Bulletin: SC000001

Dear Associates:

There exist a number of misconceptions regarding the nature of coverage under a policy of title insurance. This misunderstanding leads to false expectations among insured parties as to the recovery which they are entitled, often resulting in strained relations with the title insurance industry.

Perhaps the most basic misconception is that the policy guarantees the title of the property described in the insured deed or mortgage. A policy of title insurance is not a guarantee, but a contract of indemnity. That is, there must be an actual monetary loss to the insured for recovery under the policy. For example, suppose that a mortgagee policy is issued insuring Rocksolid Savings Bank without a Schedule B exception for a judgment which constitutes a prior lien on the insured property, Plaidacre. The fact that the prior judgment subsequently comes to the attention of Rocksolid does not immediately entitle Rocksolid to remedies under the policy. Rocksolid must incur an actual loss. Such a loss could occur in several ways under the example. The judgment creditor could seek to foreclose its prior lien threatening to eliminate or "cut off" the lien of Rocksolid's mortgage. The title insurer's obligations under the policy would then arise. Or, another scenario may find the debtor in default on the mortgage loan and in the course of pursuing foreclosure against Plaidacre, Rocksolid discovers the prior judgment lien which would decrease the amount received for the mortgaged property at the sale.

Consider the difference between a loan policy and an owner's policy as to when a compensable loss occurs. For example, "A' has an easement over "B's" forty acres. "B" conveys his forty acres to "C", a purchaser for value without notice. "C", in turn, gives a purchase money mortgage to lender "D". Policies are issued without exception for "A's" easement. "C" may recover immediately from the title insurer to the extent that "A's" easement impairs the value of the forty acres. (Or the insurer may undertake by court action or otherwise to clear the easement from the property.) Lender "D", however, may never recover under a mortgagee policy. This is because "C" may never default in the mortgage loan making it necessary for "D" to look to the security for satisfaction of the indebtedness. And, even in the event of default and foreclosure, the value of the security as impaired by "A's" easement may be sufficient to cover the indebtedness.

The case of CMEI, Inc. v. American Title Insurance Company, 447 So. 2d. 427 (Fla. App 1984) discusses the difference between owner's coverage and lender's coverage and also, holds that foreclosure of the insured mortgage does not convert a mortgagee policy to an owner's policy. In this case, the insured lender acquired title through foreclosure and sought to recover from the title insurer for two recorded easements not excepted to in Schedule B of the lender's policy. The Court noted that the mortgagee policy after foreclosure continues to provide the same coverage as before. The value of the property as impaired in the instant case, however was in excess of the indebtedness and therefore, the lender was not entitled to recovery. Had an owner's policy been issued, the easements would have formed the basis for a claim without regard as to the impairment of security.

CMEI demonstrates why it is prudent for a lender to obtain an owner's policy subsequent to acquiring title through foreclosure. In addition to broader coverage, an owner's policy issued upon foreclosure extends the effective date and provides coverage for possible deficiencies in the foreclosure proceeding.

Even those instances where the insured has clearly suffered an actual loss give rise to misconceptions as to the form of relief to which the insured is entitled under the policy. Under the terms of the policy, the title insurer has several options. The insurer may elect to file suit to establish the title or remove the defect within a reasonable amount of time. Or, the insurer may pay the amount of damages measured by (a) in the case of owner's coverage, the extent to which the value of the property is diminished; or (b) in the case of mortgagee coverage, the extent to which the security is impaired. In both cases, the maximum amount of damages would be the face amount of the policy together with costs and attorney fees incurred and authorized by insurer. In the case of mortgagee coverage, a third alternative is for the insurer to purchase the mortgage from the insured mortgagee for the outstanding balance of the indebtedness.

Generally, the insurer is obligated under the terms of the policy to defend against litigation which is founded upon an alleged lien, defect or other matter insured against. When the subject matter being litigated is excluded from coverage or excepted to in the policy, then there is no duty to defend.

In a Florida case, Pioneer Nat. Title Ins. v. Fourth Commerce, 487 So. 2d 1051 (Fla 1986) a foreclosing lender claimed that a general denial raised in the foreclosure action by defendant gave rise to the insurer's duty to defend. During a foreclosure, when a defendant attacks the priority or enforceability of the mortgage, the insurer may have an obligation to defend. The Florida Supreme Court, however, correctly held that a general denial did not provide allegations sufficient to establish that the matter is one within the scope of policy coverage. The Court observes that "to hold that a mere denial activates the duty to defend would indeed transform mortgagee title insurance into 'prepaid mortgage foreclosure costs' insurance".

In summary, a title insurance policy provides the insured very important protection, but the protection afforded is not unlimited. All agents, attorneys and lenders should be aware of the nature and extent of title insurance coverage.