The 2006 ALTA Policy Forms Roger Therien Regional Counsel – West Region With Thanks To: Dwight Bickel Regional Counsel – Northwest Region 3/4/07
Why? • The current basic policy forms have not been substantially changed for 36 years. • Many changes implemented in 1987 decreased rights of the Insureds. Those forms have still not been accepted in the commercial market. • Several court decisions have held that coverage cannot be derived from exceptions to exclusions. • The market pressure is for title insurance to provide increased coverage. • The market pressure is for the policy to clarify the rights and duties of both parties during claim administration.
NOTICE • This presentation contains a summary of the most significant differences between the 1992 and 2006 ALTA policy forms. It does not summarize provisions which are similar to previous provisions. • For ease of explanation, shortened versions of the actual policy provisions are often used. • Do not rely on this presentation to determine policy coverage in a particular situation. You must refer to the full policy forms to determine coverage.
Miscellaneous • Effective date: 6/17/06 • However, forms and rates need to be filed in most states, so implementation will be delayed. • Price is same as 1992 policies.
Miscellaneous • ALTA has decertified the 1992 policy forms as of June 17, 2007. • Title Insurers will not withdraw their existing form filings – previous versions will be available to customers who want them. • Homeowner’s Policy is still better for 1 – 4 family residences (and costs 10% more).
What’s Missing? 1. Coinsurance deleted from Owner’s Policy • 7(b). If the policy amount is less than 80 percent of the land value or if subsequent improvements increase the land value by 20%, then: • No subsequent improvement: Partial losses are only paid pro rata in the proportion that the policy amount bears to the total land value at Date of Policy; or • Subsequent improvement: Partial losses are only paid pro rata in the proportion that 120% of the policy amount bears to the sum of the policy amount and the cost of the improvement. • This only applies to that portion of any loss which exceeds 10% of the policy amount.
What’s Missing? 1. Coinsurance deleted from Owner’s Policy • Significance: • Standard practice is not to issue a policy for less than fair market value. • But if we made a decision to do so, this provision limited insurer’s liability accordingly. • Without this limitation on liability, it is even more important not to issue a policy for less than FMV, or, in the rare case that you do, you need to add a coinsurance provision as an exception or by endorsement.
What’s Missing? 2. Apportionment deleted from Owner’s Policy 8. If the land consists of two or more parcels which are not used as a single site, and a loss affects fewer than all parcels, the loss shall be computed on a pro rata basis as if the policy amount was divided pro rata as to the value on Date of Policy of each separate parcel to the whole, unless the Company and the insured agreed upon a value as to each parcel at the time of the issuance of the policy.
What’s Missing? 2. Apportionment deleted from Owner’s Policy • Significance: • Increases coverage by giving Insured the benefit of up to total Amount of Insurance on a single parcel, even though policy covers multiple parcels not used as a single site. • Similar protection afforded when a tie-in endorsement is issued to an owner.
What’s Missing? 3. Noncumulative Liability deleted from Loan Policy (retained in Owner’s Policy) 10. If the insured lender acquires title in satisfaction of the indebtedness, the amount of insurance is reduced by any amount paid under a policy insuring a mortgage shown in Schedule B or which is subsequently executed by an insured, and that amount is deemed a payment under this policy.
What’s Missing? 3. Noncumulative Liability deleted from Loan Policy (retained in Owner’s Policy) • Significance: • Extremely important provision for an owner’s policy, where it has been retained. • Not as important for a loan policy and could be unfair to lenders in some situations.
What’s Missing? 4. ML Exclusion 6 deleted from Loan Policy 6. Any statutory lien for services, labor or materials arising from work which is contracted for and commenced subsequent to Date of Policy and is not financed by proceeds of the indebtedness secured by the insured mortgage. Significance: Not much. This exclusion has never been necessary because it excludes something that is not covered by either the 1992 or 2006 policy in the first place!
What’s Missing? 5. Subsection 8(d) of the 1992 ALTA Loan Policy is deleted • 8(d): No liability under the policy for advances of principal after Date of Policy, except advances to protect the lien of the mortgage or construction loan advances. • Elimination of 8(d) means that available insurance will include the amount of advances (up to policy limits). • BUT . . .
What’s Missing? 5. Subsection 8(d) of the 1992 ALTA Loan Policy is deleted (Continued…) • ALTA 14, 14.1 or 14.2 endorsements are still needed to insure the priority of advances.
What’s Missing? 6. Subsection 9(b) of the 1992 ALTA Loan Policy is deleted • A policy may be issued for less than the amount of the loan when it is secured by additional property. 9(b): loan payments reduce the Amount of Insurance even if made to release other security. • “Last Dollar” endorsement: policy continues to secure the balance of the loan until reduced to the policy amount. • “Last Dollar” endorsement is no longer necessary.
Many Coverage Paragraphs • 14 Covered Risks in the new lender’s policy, compared to 8 in the 1992 Loan Policy. • 10 Covered Risks in the new owner’s policy, compared to 4 in the 1992 Owner’s Policy. • Several new coverage paragraphs to clearly give coverage that was previously only a qualification within exclusions. • Several Covered Risks give indemnity protection for new risks.
The 1987-92 Exclusions Improperly Implied Coverage • Judicial policy construction principle is that coverage must be in insuring clauses, not implied from the exclusions and exceptions. • Market objection to exclusion language led to exceptions in the exclusions: • environmental, except if disclosed by notice • police power, except if disclosed by notice • condemnation, except if disclosed by notice • condemnation, except if binding on a bona fide purchaser • creditors' rights, except due to insufficient or late recording
New Coverage for Notices • 5. The violation or enforcement of any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting or relating to: • (a) the occupancy, use or enjoyment of the Land; • (b) the character, dimensions or location of any improvement erected on the Land; • (c) subdivision of land; or • (d) environmental protection 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.
Exclusion Paired with Covered Risk • 1. (a) Any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting or relating to: • (i) the occupancy, use, or enjoyment of the Land;(ii) the character, dimensions or location of any improvement erected on the Land;(iii) subdivision of land; or(iv) environmental protection; • or the effect of any violation of these laws, ordinances or governmental regulations. This Exclusion 1(a) does not limit the coverage provided under Covered Risk 5.
New Coverage for Notices 6. An enforcement action based on the exercise of a governmental police power not covered by Covered Risk 5 [governmental regulation, etc]. This Covered Risk applies only when a notice of the enforcement action given by a governmental body describing any part of the Land is recorded in the Public Records at Date of Policy and only to the extent of the enforcement referred to in that notice.
Exclusion Paired with Covered Risk 1. … (b) Any governmental police power. This Exclusion 1(b) does not limit the coverage provided under Covered Risk 6.
New Coverage for Notices • 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. • 8. Any taking by a governmental body that has occurred and is binding on the rights of a purchaser for value without Knowledge.
Exclusion Paired with Covered Risk 2. Rights of eminent domain. This Exclusion does not modify or limit the coverage provided under Covered Risk 7 or 8.
Creditors’ Rights Covered Risk: • 1992 policies: creditor’s rights is referred to only in an exclusion. • NEW: Affirmative coverage for: • A fraudulent or preferential transfer that occurs PRIOR to current transaction, and • The CURRENT transaction is a preferential transfer ONLY by reason of: • Failure to timely record, or • Failure of transaction documents to impart constructive notice.
Creditors’ Rights Exclusion: • Any claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction creating the insured interest, is: • A fraudulent conveyance or fraudulent transfer, • A preferential transfer for any reason not stated in the Covered Risk.
Creditors’ Rights Coverage • An endorsement is the only proper method to provide “affirmative coverage” for creditors’ rights. ALTA 21: “The Company insures against loss. . . because of the occurrence on or before Date of Policy of a fraudulent transfer or a preference under federal bankruptcy, state insolvency or similar creditors' rights laws.” NOTE: This eliminates the limitation of creditor’s rights problems arising from the CURRENT transaction by reason of a failure to timely record, or for the transaction documents to impart constructive notice.
New Coverage for “the Gap” Owner’s version: • 10. Any defect in or lien or encumbrance on the Title . . . that has been created . . . subsequent to Date of Policy and prior to the recording of the deed or other instrument of transfer . . .
New Coverage for “the Gap” Lender’s version: • 14. Any defect in or lien or encumbrance on the Title . . . that has been created . . . subsequent to Date of Policy and prior to the recording of the Insured Mortgage . . .
New Exclusion for Taxes in the Gap • 7. Any lien for real estate taxes or assessments . . . that become due or payable, but unpaid, between Date of Policy and the date of recording . . . in the Public Records. • This exclusion is now necessary due to gap coverage, which did not exist in earlier policies.
New Covered Risks • 2. Any defect in or lien or encumbrance on the Title. This Covered Risk includes but is not limited to insurance against loss from: • (a) A defect in the Title caused by: • (i) forgery, fraud, undue influence, duress, incompetency, incapacity or impersonation; • (ii) failure of any person or Entity to have authorized a transfer or conveyance; • (iii) a document affecting Title not properly created, executed, witnessed, sealed, acknowledged, notarized or delivered; • (iv) failure to perform those acts necessary to create a document by electronic means authorized by law; • (v) a document executed under a falsified, expired or otherwise invalid power of attorney; • (vi) a document not properly filed, recorded or indexed in the Public Records including failure to perform those acts by electronic means authorized by law; or • (vii) a defective judicial or administrative proceeding.
New Covered Risks • 2. Any defect in or lien or encumbrance on the Title. This Covered Risk includes but is not limited to insurance against loss from: • (c) Any encroachment, encumbrance, violation, variation, or adverse circumstance affecting the Title that would be disclosed by an accurate and complete land survey of the Land. The term “encroachment” includes encroachments of existing improvements located on the Land onto adjoining land, and encroachments onto the Land of existing improvements located on adjoining land. • NOTE: This coverage is provided by the ALTA 9 endorsement.
New Covered Risks for Lender’s • 11(a) Mechanic’s lien coverage: Language is revised for increased clarity, but coverage remains the same. • 11(b) provides ALTA Form 1 coverage: • 11. The lack of priority of the lien of the Insured Mortgage • (b) over the lien of any assessments for street improvements under construction or completed at Date of Policy.
New Definitions • 13 defined terms as compared to 7 in the 1992 Loan Policy • (a) “Amount of Insurance”: The amount stated in Schedule A, as may be increased or decreased by endorsement to this policy, increased by Section 8(b) or decreased by Section 10 of these Conditions. • (m) "Unmarketable Title”: Title affected by an alleged or apparent matter that would permit a prospective purchaser or lessee of the Title or lender on the Title or a prospective purchaser of the Insured Mortgage to be released from the obligation to purchase, or lend if there is a contractual condition requiring the delivery of marketable title.
Expanded Definition of Successors • The term "Insured" also includes, in addition to certain successors specified in the 1992 policies: • (C) successors to an Insured by its conversion to another kind of Entity; • (D) a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the Title; • (1) If the stock, shares, memberships, or other equity interests of the grantee are wholly-owned by the named Insured, • (2) If the grantee wholly owns the named Insured, • (3) If the grantee is wholly-owned by an affiliated Entity of the named Insured, provided the affiliated Entity and the named Insured are both wholly-owned by the same person or Entity, or • (4) If the grantee is a trustee or beneficiary of a trust created by a written instrument established by the Insured named in Schedule A for estate planning purposes.
Additional Loan Policy Definitions • Definition of “Insured” also includes: (B) if the Indebtedness is evidenced by a “transferable record,” the person or Entity who has “control” of the “transferable record,” as these terms are defined by applicable electronic transactions law; NOTE: This covers MERS. • Definition of “Indebtedness”: Very extensive. Expanded to include many more elements of indebtedness normally included in the contractual provisions of the evidence of indebtedness.
Important Changes to Conditions The Claim Procedure Sections are revised and reorganized. Sec 3 requires notice, same as before. Sec 4 – Proof of Loss: • Required at the option of the Company only if unable to determine the amount of loss. • Previously, requirement was absolute. • It no longer needs to be a sworn statement.
Important Changes to Conditions Sec 6 specifies the Insured’s Duty to Cooperate • Adds references to the production of “electronic records” by the insured. • Specifies requirements for maintaining the confidentiality of the insured’s documents. • Requires the Insured to obtain production from third parties.
Important Changes to Conditions • Sec. 8 Determination and Extent of Liability - provides an increase to the Extent of Liability if the Company pursues litigation to perfect title, but is not successful: • (b) If the Company pursues its right to defend against an attack on title, and is unsuccessful in establishing the Title as insured, • (i) the Amount of Insurance shall be increased by 10%, and • (ii) the Insured Claimant shall have the right to have the loss or damage determined either as of the date the claim was made by the Insured Claimant or as of the date it is settled and paid.
Important Changes to Conditions • Arbitration option Increased to $2 Million (Loan Policy: Sec. 13, Owner’s Policy: Sec. 14). • Change to the Commitment form to provide disclosure: • The Policy contains an arbitration clause. All arbitrable matters when the Amount of Insurance is $2,000,000 or less shall be arbitrated at the option of either the Company or you as the exclusive remedy of the parties. You may review a copy of the arbitration rules at <http://www.alta.org/>.
New Loan Policy Short Form • Designed to reference the 2006 Loan Policy • New “incorporated endorsements” • New optional endorsements
New Loan Policy Short Form New “incorporated endorsements” ALTA ENDORSEMENT 4.1-06 (Condominium), if the Land or estate or interest is referred to in the Insured Mortgage as a condominium. ALTA ENDORSEMENT 5.1-06 (Planned Unit Development) ALTA ENDORSEMENT 6-06 (Variable Rate), if the Insured Mortgage contains provisions which provide for an adjustable interest rate. ALTA ENDORSEMENT 6.2-06 (Variable Rate-Negative Amortization), if the Insured Mortgage contains provisions which provide for both an adjustable interest rate and negative amortization. ALTA ENDORSEMENT 7-06 (Manufactured Housing), if a manufactured housing unit is located on the Land at Date of Policy. ALTA ENDORSEMENT 8.1-06 (Environmental Protection Lien) – Paragraph b refers to the following state statute(s): ALTA ENDORSEMENT 9-06 (Restrictions, Encroachments, Minerals)
New Loan Policy Short Form • New optional endorsements The endorsements checked below, if any, are incorporated in this policy: ALTA ENDORSEMENT 4-06 (Condominium) ALTA ENDORSEMENT 5-06 (Planned Unit Development) ALTA ENDORSEMENT 7.1-06 (Manufactured Housing – Conversion; Loan) ALTA ENDORSEMENT 14-06 (Future Advance – Priority) ALTA ENDORSEMENT 14.1-06 (Future Advance – Knowledge) ALTA ENDORSEMENT 14.3-06 (Future Advance - Reverse Mortgage) ALTA ENDORSEMENT 22-06 (Location) The type of improvement is a one-to-four family residential structure and the street address is as shown above.