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.

MARKETABLE AND INSURABLE TITLE

Marketability and insurability of title are subjective.

The Pennsylvania Association of Realtors (PAR) sales agreement handles it this way: "The property will be conveyed with good and marketable title as is insurable by a reputable title insurance company at the regular rates......."

I like this language. It leaves the insurability opinion in the hands of title insurance companies. The determination of insurability may DIFFER between title insurance companies, so the seller and the buyer have options. As long as they can find a reputable title insurance company willing to insure at the regular rates, the seller has fulfilled their obligation and the buyer is protected.


What happens if you can't find a reputable title insurance company willing to insure the land? Well, you have to look at the transaction more closely to see if the problem is curable or is there a way to isolate the insurability problem and still close.

A question of insurability was introduced last week in a news group based on a case being examined by a title insurance agent in our area. It’s an interesting case because it raises the question of whether or not insurable title was bargained for when the sales contract was negotiated. I’ve edited the discussion as it was published in the news group last week based upon additional information, which has since been made available to me.

For purposes of discussion, we’ll call our property owners Mr. & Mrs. Smith. Some years ago they purchased a lot in a recorded plan on which a house and garage were constructed. Adjacent to the lot is an unopened alley, a portion of which Mr. & Mrs. Smith have improved and maintained for over 21 years as their driveway and sole access to their garage. In our discussion we’ll refer to this parcel as the “alley lot”.

Unopened alleys or streets, sometimes called paper streets, when identified in a plan of lots are rights of way created by the developer when the plan is recorded. The rights of way are created for the use and enjoyment of all the lot owners in the plan, whether or not the alley or street is ever opened. Over time, people have a tendency to start using these areas as if they owned them. [SURVEY ALERT – This is a really good reason to have property surveyed. Even your seller may not know that side yard is really a paper street. ]

The “alley lot” became an issue when in 1994 a neighbor asserted his right to use it and attempted to access his property by going over Mr. & Mrs. Smith’s driveway. The Smiths objected and hired an attorney. Their attorney advised them to file a claim of adverse possession, which he did on their behalf. Filing the claim in the Recorder of Deeds office stopped the neighbor and the Smiths and their attorney took no further action.

Mr. & Mrs. Smith now want to sell their property. They listed the property for sale; their real estate agent found a buyer and negotiated a sales contract. The contract identified the property including the recording references for both the deed and adverse possession claim.

Let’s stop here for a moment and consider the process of negotiating a sales contract. Any good contract requires a “meeting of the minds”. In other words, do all parties share the same understanding of the terms as set forth in the contract. This is important. Think about it. How many times have you and a friend read something and come to a different conclusion? It’s a fairly common problem. So unless you are a party to the discussion underlying the words on the contract, you really don’t know if the parties had a meeting of the minds.

Consider the facts of this case as we know them. Mr. & Mrs. Smith own a lot with presumably good and marketable title. They have a claim of adverse possession on a portion of an unopened alley, the “alley lot”.

Now, consider the perfect meeting of the minds based on that set of facts. The Smiths fully understand that they do not own the “alley lot”. When they list the property for sale, they explain this to the real estate agent. The real estate agent understands and markets the property for sale, explaining the facts to the buyer. The buyer bargains for the property with full knowledge that he is getting good and marketable title to the lot on which the house sits and is acquiring any rights the Smiths may have under the claim of adverse possession on the “alley lot”. We’ll assume for now that we have a perfect meeting of the minds and move on with the transaction.

The buyer hired a title insurance agent to insure title and conduct their closing. The title insurance agent completed a title search and reported back to the buyers and Mr. & Mrs. Smith that the "alley lot" was uninsurable as the attorney had not completed the legal work necessary to quiet the title following the claim of adverse possession. The title insurance agent gave Mr. & Mrs. Smith two options - postpone closing and perform the necessary legal steps OR allow the title insurance agent to escrow all or a portion of their proceeds to close now and then have the legal work done later.

At this stage, if we still assume a perfect meeting of the minds based on the facts as we know them, we would expect the parties to raise a fuss and let the title insurance agent know they didn’t bargain for good and marketable title on the “alley lot”. In fact, in a perfect world the real estate agent would have contacted the title insurance agent before title was processed to alert them to the claim of adverse possession. This is not a perfect world and it’s not clear what the parties knew or understood. A title insurance agent at this stage is raising an issue of insurability based upon the facts, as they understand them. We have no idea whether the title insurance agent considered and rejected any other options before narrowing the choices for the Smiths.

I got involved because Mr. & Mrs. Smith have hired The Closing Specialists® as title insurance agent for their cash purchase of a new home. Mrs. Smith was concerned about the delay of both transactions and she called me to discuss some options. I told her I am not an attorney and thus could not give legal advice. I offered to post the topic in our news group so we could discuss possible solutions from the perspective of title insurance.

In the original post, I followed the lead of the title insurance agent on the case. I assumed that all parties expected good and marketable title to the so called “alley lot”.

In the post, I first suggested that as the title insurance agent, I would call the mortgage lender and ask if the value of their collateral would be impacted by the elimination of the "alley lot". I would hope that the main lot on which the house sits is where the real value lies. If the mortgage lender and their appraiser concur, they simply modify the appraisal so that it does not include the "alley lot". The mortgage property description would only include the main lot and the title insurance policies would only insure the main lot.

My second call would be to the buyer. I would ask if they consider the insurability of the "alley lot" material to the transaction. Do they care if it’s included in their owner title insurance policy? If they don't care, we can insure the main lot on which the house sits and Mr. & Mrs. Smith can use a Quit Claim deed to release any interest they have in the "alley lot" over to the buyer.So if the lender and the buyer agree that the "alley lot" insurability is not an issue, we can move forward and close.

Following that post I had a chance to speak with the title insurance agent who was processing the file and as you can imagine, there was some information I did not have. For instance, I did not know about the garage and the fact that the alley was the sole access to the garage. Well, getting to and from a garage would impact value along with the use and enjoyment of the property so there was no doubt that the title insurance would have to cover access. I argued that since the alley was a right of way in a recorded plan, the right to use it could be insured, however, its use would be subject to the rights of others. We conferred with a title insurance company-underwriting attorney who agreed.

The buyer could receive good and marketable title for the main lot with the house and an insured right of way for the use of the “alley lot” including the assignment of any rights the seller may have under the claim of adverse possession.

Thinking the matter was resolved, I was totally surprised this morning when Mrs. Smith called to say the buyer was insisting that they quiet title on the “alley lot” and obtain from the court full, good and marketable title. Quiet title actions are not cheap and I suggested to Mrs. Smith that she and her husband confer with their attorney, review the terms of the sales contract, and let him advise them on their options, etc.

Only the parties in this transaction know what was said and to whom and what promises, if any, were made or implied. We hope that all parties had a perfect meeting of the minds and clearly understood the facts when they made their bargain.

But what if they didn’t?

What if Mr. & Mrs. Smith misunderstood the adverse action claim and really thought they owned the “alley lot”? They would have set the stage for a misunderstanding and may have implied and promised good and marketable title.

What if the Smiths and their real estate agent fully understood the nature of the adverse action claim but the buyer didn’t comprehend it and thought he would own the “alley lot”?

What if everyone had a perfect understanding of the facts and bargained in good faith but the buyer has just changed his mind?

These are all possibilities and the resolution of who said what to whom, etc. is not the business of the title insurance agent. The paths to insurable title have been identified. The parties themselves will have to decide which path to take, insurable access rights, which already exist, or agree to change the underlying title by further legal action creating full good and marketable title to the “alley lot”.

I do hope that the parties are able to amicably resolve their differences and that sharing their story here in TitleInsuranceTalk will help you better understand the role of a title insurance agent.