Voluntary Transfers Of Real Estate And Their Impact On Your Standard CLTA Title Policy
Most of us will never make a claim on a policy of title insurance. If we did so, we might be shocked to learn that certain terms of your standard title policy may limit who receives the benefits of that policy. It happened to a client of mine recently, who was chagrined to learn that his wife was not covered by the policy and that the title industry had made no effort to bring this issue to his attention.
The facts in my client’s case were that he purchased a residence in his name and the name of his first wife. Unfortunately, his first wife passed away, and five years later, he remarried and added his new wife on title. Several years later, a neighbor claimed to have an easement across my client’s property, and my client and his neighbor ended up in litigation over that alleged easement. When my client tendered the claim to the title insurance company, they agreed to hire an attorney to defend the neighbor’s claim of an easement but denied any such coverage for his wife.
The wife was not covered under the policy because she did not meet the definition of an “insured” under the policy. Coverage under the standard CLTA policy is written to protect the individual or entity identified on Schedule A of the policy as well as those defined as “insureds” under the policy. Whether a successor in interest (such as my client’s wife) is also an insured turns on whether the individual or entity who acquired the successor interest did so by operation of law or whether they acquired their interest by purchase, gift, or other voluntary transfer. Examples of a transfer by operation of law include a transfer to an heir, distributee, survivor, next of kin, devisee, and/or personal representative of the named insured.
The issue presented by this situation is not limited to the facts that confronted my client but has potentially a broader application.
The following are other examples of situations in which this issue may arise:
1. The named insured acquires property as their separate property and voluntarily transfers an interest in that property to their spouse;
2. The named insured is married, then divorces, and later adds a new spouse to title;
3. A husband and wife acquire title to the property in their individual names and later transfer it to a trust;
4. The property is acquired by individuals and subsequently transferred to an LLC;
5. The property is acquired by an entity (such as an LLC, a corporation, or a partnership) and then is transferred out to named individuals or to another business entity or entities;
6. The property, or a portion thereof, is gifted by one individual to another; or
7. An LLC is insured; it is then dissolved and title is transferred to members of the LLC in their capacity as trustees of a family trust.
There is another issue that may present itself to a successor when the transfer is made between an individual or a business entity and its principals/members or another business entity. An example of this is where an individual purchases a property and then sells it to a partnership composed of that individual and other partners. The standard CLTA title policy generally does not cover certain matters known by the insured and not disclosed in writing to the insurer by the date of the policy. Facts known to the insured may then be imputed to a successor who otherwise would qualify for coverage but who was not familiar with the same facts that the initial insured was at the time of acquisition.
Another issue that may present itself is how to ensure that there is coverage where a partnership or LLC is acquiring property and a new partner or member is admitted, an existing partner or member withdraws from the partnership or LLC, or there is a change in any partner’s or member’s interest in the capital or profits of the partnership or LLC.
The first step in addressing any of these issues is to evaluate the terms and conditions of the title insurance policy before any transfer takes place. This article has focused on the standard CLTA policy, but the definitions affecting a successor interest may be different in an ALTA title policy.
The second step is to contact the title company before the transfer to determine if an endorsement can be issued to cover the successor or other transferee. Various endorsements exist to cover these situations, including one for successor owners, a non-imputation endorsement to address prior knowledge of the original insured, and a fairway endorsement to cover anticipated additions or withdrawals of partners or LLC members or a change in any partner’s or member’s interest in the capital or profits.
In each of these instances, it may be necessary to obtain a “date down” so that coverage against newer matters that arose between the original policy date and the date of issuance of the new title policy including the successor in interest.
These are not the only types of transfers that may eliminate coverage under the policy. As with any transfer of real estate, there are potential consequences, including tax issues, successor liability issues, and insurance coverage issues. Analyzing the impact of any transfer on a policy of title insurance or, for that matter, any other policy of insurance is just one evaluation that needs to be made before any such transfer takes place.
Unfortunately, unless you are aware of these issues and make these specific requests of the title insurance company, you may be at risk.