Obtaining robust and extensive title insurance coverage is the most desirable outcome in most cases. But what happens when you’ve been expecting a policy with extensive coverage only to hear just before closing that the coverage will be something different, something less extensive? Under what circumstances should you push back and demand what you expected? Are there times when you should be satisfied with the reduced coverage?
While cost is certainly a concern (CLTA and Standard Coverage policies are notably cheaper), this article will ignore cost to focus on the remaining two competing forces: coverage versus timing of closing.
CLTA and the Western Regional Exceptions
The California Land Title Association (CLTA) has a standardized form of title policy referred to as the CLTA Standard Coverage – 1990. It has 7 listed coverages:
- Title to the property is vested in the owner shown on Schedule A
- Protection against defects, liens, and encumbrances
- Unmarketability of the title
- Lack of a right of access to the property
- Invalidity or unenforceability of the mortgage or deed of trust
- The priority of the mortgage or deed of trust
- The invalidity or unenforceability of the assigned mortgage or deed of trust
These coverage items are among the most important to obtain, but as shown in the sections that follow, they leave much to be desired.
As with any title policy, there are listed exclusions that clarify the coverages and reduce their scope. These are:
- Zoning and other legal restrictions on the use of the property, except to the extent notice of the violation or enforcement thereof has been recorded in the land records
- Rights or claims involving eminent domain, except to the extent the enforcement thereof has been recorded in the land records
- Defects, liens, and encumbrances:
- Agreed to by the insured
- Not known to the title company, but known to the insured and not disclosed
- Resulting in no loss to the insured
- Resulting in loss to the insured, but wouldn’t have if the insured paid value for the insured mortgage or deed of trust
- Unenforceability of the mortgage or deed of trust because of a failure to comply with doing business laws
- Unenforceability of the mortgage or deed of trust because of a failure to comply with usury or truth in lending laws
- Claims arising out of the loan transaction by operating of federal bankruptcy or state insolvency laws
Lastly, there are additional exceptions to the coverages, which operate like exclusions, but are set apart from them as they are technically removable by negotiation with the title company. However, with the CLTA policy the exceptions listed below, also known as the “Western Regional Exceptions” and in other places, the “Standard Exceptions”, will likely not be removed except in special circumstances. Additional exceptions, called “special exceptions” relate to the specific properties identified in the policy and the matters that pertain only to them.
The Western Regional Exceptions are:
- Taxes or assessments which are not yet shown as existing liens
- Facts, rights, interests, or claims which are not recorded but could be discovered by inspection or inquiry from those in possession of the property
- Easements, liens, or encumbrances that are not recorded
- Discrepancies, boundary lines, shortages in area, encroachments, and other facts that a survey would disclose and which facts are not recorded
- Mineral, mining, and water claims
- Mechanic’s liens which are not recorded
ALTA Standard Coverage
The American Land Title Association (ALTA) is a nationwide association that has promulgated its own standardized forms of title policies, and which are by far the most commonly used. While there are a few other more specialized versions of these policies, the two most commonly used are the Standard Coverage version, discussed here, and the Expanded Coverage version discussed in the next section.
While the CLTA policy had only 7 coverage items, the ALTA Standard Coverage policy has 14 – sharing the CLTA’s 7 and adding 7 more. While not listing all of them, among the most notable are:
- An expanded scope of insured priority of the lien of the mortgage or deed of trust securing advances of proceeds (subject to certain limitations)
- Insuring over defects recorded during the period between the date of the policy and the date the mortgage or deed of trust is recorded
The Standard Coverage policy has virtually the same exclusions as the CLTA policy, with the exception that:
- The exclusion for federal bankruptcy or state insolvency laws is limited to instances of fraudulent conveyance or preferential transfer
- Real estate tax liens that occur between the date of the policy and the date of the recording of the mortgage or deed of trust
The Standard Coverage Policy also comes with the list of standard exceptions which are very similar to the Western Regional / CLTA exceptions. However, unlike with CLTA, these can generally be removed on a line by line basis depending on the circumstances. The notable differences are the addition of:
- Exception for defects, liens, encumbrances that are recorded during the period between the date of the title commitment and the effective date of the commitment conditions are met (usually recording of the mortgage or deed of trust is the last in time)
- Rights of parties in possession.
ALTA Expanded Coverage
Another available ALTA policy is the Expanded Coverage. It doubles the coverages over the Standard Coverage policy to a total of 28. Among the most notable additions are coverages for:
- The street address matching Schedule A
- The property is improved, zoned properly, and legally created parcel for a 1-4 family property or condo
- Forced removal of a 1-4 family or condo as a result of zoning violations
- Encroachments onto the insured’s property and from the insured’s property onto another property after the date of policy
- Forgery after the date of policy for instruments that subordinate, assign, release, or convey the insured mortgage or deed of trust, or to otherwise encumber title
The Expanded Coverage policy also comes standard with the following endorsements, where applicable: 4.1 (Condo), 5.1 (Planned Unit Development), 6 (Variable Rate), 6.2 (Variable Rate – Negative Amortization), 8.1 (Environmental Protection Lien), 9.10 (Restrictions, Encroachments, Minerals – Current Violations).
The Expanded Coverage policy adds 3 new exclusions, but also deletes the real estate tax lien exclusion found in the Standard Coverage policy – excluding:
- Claims of invalidity, unenforceability, or lack of priority over advances or modifications made after the insured has knowledge the ownership of the property has changed
- Real estate tax liens attaching after the date of the policy
- Failure of the property to have been built according to applicable building codes
The standard exceptions found in the Standard Coverage policy and similarly in the CLTA policy do not exist in the Expanded Coverage policy.
You should note, however, that the ALTA Expanded Coverage policy is only issuable for loans secured by 1-4 unit residential properties. Some of the additional coverages provided by this policy are available in more or less equivalent terms by specific endorsements to the Standard Coverage policy. Additionally, some title companies are more flexible than others and may, by negotiation, add back in additional coverages to the Standard Coverage policy that can be found in the Expanded Coverage policy either by manually editing the listed coverage items or by a special endorsement.
Title Throws a Curveball – Timing the Closing is Everything
The day of the closing arrives. You’ve planned on getting an ALTA Expanded Coverage policy and it is indicated as such in your instructions provided to the title company. Then the title company gets sends you an email to inform you that only the CLTA policy or an ALTA with the Western Regional exceptions is available. What do you do?
The first thing to consider is any requirements for a title policy type that may be contractually binding on you, such as from investors, participants, loan purchasers, etc. If there are requirements beyond your control you should push back against the title company while also discussing with your contract partners to discuss waivers of these requirements under the circumstances.
Next, look to overall risk in the loan from a title standpoint. Some include:
- Short term versus long term. Generally, a shorter-term loan is going to be less risky than a longer term loan since there will be a shorter time period for issues to occur within.
- Bridge loan versus rehab versus rental. If there will be only a single disbursement of loan proceeds, and/or no tenants or occupants, then there will again be less risk for title issues to occur.
- Prior rehab work. If the property needs rehab work to be done, but you can determine (through an affidavit of the owner/seller, or otherwise) that no work has been done by a contractor in at least the most recent 90 days, or paid receipts can be shown for such work that has been done, then the likelihood of potential mechanic’s liens is reduced.
- Nature of the property and prior ownership. If the property is a single family home in a quiet neighborhood which was owned for 40 years by the prior owner without issue, then the likelihood of title issues are reduced.
- Plats, surveys, and sketches. If an official recent survey is not available, check the land records for the recorded plat, or a sketch which may be found in an appraisal. These can help identify whether the permanent improvements on the property are safely within the lot lines, heading off potential encroachment issues.
- Real estate taxes and assessments. Make sure that real estate taxes and any public or private assessments for all past installments, the current installment, and perhaps the next installment are paid in full. If these are either proven to be paid by proper documentation or can be paid at the closing, risk of a lien that can take priority over your mortgage or deed of trust is greatly reduced.
The lower the title risk, the more amenable you can be to obtaining a CLTA or Standard Coverage policy. Title risks should always be considered during loan underwriting, even when obtaining the most robust policies. Obtaining a less robust policy, like the CLTA or Standard Coverage, on the other hand simply means you are internalizing the more of the risk, though not all. If the over all risk is lower, then internalizing it shouldn’t be a deal killer.
If you find, however, that the risk is too great for a CLTA or Standard Coverage policy, or that contractual obligations require you obtain greater coverage then switching title companies may be the only way forward. Occasionally, mentioning to the existing title company of your willingness to switch may spur them to change their mind, but switching may be the best option in these circumstances.
Looking Forward – ALTA 2021
ALTA has made significant revisions to their policies in 2021, which are now known as the “2021 ALTA Policy”. Since the majority of policies still issued are the 2006 ALTA Policy, this article has used them as the basis of comparison – though little has changed for 2021 that would alter the analysis above. For further information on these revisions please see our prior publication on the subject at https://geracilawfirm.com/alta-2021-replaces-alta-2006-what-lenders-need-to-know/.
Obtaining a CLTA or Standard Coverage title policy is much, much better than not having a policy at all. They cover the most common title issues and offer significant protection. They are more or less adequate for the majority of real estate transactions. However, we continue to recommend the broadest protection possible of an ALTA Expanded Coverage policy, as well as a few standard endorsements and additional deal-specific or property-specific endorsements.
The attorneys at Geraci’s Banking and Finance department are always happy to discuss this topic and many more should you have further questions or require representation.
 The reader should note that unless otherwise noted, the coverages, exclusions, and exceptions may not be a full list. Likewise, they are not copied verbatim for purposes of brevity and ease of understanding. Each policy may also list any of these items in a different order or use slightly different phrasing and are further subject to substantial differences in several states.