What’s Wrong with Exceptions on Your Title Insurance Policy?

February 17, 2021 by Caleb R. Nissley, Esq. Lindsay Anderson, Esq.

To answer this question, it is helpful to understand what title insurance is.

Investopedia defines Title Insurance as “a form of indemnity insurance that protects lenders and homebuyers from financial loss sustained from defects in a title to a property.” Without title insurance, some lenders could lose their entire security interest for a loan, illustrating how valuable title insurance is. Yet, even with a title insurance policy, exceptions to the policy can still cause issues for the lender.

Exceptions to the Title Policy Arise from Existing Claims to the Property

In determining the extent of the title insurance coverage, a title company will do a search to find out whether there are any claims on the property. The results of this search for claims show up on a preliminary report (“prelim”) as a list of exceptions. One can think of exceptions to the title insurance policy as equivalent to existing claims to the property.

Unless the lender comes to some sort of agreement with those who have an existing claim on the property or unless the lender purchases certain endorsements from the title company, the lender’s claim to the property is subject to the existing claims, because the title company will take exception to them – hence the name “exceptions.” This means it is in the lender’s best interest to know the full extent of any existing claims on the property and remove claims adverse to the lender’s interest.

Remove and Resolve Exceptions to the Title Policy Where Possible

The problem for lenders is that title companies will not actively take steps to remove existing claims from the property without direction to do so from the lender. Furthermore, many times title companies only do a partial search to identify every claim to the property. For the lender this can be problematic, because, whether the title company does a complete search or not, the lender will take subject to those claims if notice of those claims can be found in the public record, and in some states if notice of those claims can be found by an inspection of the property. This means that the lender needs to actively take steps to protect their claim to the property by removing what exceptions it can and pushing the title company to do its due diligence if needed.

Where title companies complete only a partial search of any claims, very often they put placeholder exceptions onto the prelim by describing a category of claims to property. Key words in the list of exceptions that often indicate where the title company has done this are “if any” and “whether or not shown in the public records.” These key words by themselves do not confirm that these exceptions can and should be removed from the title policy, but they can alert the lender to a potential opportunity for the title company to look further.

Examples of the Types of Exceptions That Can Be Removed or Resolved

  • Property taxes, including any personal property taxes and any assessments collected with taxes, are as follows:
    • Code Area:                    9876
    • Tax Identification No.: 1234-567-891
    • Fiscal Year:                   2020-2021
    • 1st installment:             $1,299.68 Paid
    • 2nd installment:             $1,299.67 Open
  • Any easements or servitudes appearing in the Public Records
  • Covenants, conditions, or restrictions, if any, appearing in the Public Record

Not All Exceptions to the Title Policy Can be Removed or Resolved

Some exceptions on the title policy can be difficult or perhaps even impossible to remove. Common examples include certain types of liens, oftentimes involving bankruptcy and foreclosure; easements; encroachments; and covenants, conditions, restrictions, and zoning requirements. While the prelim may sometimes refer to these types of exceptions using these names, very often, the prelim does not and instead simply describes them.

Examples of The Types of Exceptions That Would Stay on a Title Policy:

  • Easement(s) for the purpose(s) shown below and rights incidental thereto as set forth in a document:
    • Purpose:                      Pole lines and conduits
    • Recording No:             Book 1957, page 295, Official Records
    • Affects:                        Said Land
  • An unrecorded lease with certain terms, covenants, conditions and provisions set forth therein as disclosed by the document
    • Entitled:                       An Assignment of Lessor’s Interest in Lease
    • Lessor:                         Actual Corp.
    • Lessee:                        Unique LLC
    • Recording Date:          01/23/2018
    • Recording No:             123456

Recognizing which exceptions cannot be removed is not where the analysis ends, because although some exceptions that stay on title are not a problem, some can be a problem and can be difficult to spot. For these reasons, it is advisable to ask an attorney to review the prelim for you.

Consult with Your Attorney About Exceptions to the Title Policy

In summary, knowing which exceptions on the prelim will remain as well as which should be removed or resolved can sometimes be difficult due to the many issues and ways that companies can describe them. Understanding the significance of allowing a particular item to remain on title requires practice. To protect their security interest, lenders should have their attorney review the prelim for issues and ask that certain exceptions be removed where possible and resolved as needed.

Reach out to Geraci Law Firm here for a free consultation.

About the Authors

Caleb Nissley is a Transactional Attorney at Geraci LLP who specializes in banking and finance transactions including drafting promissory notes, security agreements, and other loan documents. Caleb works most closely with lenders and brokers who make business purpose loans secured by real property. He also researches legal and compliance issues for clients as it relates to clients’ specific banking and finance needs.

Lindsay Anderson, Esq., is a Banking and Finance attorney at Geraci LLP. She has experience preparing commercial, residential, and construction loan documents. Her practice focuses on representing nationwide mortgage companies and private lenders in all aspects of real estate transactions by advising on transactional matters.

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