“I ain’t afraid of no goats” because I have title insurance

It was a rather peculiar experience for lifelong Chicago White Sox fans to witness the Chicago Cubs win their first World Series since 1908 this past November, after a 108-year drought. For anyone that may be interested in extrapolating that figure a bit, that comes to 1,296 months or 5,616 weeks or (give or take) 39,420 days. Now, in hopes of not further alienating Cubs fans after seeing those numbers in print, exactly how do the Cubs and the aforementioned 108-year drought demonstrate the importance of title insurance for real estate lenders? The simple answer: goats.

It is commonly accepted that title insurance in the United States has been around since at least the 1870s. An advertisement from the middle of that decade shows the general purpose was the same then as it is now – to protect buyers against “loss from defective titles, liens, and encumbrances” so they can purchase property with confidence. At a base level, title insurance is protection against loss arising from problems connected to the title of a property. From a lender’s perspective, such title insurance is intended to help protect its security interest in that property as it is virtually the only way the lender can ensure that it can recover from its mortgage lien in the event of a superseding lien or an outright failure of title. Without title insurance, lenders have no recourse if the information obtained from a title search is defective or if an intervening lien is recorded between when that search is conducted and when its security instrument is recorded.  

The foregoing historical overview sheds some light on how the former Curse of the Billy Goat reminds us of the importance of title insurance. For sake of explanation, imagine the decades from the 1870s through 1908, when the Cubs last won the World Series. Although urban expansion was well underway, a vast majority of the American landscape was still comprised mostly of large swaths of land. Property disputes were not uncommon, but it was undoubtedly easier to resolve such disputes as the public record was rather limited and ownership itself did not, quite obviously, date back as far as it does now.

Envision if you will one goat farmer who inherited his land from his parents and demarcated it with a barbed wire fence. His neighbor, also a goat farmer, likewise inherited his land, which runs up to the same barbed wire fence. Each was well aware of where his goats roamed and, for the most part, respected the other farmer’s property rights. Now, compare that to the world we live in today – one in which even the most rural of areas is likely to have at least one strip mall. Quite simply, the relationship between the goat farmers is no longer solely delineated by a barbed wire fence. Rather, the farmers likely have to deal with countless easements, utilities, subdivisions, declarations, conditions, restrictions, rights of first refusal and permanent injunctions, just to name a few. And title insurance has become the way for financial institutions lending money to the goat farmers, for expansion and modernization, to confidently navigate their way through such title issues and ensure their security interest in their collateral is protected.

As for title policies themselves, the American Land Title Association (ALTA) forms are almost universally used in the United States, though they have been modified in some states. In general, the basic elements of insurance that these forms provide to lenders cover losses from the following matters:

• Title to the property on which the mortgage is being made is either:

1.  not in the mortgage loan borrower;
2.  subject to defects, liens or encumbrances; or
3.  unmarketable, all of which are vital because they ensure that lenders will get what they bargained for upon recordation of the mortgage, which is the ability to foreclose against the true owner of the property and to take title to the property subsequent to said foreclosure subject to no defects, or superior liens or encumbrances.

• The lien created by the mortgage that is:

1.  invalid or unenforceable;
2.  not prior to any other lien existing on the property on the date the policy is written; or
3.  subject to mechanic's liens under certain circumstances. As with all of the ALTA forms, a title policy is also intended to cover the cost of defending insured matters against attack.

More often than not, lenders require title coverage in an amount equal to the loan. Coverage afforded in a loan policy lasts until the loan is repaid. It is important to note, however, that title insurance only protects against losses from claims resulting from events or circumstances that arose prior to the date of the policy. This is in marked contrast to property or life insurance, which protect against losses resulting from events that occur after the policy is issued for a specified period into the future.

In the event the priority of a mortgage is challenged, a loan policy can (subject to certain exclusions and exceptions) protect lenders from monetary loss up to the lesser of the amount of the mortgage; the amount of the indebtedness secured by the mortgage; or the difference between the value of the property as insured and the value of the property subject to the defect. 

So the next time there is some uncertainty as to whether to require a title insurance policy on a loan facility secured by real estate, please remember that, much like the Chicago Cubs realized last year, there is more at stake these days than goats, and goats alone.  

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Andrew Luczak Glubisz, Associate

This alert originally appeared in the Summer 2017 Banking Focus newsletter.