Introduction

Few real estate transactions are closed without a title insurance policy. The key to understanding title insurance is to realize it is a contract of indemnity in which the insurer agrees to pay the insured for loss or damage covered by the policy. The loss or damage generally arises from the state of title not being as described in the policy as of the date of policy. The policy also includes an agreement to pay costs to defend claims challenging matters covered by the policy. The two types of real property interests generally insured are owner's interests and lender's interests. The owner's policy safeguards the buyer's investment or equity in the property up to the face amount of the policy. The loan policy protects the lender's interest in the property as security for the outstanding balance under the buyer's mortgage.

In most real estate transactions, at least one party's satisfaction with the state of title is a condition to closing. Some transactions close only because of the insurer's agreement to provide coverage for a particular title problem that otherwise would cause the transaction to collapse.

The American Land Title Association (ALTA) publishes forms most title companies use and are, by and large, an industry standard. The most commonly used forms are ALTA's Commitment for Title Insurance – 1966, ALTA Owner Policy Form B – 1992, and the ALTA Loan Policy – 1992.

  1. The Title Commitment. The title insurance commitment is a contract to insure, and generally terminates six months after the date it is issued. The title insurance commitment primarily consists of Schedule A and B. In turn, Schedule B is comprised of two parts: B-I and B-II.

     

    1. Schedule A. Schedule A contains the following information which should be reviewed for accuracy: (i) Type of Policy, (ii) Effective Date, (iii) Proposed Insured, (iv) Amount of Coverage, (v) Type of Estate or Interest in Land (vi) Current Owner of Title to the Estate or Interest in the Land, and (vii) Property Description.
    2. Schedule B-I Requirements. Each requirement of Part I of Schedule B must be satisfied or waived before the title insurance company will issue the policy. Standard requirements on commitments are as follows:
      1. Payment of Consideration
      2. Recordation of Instrument to be Insured
      3. Requirements of Authority, if Entity
        1. Corporations: (i) certificate of incumbency, (ii) shareholders/board of directors resolution, (iii) Articles of incorporation, (iv) bylaws, (v) certificate of good standing, (vi) Qualification to do business, if foreign corporation.
        2. If other entity, such as partnership, limited liability company, etc., use conforming corporate authority documents.
      4. Survey and Surveyor's Inspection Report
      5. Requirements for Cancellation and Satisfaction
        1. Release of liens, execution, and judgments
        2. Payment of estate taxes
      6. Requirements for General and Specific Affidavits
        1. Owner's affidavit: (i) no improvements, (ii) no liens, (iii) possession, (iv) payment of all taxes and special assessments.
        2. Commercial real estate broker's affidavit and lien waiver
        3. Purchaser's affidavit regarding commercial real estate broker.
        4. Seller's affidavit regarding commercial real estate broker.
      7. Miscellaneous Affidavits
        1. Affidavit of possession.
        2. Affidavit of descent.
    3. Schedule B-II Exceptions. Section B-II of the commitment sets forth matters that will be exempted from policy coverage. The matters shown in Schedule B are generally those matters disclosed by the title examination which affect the property interest being insured.

      The standard exceptions are excepted from the proposed coverage because they involve matters which affect the quality of title but may not be revealed by a title examination. In many cases, the insured will request that these printed exceptions be deleted from the commitment. In most cases this "extended coverage" is available. The requirements necessary to remove these exceptions will vary somewhat, from company to company. Generally, if the title company is provided with a current survey and surveyor's inspection report which does not disclose unrecorded easements, or visible discrepancies as to the location of the boundaries, then items (ii) and (iii) can be deleted. Any matters which the survey does disclose are then itemized in the "Special Exceptions" portion of Schedule B. Items (i) and (iv) of the "Standard Exceptions" are normally deleted based upon an affidavit of the property owner stating that there are no parties in possession, and that no improvements have been made on the property for which a mechanics' or materialmen's lien could attach.

      1. Standard Exceptions. Schedule B-II is also divided into two sections. The first section designated "Standard Exceptions," contains five printed exceptions against which the proposed policy does not provide coverage. These exceptions include:

         

        1. Rights or claims of parties in possession not shown by the public records;
        2. Easements or claims of easements, not shown by the public records;
        3. Encroachments, overlaps, boundary line disputes, or other matters which would be disclosed by an accurate survey or inspection of the premises;
        4. Any lien, or right to a lien for services, labor or material heretofore or hereafter furnished, imposed by law and not shown by the public records.
        5. Taxes or special assessments which are not shown as existing liens by the
          public records.
      2. Specific Exceptions. The second section of Schedule B-II is "Special Exceptions," and includes such things as: (i) easements/rights-of-way, (ii) declarations of restrictive covenants, (iii) reservation of rights, (iv) matters of survey, and (v) taxes.
      3. ALTA Owner Policy Form B – 1992. Both the ALTA Owner and Policies are comprised of five primary elements: (i) Schedule A, (ii) the Insuring Provisions, (iii)
        Exclusions from Coverage, (iv) Schedule B, and (v) Conditions and Stipulations.
      1. What is Insured.

         

        1. Title to the Estate or Interest Described in Schedule A Being Vested Other Than as Stated Therein. Schedule A basically contains
          the insured's name, the amount of coverage, the estate or interest being insured by the policy and the person or entity in whom title is vested at the date of the policy.
        2. Any Defect in or Lien or Encumbrance on the Title. This provision is, of course, subject to the exceptions of the policy which are discussed below.
        3. Unmarketability of Title. According to Arkansas law, “a marketable title is one that is free from reasonable doubt. There is reasonable doubt when there
          is uncertainty as to some defects appearing in the course of its deduction, and the doubt must be such as affects the value of the land or that will interfere
          with its sale." Baugh v. Johnson, 6 Ark. App. 308, 641 S.W.2d 730 (1982).
        4. Lack of a Right of Access to and from the Land. The scope of this coverage was discussed by the dissent in Riffle v. United General Title Insurance Company,
          64 Ark. App. 185, 984 S.W.2d 47 (1998), where the court denied coverage to an insured whose only access to the property was by boat. Evidence was, however,
          introduced that the insured knew about the access problems at the time the policy was issued.
      2. What is Excluded. The following items are generally listed as exclusions to coverage under a title policy.

        In addition to the above, Schedule B sets forth additional exclusions and exceptions. For example, if not removed from the commitment, the standard and special exclusions discussed above will also be exclusions to the title policy.

        1. Laws affecting or restricting the use of the property;
        2. Eminent Domain;
        3. Defects, liens, encumbrances, adverse claims or other matters: (i) created, suffered or assumed or agreed to by the insured, (ii) matters which are known
          to the insured, but which are not known to the title company and are not disclosed by the public records;
        4. Matters not resulting in loss or damage to the insured (Example: beneficial easement);
        5. Matters which first arise after the date of the policy;
        6. Liability in the event a loss results from the insured not being a purchaser for value. (Note: The ALTA loan policy does not contain this item since the lender is not a purchaser. The loan policy does, however, contain an additional exclusion for loss due to the unenforceability of the insured deed to secure debt as a result of the lender's failure to comply with the applicable "doing business laws" of the state).
      3. Who is Covered. Since the Title Policy is primarily a contract of indemnity, the principal determination of whom is insured lies in the definitional section of the Owner Policy's Conditions and Stipulations.
    4. The Coverage Amount
  2. Lender's Policies.
    1. What Lender's Need/Require.

       

      1. What is Covered. In addition to all of the coverages provided in the Owner's Policy, the ALTA Loan Policy covers the following additional matters:

         

        1. The Invalidity of Unenforceability of the Lien of the Insured Mortgage Upon the Title
        2. The Priority of Any Lien or Encumbrance Over the Lien of the Insured Mortgage
        3. Lack of Priority of the Lien of the Insured Mortgage Over any Statutory Lien for Services, Labor or Material
        4. The Invalidity or Unenforceability of Any Assignment of the Insured Mortgage, Provided the Assignment is Shown in Schedule A, or the Failure of the Assignment Shown in Schedule A to Vest Title to the Insured Mortgage in the Named Insured Assignee Free and Clear of all Liens
      2. Who is Covered. Again, the Loan Policy is primarily and contract of indemnity, and the principal place to look for this determination is in the definitions section of the Loan Policy's Conditions and Stipulations.
    2. Construction Loans. The primary issue arising in connection with Construction Loans are mechanics and materialmen's liens.
    3. Endorsements. Title policies can provide additional coverage by use of endorsements.