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Title Insurance In Texas - An Introduction
by David J. Willis, J.D., LL.M.
Title insurance is available to protect owners and lenders from loss resulting from defects in the title to real estate. Title policies and regulations are a complicated and evolving area and we are not offering a comprehensive treatise on the subject here. This article is designed only as an introductory overview for investors. Further information may be obtained at the websites for the Texas Land Title Association (www.tlta.com) and the Texas Department of Insurance (www.tdi.state.tx.us).
Closing at a title company that issues a title insurance policy to both buyer and lender is the usual way to do business in Texas, but it is not the only way. Closings can occur without title insurance—for example, in a lawyer’s conference room or even at the kitchen table of one of the parties. There are good reasons, however, why obtaining title insurance is customary:
(1) The title company maintains a database of real estate resources that can be searched in order to produce a “title commitment,” which is a review of the status of title and an important part of the preclosing process.
Does the Title Company have an obligation to produce good title?
(2) The title company acts as a clearinghouse for closing documents that need to be signed and recorded, as well as for funds to be collected and disbursed at closing. The “closer” is the contact person who assembles the file (which is assigned a file number or “GF” number), prepares the HUD-1 settlement statement, and supervises the execution and notarization of documents on the day of closing.
(3) The title policy provides an avenue of recourse and recovery in the event either lender or buyer sustains a monetary loss as a result of a title defect. What kind of monetary loss? Well, suppose the title company missed a valid lien and the lienholder comes to collect; or suppose there is a previously unknown heir who appears and claims an interest in the property. The title company will work to resolve such issues or, if appropriate, pay compensation. In many respects, a title company is like any other insurance company.
No. A title company examines title but does so for its own information and benefit in order to determine whether or not it will issue a title policy. The investigation of title is not done for the benefit of the party (either buyer or lender) to be insured by the policy. It is part of the insurer’s own due diligence, in other words. Does the title company have a duty to at least point out issues that affect title? Again, no. “A title insurance company is not a title abstractor and owes no duty to examine a title or point out any outstanding encumbrances.” IQ Holdings, Inc. v. Stewart Title Guaranty Company, 451 S.W.3d 861 (Tex.App.—Houston [1st Dist.] 2014, no pet.).
This raises the broader question, particularly relevant for real estate investors, as to how much reliance can be placed on a title company to look after the particular interests of the any of the parties to the transaction. The answer is short: no such reliance is justified. It is not the title company’s job to cure title defects or cause legal documents to be prepared in any party’s best interest. The only safe assumption that can be made is that the title company will look after itself. Involvement of a title company in a transaction is accordingly no substitute for the services of a real estate attorney specifically retained to protect one’s interests—whether in connection with contract interpretation, curative issues, the effect of restrictive covenants or prior deed reservations, or the content of the closing documents.
What does the title company owe the parties? The IQ Holdings case states that a “title insurance company assumes a fiduciary duty to both parties when it acts as an escrow agent in a transaction” — i.e., when it collects and holds money. This consists of “(1) the duty of loyalty; (2) the duty to make full disclosure; and (3) the duty to exercise a high degree of care to conserve the money and pay it only to those persons entitled to receive it.” Again, however, these duties pertain to funds in escrow, not the status of title. Beyond this fiduciary duty, the title company’s only obligation is to honor the terms of its policy and indemnify the insured against covered losses.
The Title Commitment
The examination of title referred to in the previous section is reflected in the title commitment. The title commitment is produced after the title company has received a copy of a signed sales contract and a check for earnest money. The commitment reviews the status of title, lists title issues and defects that need to be addressed or cured before closing, and states any other preconditions to issuance of a title policy.
The title commitment consists of Schedules A through D plus various notices and disclaimers. Schedule A indicates the type of transaction that will be insured plus the current owner of record and legal description of the property to be conveyed (lot and block or metes and bounds). It also lists the amount of the policy that will be issued at closing (for prospective owners, this amount should be the contract sales price).
Schedule B lists exclusions and exceptions to coverage including such matters as restrictions, setback requirements, and utility easements. Items one through nine are standard exceptions and are general in nature. Any items which are follow are special exceptions pertinent to the property being conveyed.
Note that the second item on Schedule B excepts discrepancies, conflicts, or shortages in area or boundary line, or any encroachments or protrusions, or any overlapping of improvements. By checking box 6.A.(8) on the TREC contract, the buyer may amend the commitment and delete this “survey exception”–except for the part that refers to “shortages in area,” which stays in regardless of whether the survey exception is deleted or not.
Schedule C lists potential problem areas such as liens and judgments, and the title company routinely requires release of these. Other miscellaneous requirements may apply, such as a marital status affidavit, a not-same-name affidavit if there is a judgment in a name similar to that of the seller, an affidavit as to debts and liens, and the like. If there are more serious issues like mechanic’s liens, judgments against the seller, tax liens, lawsuits affecting title, heirship issues due to a previous owner dying without a will, or gaps in the chain of title, the commitment will indicate what must be done if title is to be insured in the name of the new owner. Specific curative action may be required.
Schedule D is usually of less concern to investors. It discloses, among other things, the parties who will receive any part of the title policy of premium.
Role of the Earnest Money Contract
The title company’s duties commence when it receives the executed sales contract and a check for earnest money. For residential transactions, Paragraph 6 of the TREC 1-4 contract entitled “Title Policy and Survey” applies. Although it is customary for the seller to pay for the title policy, this is not required, and paragraph 6 provides the opportunity to check the buyer as the paying party. The title company has 20 days to produce the commitment with an automatic 15 day extension if needed.
Paragraph 6.D provides a blank for insertion of a time period during which the buyer may object to issues raised by the commitment. The period inserted in this blank is usually seven to ten days. If the buyer does not make timely objections, any such issues are waived. Despite the buyer’s waiver, however, the title company may insist that Schedule C items be cured before a title policy issues. It is, after all, the title company’s liability that is on the line. If the buyer timely raises objections, then the seller must cure them or the TREC contract terminates.
Policies of Title Insurance
“A title insurance policy is a contract of indemnity that imposes a duty on the insurance company to indemnify the insured against losses caused by defects in title. The alleged defect must involve a flaw in the ownership rights of the property to trigger coverage. An irregularity that merely affects the value of the land, but not the ownership rights, is not a defect in title.” McGonagle v. Stewart Title Guaranty Company, 432 S.W.3d 535 (Tex.App.—Dallas 2014, pet. pending).
Two policies are usually issued: one for the buyer (the T-1 Owner Policy of Title Insurance) for the sales price of the land and improvements, which remains in effect so long as the new owner retains an interest in the property; and one for the lender (the T-2 Loan Policy of Title Insurance, formerly called the “Mortgagee Policy”) for the value of the property or the amount of its loan, whichever is less. The loan policy terminates when the note matures and the four-year statute of limitations for foreclosure on the lien expires. An investor will not get a loan on Texas real estate from an institutional lender without a T-2 loan policy, so plan on using a title company if the intent is to borrow purchase money from a bank. A private hard-money lender may do the deal without title insurance, however, since the private market is far less regulated.
A title insurance policy insures “good and indefeasible” title, which is a slightly lesser standard than “good and marketable” title. The distinction goes back to the Great Depression when many properties were sold at sheriff’s sales. Issues of marketability were raised, and this led to Texas adopting the “good and indefeasible” title rule—stating, in effect, that one’s title is better than anyone else claiming it.
In the case of a construction loan, title companies do not cover mechanics’ liens filed during construction, although one can and should request a down-date endorsement to the policy for an extra fee.
Remember, an owner policy is not required by law. It is always possible to do a title search or obtain a title report or abstract of title, thereby providing a comfort level regarding the status of title, the absence of liens, and the like—and then proceed on that basis. Many investors do just that and then close their deals. In fact, savvy pros learn how to do their own informal title searches at the courthouse and consult with their attorneys about what they find, reducing delays and costs.
Title Insurance Rates
The cost of title insurance is set by the Texas Department of Insurance which regulates this industry pursuant to Title XI of the Texas Insurance Code (the “Texas Title Insurance Act”). The form of a title insurance policy and the various available amendments are prescribed. The basic premium for a $100,000 policy is less than a $1,000, which is a one-time fee for coverage that lasts as long as the buyer has an insurable interest in the property. A formula applies for amounts higher than that. Hearings on rate increases occur biennially in even-numbered calendar years. Further information is contained in the Texas Title Insurance Basic Manual which can be found at http://www.tdi.texas.gov/company/titleman.html.
It is customary in Texas for the seller to pay the cost of the owner’s policy. However, this is negotiable. It is all a question of price.
Exclusions and Exceptions to Owner’s Coverage
As with any insurance policy there are exclusions and exceptions. The residential owner’s policy expressly excludes such items as building and zoning ordinances; condemnation; title problems created by or undisclosed by the insured, or arising from fraud by the insured; title problems that result in no actual loss; access issues; refusal of anyone to lend money; and physical condition of the land.
Exceptions are specific limitations on coverage. These include standard printed exceptions on Schedule B—restrictive covenants and deed restrictions; the survey exception (“discrepancies, conflicts, or shortages in area”) which can (and, for buyers should) be deleted for a fee; homestead, community, and survivorship rights; the exception for riparian rights, water-rights, and tidelands; the tax exception, including rollback taxes; the mechanic’s lien exception; the exception for leases and subordinate liens; the rights of parties in possession; and, if there is no survey, easements and encroachments. The title company may also add special exceptions that it deems necessary after doing its research.
Title companies do not insure fraudulent conveyances or preferential transfers (transfers made to avoid payment of creditors). Excluded is “any claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction vesting the Title as shown in Schedule A is (a) a fraudulent conveyance or fraudulent transfer, or (b) a preferential transfer for any reason not stated in Covered Risk 9 of this policy.” So if one is engaged in edgy asset protection, do not look to a title company for assistance.
Title insurance companies are not required to insure the mineral estate. See Tex. Ins. Code § 2703.0515. Prior to this statute, minerals and mineral rights were generally excepted under Schedule B of the policy. Title companies have traditionally taken the view that the job of determining title to minerals belongs not to title insurers but to landmen and oil and gas attorneys, although the title company will provide copies of mineral leases and conveyances if a buyer or the buyer’s attorney wishes to review them prior to closing (never a bad idea). Since minerals in producing regions have usually long-since been conveyed away (especially in the typical urban residential setting) the sole concern of a homeowner is use of the surface of the land (surface estate) by a mineral-interest holder to gain access to the minerals. Optional endorsements are available that will protect against damage to the surface estate (T-19.2 or T-19.3). The Texas T2-R already protects lenders against such surface damage. This is an evolving area currently under review by the Department of Insurance.
Community Property and Heirship Property
Texas is a community property state and, as such, all property acquired by either spouse during marriage is presumed to be community. Tex. Fam. Code § 3.003. It is common for a title company to either require joinder of a seller’s spouse on a deed or, in the alternative, a marital status affidavit and/or a nonhomestead affidavit.
Differences between Title Companies
If someone in the chain of title died without a will, you may also expect that the title company will require a conveyance of some kind (usually a special warranty deed) from each and every heir and, if an heir is deceased, from the heirs of that heir. Alternatively, the title company may be satisfied with an affidavit of heirship if there are no other heirs and the circumstances of family history can be sufficiently well established. It can get complicated and expensive to cure defects in heirship property. See the chapter on affidavits of heirship.
Since rates are regulated, there is nothing to gain from comparing title companies for the cheapest policy. Title companies do, however, vary in at least two significant respects: first, in the level and quality of service they (or a particular closer) may provide; and second, in their willingness to “insure around” certain potential defects or insure nonstandard transactions (wraparounds, trusts, and the like). Title companies are by nature conservative institutions. If a title company refuses to do a transaction, or sets out requirements that are difficult or impossible to satisfy—and this happens—then it may be necessary to shop title companies until one is found that is willing to do the more creative deals.
Some law offices enter into an arrangement with title underwriters to act as “fee attorneys,” meaning that these attorneys can close transactions in their offices and issue title policies as an agent for the underwriter. While this may seem convenient, prominent real estate attorney Chuck Jacobus and others argue that it is a conflict of interest—that the lawyer’s job is to advocate for the buyer or seller, not act as neutral escrow officer in order to collect insurance premiums and fees. We agree. The interests of buyers and sellers differ, sometimes immensely. Real estate documents can often be highly customized to favor one party or another. A lawyer trying to represent everyone may mean that no one gets adequate representation.
The Title Company’s Duty to Defend
If a title defect or lien appears after closing, the title company must investigate and
- commence legal proceedings to clear title;
- indemnify the insured pursuant to the policy;
- reinsure the title to the property at current value;
- indemnify another insurer if another company does the reinsuring; or
- cure the defect or obtain a release of the lien.
If the title company does not take one or more of the above actions, it can be sued by the insured for breach of contract. Note that the company’s duty to defend is contingent upon the insured providing timely written notice of the defect or lien. The duty to defend is not triggered by claims of money and the like that do not constitute a true cloud on the title.
The Title Company’s Liability for Damages
A title policy is like any other insurance contract in that it can be breached and, if a breach occurs, the title company may be liable for monetary damages. Recovery under an owner’s policy is limited to the owner’s actual money loss or the amount of the policy, whichever is less. “The only duty of a title insurer is to indemnify the insured against losses caused by a defect in title” states the court in the McGonagle case, in which the plaintiffs alleged liability on the part of Stewart Title for failing to point out the existence of restrictive covenants. In a judgment that should alarm most real estate investors, the court went on to conclude that Stewart had no such duty. Accordingly, it should be part of an investor’s routine procedure to specifically request copies of any restrictive covenants from the title company.
Making a Claim
In an insurance contract dispute, the initial burden falls on the insured to establish coverage under the terms of the policy. Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 188 (Tex.App.—Houston [14th Dist.] 2003, pet. denied). The insured must give the title company prompt notice and cooperate in furtherance of the claim. The old requirement that the policy itself be produced in order to recover has been eliminated. Payment must be made by the company within 30 days of determination of liability and the extent of the loss. If the title company settles a covered claim, it is subrogated to the rights of the insured as to that claim (i.e., it assumes the insured’s right of recovery).
The usual four-year statute of limitations for written contracts applies, commencing when a claimant knew or, through the exercise of ordinary diligence, should have known about the breach and ensuing injury. This places a duty upon policyholders to read closing documents and discover obvious errors. In one case, the title company was supposed to insure title to both lots 8 and 9; however the warranty deed and the deed of trust referred only to lot 9. The court ruled that the claimant should have raised this issue at closing and not waited over nine years to bring his claim. Dunmore v. Chicago Title Insurance Company, 400 S.W.3d 635 (Tex.App.—Dallas 2013, no pet.).
Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well as we are not tax advisors. This firm does not represent you unless and until it is retained and expressly retained in writing to do so.
Copyright © 2015 by David J. Willis. All rights reserved. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, http://www.LoneStarLandLaw.com.