way, marketable title is always insurable, but insurable title isn't always marketable. In your example, I would agree that the buyer's concerns were not "reasonable," and therefore he had no basis to claim that the title was not marketable (and thus not insurable). I can, however, conceive of many other situations where reasonable minds might differ on marketability, and it is with that in mind that I'm careful about issuing a policy in those situations. For example, say there is an unreleased mortgage, held by a now-deceased individual whose heirs can't be found. The mortgage appears to have been paid off when the current owners purchased it from the person who bought it and owner-financed it from that deceased individual, because their HUD shows a payoff. The deceased individual just never bothered to execute a release (as individual lenders are particularly wont to do). Still, it's only been a couple of years since that mortgage was supposedly paid off.
If the owner was unable to get a release, a new buyer would be perfectly entitled to walk away from a sale due to this issue, even though I wouldn't hesitate to insure over it based on the HUD and other evidence the underlying loan was paid off. It's a cloud on the title, not one I would fear could result in an actual loss due to enforcement, but one, nevertheless, which can reasonably lead a buyer to refuse to purchase. In other words, it renders the title unmarketable, but still insurable.
There have been many times where I was willing to insure title, but the buyer was not willing to pay good money for it, and we were both right. I agree that perfect title is unreasonable, but I don't agree that insurable means marketable. Opinions of marketablity are what make title insurance an art, not a science.

I still love this blog!

Diane Cipa said...

Thanks, Anon, for a thoughtful comment. How true, how very true!