Humorist Dave Barry recently wrote about concern that global warming might raise the oceans putting his Florida home below sea level. He commented that he did not see that in his title insurance policy. For those in the real estate business, this is a good laugh, but it also points out how key it is to know what is covered by such policies.

 

Pretty much everybody knows that a standard policy protects against loss or damage arising from public or private liens or encumbrances on the title (1) as of the policy effective date and (2) not otherwise excluded. Additionally, insurers regularly cover liens from zoning enforcement actions when a notice of defect has been recorded.

The Basics: A critical distinction exists between "title" and "physical condition." Title insurance covers only "title" defects. Hocking v. Title Insurance and Trust Co. (1951) shows how subtle the distinction can be. In Hocking the insured acquired two lots created by a subdivision. The subdivision had been erroneously approved because the developer failed to perform street improvements as required by ordinance. As a result, the insured’s building permit application was denied. The insured claimed that the condition was a "title" defect covered by the policy.

 

A Big Exception: The court found for the title company holding that the injury pertained to the property’s physical condition, not the title. Thus to the extent the claim is characterized as a physical defect, the insurer is not liable.

Another Exception:  While a recorded notice normally creates an encumbrance to be disclosed on a title report, a notice warning that failure to correct a physical defect would result in City action to correct it and assessments against the property does not — or at least it did not in Elysian v. Stewart Title (2002). In Elysian, Stewart Title failed to disclose such a notice to Elysian when it bought the property.

 

The court disagreed with Elysian’s contention that the notice was a title defect and held that it merely warned of a physical defect. City enforcement action was required to create a lien. Since title insurance only pertains to conditions on the effective date and not future events, the notice about the current physical condition is not covered. The message here is a warning to not rely on standard coverages as a reliable or exhaustive search of the public record. In fact, Insurance Code § 12340.11 says exactly that.

 

A Possible Solution:  Acknowledging the problems that Hocking and Elysian create, the American Land Title Association has proposed a new standard loan policy that covers these situations. It covers ". . . [t]he violation or enforcement of any law, ordinance, permit or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting or relating to: the occupancy, use or enjoyment of the Land; the character, dimensions or location of any improvement erected on the Land; subdivision of land; or environmental protection."

 

The coverage only applies when there is a recorded notice regarding the matter and ALTA is expected to make conforming changes to a standard owners policy. In the meantime, express endorsements can be obtained at an extra cost to cover these items.