Underwriting Manual: TX
9.04
Indemnity Agreements
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9.04.1
In General
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| In order to insure around certain special matters, or waive certain title exceptions, it is customary for title insurance companies to rely on specific indemnities executed by sellers, mortgagors, or third parties on behalf of them. |
| Although indemnity agreements may adopt a myriad of different forms, they are basically of three kinds: |
| · | Agreements without deposit - also known as personal indemnities or personal undertakings. These indemnities are based on the following factors: |
| ¨ | The indemnitor’s solvency. |
| ¨ | The indemnitor’s being locatable. |
| ¨ | The indemnitor’s willingness not to deny liability. |
| ¨ | Privity of contract between the indemnitor and the title insurance company. |
| In some instances, indemnities without a cash deposit are tantamount to no indemnities at all. |
| · | Agreements with cash deposit Agreements with a cash deposit are the most efficient form of indemnities and may fully protect the title insurance companies against any possible loss. These indemnities require: |
| ¨ | A well drafted escrow agreement. |
| ¨ | The undisputed authority of the Company to utilize the escrow funds for the purpose of eliminating the title problem. |
| ¨ | The amount of cash being deposited must fluctuate, depending on the circumstances, between l50% and 200% of the amount needed to eliminate the title problem. |
| ¨ | Privity of contract between the indemnitor and the title insurance company. |
| · | Letters of credit See also Acceptable Letter of Credit Forms. (9.04.4 below) |
9.04.2
Special Considerations
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| The following matters must be fully considered in connection with the acceptance of an indemnity agreement: |
| · | Is the subject matter of the indemnity one for which an indemnity can be taken? |
| · | Does the acceptance of the indemnity need to be approved by the Company? |
| · | Is it necessary to show the matter as an exception and then insure over it? |
| · | Does the indemnitor’s financial position and reputability justify the acceptance of a mere personal indemnity or undertaking? |
| · | Does the risk to be undertaken make it necessary to demand an indemnity with deposit? |
| · | Is the amount of cash to be deposited no less than 150% of the amount of the lien, judgment, or potential claim? |
| · | Is the indemnity agreement supported by proper corporate resolutions? |
| · | Is the indemnitor’s liability stated and defined in the agreement? |
| · | Are the rights of the Company clearly stated and defined in the agreement? Has privity been established? |
| · | Does the agreement detail the name of the bank or savings institution where the funds should be deposited? |
| · | Is the Company being absolved from liability in the event of loss of funds arising as a consequence of the financial failure of the institution where the funds were deposited? |
| · | Does the Company possess the unrestricted right to apply the deposited funds for the payment or satisfaction of the lien, or potential claim that is insured by the policy? |
| · | Does the party signing on behalf of the indemnitor possess authority to execute the indemnity? For example, Banks and Savings and Loan Associations must provide resolutions authorizing the specific indemnity. |
| · | Because indemnities are for the benefit of the underwriter, no indemnity should be accepted without approval of Texas Underwriting Counsel or Texas Agency Manager. Indemnities are not accepted against title defects which cannot be resolved. Only rarely will an indemnity, even from another insurer, be accepted against an abstract of judgment. |
| Your underwriting agreement generally requires you to obtain prior approval from an appropriate company officer before you may accept an indemnity in order to insure around or over a title defect or to issue on an extrahazardous risk. THE NATIONAL LEGAL DEPARTMENT MAINTAINS A VARIETY OF INDEMNITY AGREEMENTS WHICH MAY BE TAILORED TO YOUR SITUATION. |
9.04.3
Letter Of Credit
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| A letter of credit is an agreement in writing executed by a bank or other lender (the issuer) made at the request of a customer (account party), stating that the bank or lender will honor drafts or other demands for payment by third parties (the beneficiaries) in accordance with the conditions set forth in the agreement. |
| Because letters of credit are subject to disclosure by issuing banks and may be subject to onerous and burdensome conditions and provisions. |
| YOU MUST OBTAIN THE CONSENT OF THE NATIONAL LEGAL DEPARTMENT, OR A TEXAS UNDERWRITING COUNSEL, OR THE TEXAS AGENCY MANAGER BEFORE ACCEPTING LETTERS OF CREDIT AS AN INDEMNITY. |
| The general standards for the acceptance of letters of credit are: |
| · | That the issuing bank be a healthy, viable institution. |
| · | That the letter be unconditional. |
| · | That the letter be irrevocable. |
| · | That the letter contain no qualifying language as to the right to draw on the credit. |
| · | That the expiration date of the letter be later than the time of expected need. |
| · | That the letter be subject to the Uniform Customs and Practice for Documentary Credits. |
| · | That there be an underlying written escrow agreement between the title insurance company and the borrower covering the right and authority of the title insurance company to expend funds secured from the letter of credit. |
9.04.4
Acceptable Letter Of Credit Form
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| Any letter of credit to be accepted by the Company must conform with the following form: |
| (Name of the Bank) (City - State) (Month-Day-Year) |
| IRREVOCABLE LETTER OF CREDIT |
| Letter of Credit No. _____________ |
| Stewart Title Guaranty Company (Address) (City, State) Gentlemen: |
| We hereby establish our Irrevocable Letter of Credit in your favor of _____________________, available by your drafts drawn at sight on ______________________ for any sum or sums not exceeding a total of _____________________ ($________________), and accompanied by: |
| NO DOCUMENTATION REQUIRED. |
| Except as otherwise stated herein, this credit is subject to the Uniform Customs and Practice for Documentary Credits (___Revision), International Chamber of Commerce, Brochure No. ___________). |
| The amount of each draft negotiated, with the date of negotiation, must be endorsed hereon by the negotiating bank, and any draft presented to us shall constitute a warranty of the negotiating bank that such endorsement was effected. |
| All drafts drawn under this credit should bear the clause “Drawn under ____________________ Irrevocable Letter of Credit No. __________ dated _______________”. |
| We hereby agree with you that all drafts drawn under and in honored upon presentation to ___________________________ together with this letter of credit on or before _______________. |
| Bank |
| BY: ____________________________ |
| (Permissible Special Instructions) |
| It is a condition of this Letter of Credit that it shall be deemed automatically extended (without amendment) for one year from the present or any future expiration date hereof without limitation on the number of extensions, unless sixty (60) days prior to any such date, we shall notify you in writing that we elect not to consider this letter of credit renewed for any such additional period. Upon receipt by you of such notice, you may draw hereunder without having incurred liability by reason of having issued your policies of title insurance by means of your drafts on us at sight accompanied by your written certification that the aforesaid policies of title insurance are still outstanding and that the proceeds of your draft will be retained and used by you to meet any payments which you may thereafter be required to make under your policies of title insurance and, further, that in the event your liability under your policies of title insurance is satisfied, you will refund to us the amount paid, less any amounts which may have been paid by you in the meantime, under your policies of title insurance and any unpaid premiums due you on said policies of title insurance. |