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LIMITED LIABILITY COMPANIES, CORPORATIONS, GENERAL PARTNERSHIPS, LIMITED

PARTNERSHIPS, JOINT VENTURES, TRUSTS—WHO DOES THE TITLE INSURANCE COVER?


Author(s): Joyce Dickey Palomar
Source: Real Property, Probate and Trust Journal, Vol. 31, No. 4 (WINTER 1997), pp. 605-645
Published by: American Bar Association
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LIMITED LIABILITY COMPANIES,
CORPORATIONS, GENERAL PARTNERSHIPS,
LIMITED PARTNERSHIPS, JOINT VENTURES,
TRUSTS?WHO DOES THE
TITLE INSURANCE COVER?

Joyce Dickey Palomar*

Editors' Synopsis: The legal form of a party holding title to real


estate may be an importantfactor in deciding who should be covered
as an insured under a policy of title insurance. This Article discusses
who is the insuredparty in a variety of ownership contexts, consider
ing also the interestsofparties that do not directly hold legal title and
the effect upon coverage of transfers of title or dissolution of a title
holder.

L Introduction
II. Who is Insured Under Owner's Policies
A. Termination of Future Coverage Versus Termination of
Pre-existing Claims
B. Warranty Coverage
III. Who is Insured Under Loan Policies
IV. Corporate Insureds
A. Corporate Successors
B. Stock Transfers
C.
Corporate Mergers
D.
Corporate Dissolutions
E.Standing toAssert Claim or Bring Legal Action Against
Insurer
V. General Partnerships
VI. Limited Partnerships
VII. Shareholders and Limited Partners

*
Ada Lois Sipuel Fisher Presidential Professor of Law, University of Oklaho
ma. B.S., 1975,M.A, 1977, J.D., 1986, University of Nebraska. This Article is
adapted from a chapter by the author in Joyce D. Palomar, Title Insurance
Law (Clark Boardman Callaghan Publishers, Inc. 1994).

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606 31 real property, probate and trust journal

VIIL Joint Ventures


IX. unincorporated associations
X. Trusts
XL Limited Liability Companies
XII. Claims of Uninsured Third Parties
XIII. Conclusion

I. Introduction

In theUnited States, title insurance has become the preferred


mode of protectingparties acquiring interestsin real propertyagainst
loss from unexpected encumbrances and undiscovered claims to the
land. In fact, few commercial real estate transactions close today
without the issuance of an owner's policy, a lender's title insurance

policy, or both. Yet, while real estate purchasers and lenders seem
to understand title insurancewell enough to buy it, the amount of
litigation in recent years involving claims against title insurers
suggests that they have very little understanding of the coverage

actually obtained.

Today, the most frequently issued standard form owner's title


insurance policy has four insuringclauses; the lender's policy has
eight.1 Each policy has pages of finely printed conditions and
stipulations, exclusions, and general and special exceptions. In
addition to the complexity of title insurance policies, real estate
transactions have becomeincreasingly innovative and multifarious.
Further, the insured owner or lender may be a corporation,, limited

liability company, general partnership, limited partnership, joint


venture, trust, or any combination of these entities. Therefore,
answers to title insurance coverage claim questions are not always

simple.

1
American Land Title Association [ALTA] Owner's Policy (Oct. 17, 1992)
[hereinafterALTA Owner's Policy] and ALTA Loan Policy (Oct. 17, 1992)
[hereinafterALTA Loan Policy], reprintedinJoyce D. Palomar, Title Insurance
Law App. D&E (1994).

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WINTER 1997 Who Does the Title Insurance Cover 607

This Article addresses the frequentlylitigated issue ofwhether a


party qualifies as an insured under a title insurance
particular policy.
Schedule A of standard form policies sets out the name of the
insured,and theConditions and Stipulations section defines the term
insured.

To be insuredunder a title insurance policy, an applicant must


have such an interest in real property that he or she would suffera
pecuniary loss ifthe property's titlewere defective or ifencumbranc
es existed upon the title.2 Owners, mortgagees, trustees and
beneficiaries under deeds of trust,and lessees all have sufficient
interests in real property to be insured by a title insurance policy.
Additionally, both the purchaser's and the seller's interests under an
installment land contract are insurable by an owner's title policy,
whether or not the interest actually is considered an interest in real
Furthermore, both a trustee's legal title and a benefici
property.3
ary's equitable titlemay be insuredby a title insurancepolicy.4

II? Who Is Insured Under Owner's Policies

In an American Land Title Association [ALTA] Owner's Policy,


the insured is defined as the named insured and thosewho succeed
to the named insured's interest by operation of law, as distinguished
from those who succeed by purchase.5 An owner's title insurance

policy generally cannot be assigned by the insured to purchasers of


the subject property.6As examples of successors by operation of law

2
Empire Dev. Co. v. Title Guar. & Trust Co., 121 N.E. 468, 470 (N.Y. 1918);
9 John A. Appleman & Jean Appleman, Insurance Law & Practice ? 5202, at
n.2 (rev. ed. 1981).
3 See
Peck v. Title USA Ins. Co., 766 P.2d 290 (N.M. 1988).
4
Spellings v. Lawyers Title Ins. Corp., 644 S.W.2d 804, 807 (Tex. Ct. App.
1982). See infraPart X (discussing trustsas insureds).
5
Palomar, supra note 1, at App. D-5.
6 See
ALTA Owner's Policy, supra note 1, Conditions and Stipulations ? 1(a)
and 112. This policy condition has been upheld because the insured pays only a
single premium at the time title is acquired. See also Second Benton Harbor Corp.
v. St. Paul Title Ins. Corp., 337 N.W.2d 585 (Mich. Ct. App. 1983) (holding that the

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608 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

that the policy will cover, theALTA definition listsheirs, devisees,


distributees, survivors, administrators and executors of the insured's
estate, and corporate or fiduciary successors.7 These successors to
a named insured are subject to the same rightsand defenses of the
title insurer as the named insured.8

When an owner's policy is issued to the purchasers under an


installment land contract or contract for deed, it covers the purchas
ers, who are the equitable owners during the pendency of the
contract.9 The policy does not cover the sellers, though they still
hold legal title.10Nevertheless, a situation could arise where all of
the parties intend the policy to cover both the sellers' and thebuyers'
interests.To avoid a finding that the policy is ambiguous and that it
should be construed to cover both the sellers and thebuyers under a
land contract as owners, the insurer should expressly state in
Schedule A that thepolicy covers thepurchasers' equitable titleonly.

Pursuant to Condition paragraph 2 in 1970 and subsequent


ALTA owner's and loan policy forms, to maintain coverage the
insured must retain an estate or interest in the insured land,11 retain
a debt secured by a purchase money mortgage given by a purchaser

title insurer'sObligation terminatedwhen the insurertransferredthe land because no


reinsurance premium paid); Sylvania v. Stein, 425 A.2d 701 (N.J. Super. Ct. Ch. Div.
1980) (holding that the title insurer's obligation terminated when the insured
transferredthe land); Southwest Title Ins. Co. v. Plemons, 554 S.W.2d 734 (Tex. Ct.
App. 1977) (holding that title insurer's obligations terminated when insured
transferredthe land);Wolff v. Commercial Standard Ins. Co., 345 S.W.2d 565 (Tex.
Ct. App. 1961) (holding that the insurer'sduty does not extend to futurepurchases).
However, some policy formshave permitted the owner's policy to be assigned
to a mortgagee of the insuredestate or interest.See Hanie v. Atlanta Title & Trust
Co., 163 S.E. 515, 515 (Ga. 1932); Sandier v. New JerseyReal Title Ins. Co., 178
A.2d 1, 4 (N.J. 1962).
7
Palomar, supra note 1, at App. D-5.
*Id.
9
Bruer-Harrison, Inc. v. Combe, 799 P.2d 716, 729 (Utah Ct. App. 1990).
10Id.
11See
Palomar, supra note 1, at App. D-5. See Willow Ridge Ltd. v. Stewart
Title Guar. Co., 706 F. Supp. 477 (S.D. Miss. 1988); Second Benton Harbor Corp.,
337 N.W.2d at 585.

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WINTER 1997 Who Does the Title Insurance Cover 609

of the land from the insured,12or remain subject to liabilityby


reason of covenants of warranty the insured made in a conveyance of
the insured estate or interest.13Like all policy clauses, this condi
tionwill be strictlyconstrued against the insurer. Thus, courts have
held that a title policy was not terminated when the insured
transferredtitle to the insured'swholly owned corporation, and the
corporation then reconveyed title to the insured.14

A. Termination of Future Coverage Versus Termination of Pre

existingClaims

Two courts have correctlyheld that an insuredwho sustains a


losswhile owning an insured interestdoes not lose its claim despite
filing the claim against the title insurer after selling the property
interest.15 While a transfer of title terminates future coverage,
provided that the insured held title at the time of the loss, the
insured's subsequent transfer of title does not terminate its pre

existing claim. How a title insurer could argue otherwise in good


faith is difficult to see. However, there are cases inwhich title
insurers unreasonably contend that an insured who owned the
insured land when it discovered unexcepted encumbrances that
adversely affected the land'smarket value and gave the insurernotice
of its claim, loses the right to assert the claim when the insured

subsequently sells the land. Courts need to recognize that an


insured's legal claim against the titlepolicy arises when the insured
sustains a loss16 while the insured interest. To preserve an
owning
existing claim, the policy does not require the insured to continue
holding the land while waiting?sometimes for several years?for the
title insurer to pay. One may draw a simple comparison to general
insurance practices. For example, once Jane Homeowner sells her

12Foremost Constr. Co. v.


Killam, 399 S.W.2d 593 (Mo. Ct. App. 1966).
13See id. and I?.B.
infrapart
14
Sandier v. New JerseyRealty Title Ins. Co., 178 A.2d 1 (N.J. 1962).
15
Lawyers Title Ins. Corp. v. Frieder, 362 P.2d 555 (Colo. 1961); Sandier, 178
A.2d at 1.
16
Judicial definitions of loss,within themeaning of owners and lenders' title
insurance policies, are discussed inPalomar, supra note 1, ?? 6.06 & 10.04 (1994).

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610 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

house and delivers the deed to the vendee, she no longer is insured
by her homeowner's insurance policy. On the other hand, if the
house were destroyed by a tornado before she contracted to sell it,
her subsequent conveyance of the property to thevendee fora lesser
amount would not terminate the claim against her homeowner's
insurancepolicy that arose when the tornado inflictedthe damage.

Insured parties would certainly not expect to have to forego

opportunities to sell their property and move their businesses or


themselvesduringwhatever time it takes for the insurertomeet the
obligations arising under the policy. Not only would such an
interpretationof the policy's continuation of coverage condition17be
contrary to the insureds' expectations, itwould also be contrary to

public policy. While title insurance is promoted as enhancing the


alienability of land, title insurance policies would restrain the
alienabilityof land if theywere to bar sales by insuredsduring the
time their claims were pending. Therefore, a title insurer's
misapplication of the standard continuation of coverage condition,
terminating the pending claim of an insuredwho sustained a loss
while owning the land, is unreasonable.

The situation is differentif the insureddiscovered a titledefect


while owning the property,but did not consequently suffera loss in
the value of the land either while owning the land or when trans
ferringthe title. If the insured then conveys the land by quitclaim or
special warranty deed to avoid sufferingfuture loss from that title
defect, the insuredwill not have a claim for indemnificationfrom the
title insurer. However, the reason for this result is not that the
insured conveyed away the insured interest,but that the insured
never did, and never will, sustain a loss because of that title defect.
Thus, when an insuredhad discovered an easement problem but sold
the land forwhat the insured testifiedwas its fairmarket value
without the easement, a court found that the title insurer'sobliga
tions terminatedwhen the insured gave the quitclaim deed.18 This

17
ALTA Owner's Policy, supra note 1,Conditions and Stipulations 1?2; ALTA
Loan Policy, supra note 1,Conditions and Stipulations 2.
18
Second Benton Harbor Corp. v. St. Paul Title Ins. Corp., 337 N.W.2d 585
(Mich. Ct. App. 1983).

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WINTER 1997 Who Does the Title Insurance Cover 611

case is clearly distinguishable from the prior situation inwhich the


insured sustained a losswhile owning the insured interest,but is told
by the insurer that the subsequent sale of the insured property
prevents assertion of the pre-existing claim.

B. Warranty Coverage

After transferringall interest in the land, the insured under an


ALTA Owner's Policy retains only limited coverage for losses
suffered by reason of covenants of warranty made when the insured
transferred the insured estate or interest. The policy's transformation
from owner's insurance to warrantor's insurance has been described
by one court as follows:

The title policy upon which this suit is based expressly


provides that upon the sale of an insured's interest, the
policy automatically becomes a warrantor's The
policy.
effect of thisprovision is to protect an insuredwho subse
quently conveys his interestagainst any loss occasioned by a
defect in the titlewarranted by the conveyance. The insurer
is thus not liable to the vendor under the ownership provi
sions of the policy; recovery is conditioned upon a claim
under the warrantor's provisions.19

When the owner's policy continues as a warrantor's losses


policy,
presumably must be of a type that otherwise would have been
covered by the policy.20 Standard policy exceptions and exclusions
from coverage would apply.

Courts have held that, to be entitled to warranty coverage, an


insuredmust have acted in good faith in conveying titleby general

19
Southwest Title Ins. Co. v. Plemons, 554 S.W.2d 734, 738 (Tex. Civ. App.
1977). See abo ALTA Owner's Policy, supra note 1,Conditions and Stipulations, ? 2.
20 v. Commercial Standard Ins. Co., 345 S.W.2d 565
Cf. Wolff (Tex. Civ. App.
1961) (requiring title insurers to pay for removal of encumbrances against property
conveyed bywarranty deeds).

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612 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

warranty deed.21 An insured should not intentionally and unreason

ably fail to informthe title insurerof a discovered titledefect prior


to conveying the land by general warranty deed. The title insurer
may be able to prevent any loss by eliminating the titledefect prior
to the sale. However, if the insured and the vendee learn of a title
problem the day before closing, the insured does not have to
relinquish the sale or delay the closing to the detriment of the
insuredor thevendee. The insuredmust only disclose thematter to
the insurerwithin a reasonable time after discovering it, to give the
title insurer the opportunity to mitigate the losses. Furthermore, lack
of good faithwill not be impliedwhen an insured conveysby general
warranty deed without certainty as to when a title defect arose or
whether the insuredwas entitled to claim indemnityunder the title
insurance policy.22

Some non-ALTA owner's policies have limited warranty coverage


to a certain number of years, placed conditions on when the warranty

period commences, or simply made no provision for warranty


coverage. In these cases, or when the insured conveys the insured
real property interestby quitclaim deed, the policy's coverage simply
ends. Termination of the policy's coverage is also the practical result
when an insured owner has transferred the insured real property
interestby special warranty deed. A grantor conveying by special
warranty deed covenants only that the grantor has created no title
defects that will render the title unmarketable or disturb the
grantee's quiet enjoyment thereof. One standard exclusion in owner's
title insurance policies excludes from coverage losses due to matters
"created, suffered, assumed or agreed to by the insured."23 In
addition, other clauses limit coverage under an owner's title
policy
insurance policy to losses caused by defects existing prior to the
effectivedate of thepolicy,which is almost always contemporaneous
with the date that the owner acquired the insured real property
interest. The insuredowner generallywould not have created title
defects prior to acquiring title to the land. Therefore, titledefects

21 Stewart Title Guar. Co. v.


Lunt Land Corp., 347 S.W.2d 584 (Tex. 1961).
22
Title Ins. Co. ofRichmond v. IndustrialBank ofRichmond, 157 S.?. 710 (Va.
1931).
23
ALTA Owner's Policy, supra note 1,Exclusions fromCoverage 1?3.

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winter 1997 Who Does the Title Insurance Cover 613

forwhich a grantor could be subject to liabilityunder a special


warranty deed necessarily would be excluded from the warranty
coverage of the owner's title insurance policy.

III. Who is Insured Under Loan Policies

In the standard form loan policymost frequentlyused throughout


theUnited States, the insured is not only the named insuredbut also
(i) the owner of the indebtedness secured by the insuredmortgage
plus successors in ownership of that indebtedness, (ii) any govern
mental agency or instrumentality which insures or guarantees any
part of the indebtedness, and (iii) the preceding parties ifand when
theyacquire title to the estate or interestin real propertydescribed
in the policy.24

The firstdefinitionof insured in theALTA Loan Policy insures


themortgage lien both while the loan is held by the original lender
and when the loan is soldto an assignee in the secondary mortgage
market.25 A secondary mortgage market assignee does not have to
be named as an insured in the policy's Schedule A or added by a
subsequent endorsement. Extending mortgagees' title insurance
coverage to purchasers of loans in the secondary mortgage market
has been credited with raising investors' confidence in the secondary

mortgage market, impellingthegrowthofthatmarket, and increasing


nationally the availability of money for loans to the public for real

24See ALTA Loan


Policy, supra note 1,Conditions and Stipulations ?? 1(a), 2.
25See Border Sav. & Loan Ass'n v. FirstAm. Title Ins. Co. ofMidAmerica,
City
768 F.2d 89, 92 (6th Cir. 1985) (holding that the language in the policy definitionof
insured including "the owner of the indebtedness secured by the insuredmortgage"
was not intended to include a participant in theoriginal loan not named in the policy
as an insured and whose interest in the insuredmortgage was not known to the
insurerat the time the policywas issued); Capital Am., Inc. v. IndustrialDiscounts,
Inc., 383 So. 2d 936 (Fla. Dist. Ct. App. 1980) (holding that a purchaser of real
propertywho assumes an existingmortgage is not insured under themortgagee's
Loan policy because the purchaser has merely taken subject to themortgage and
agreed tomake payments on the original loan and is not an assignee or successor of
the indebtedness secured by the insuredmortgage).

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614 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

estate purchases and development.26

The second definitionof insuredextends the policy's coverage to


inure to governmental guarantors or mortgage insurers. Conversely,
the policy will not extend to obligors (guarantors or mortgage
insurers) who are not governmental insurers or guarantors.27

When an insured mortgagee assigns the subject note and


mortgage, the assignee becomes the insured and the assignor loses
status as an insured under the policy. However, if an insured
mortgagee suffered a loss while holding the subject note and
mortgage, themortgagee should not have to forego the opportunity
to sell the note and mortgage to an investor to be able to continue to
pursue a claim against the title insurer.28 The insured mortgagee
who discovers a titledefect and asserts a claim against the insurer
should not lose the ability to continue a claim on the basis that a
subsequent assignment of the note and mortgage has made the
successor the insured. Instead, an insured to
mortgagee's assignment
another should impact the assignor's ability to continue a claim
against the title insurer only if the insured sold the note and
mortgage for the full amount paid to acquire them and, therefore,
suffered no loss.

Successors to the owner of the indebtedness other than assignees


in the secondary mortgage market?those who succeed to the

26See
Palomar, supra note 1, ?? 1.03 & 3.07.
27James L.
Gosdin, Title Insurance 56 (1996).
28 Resolution Tnist
In Corp. v.American Title Ins. Co., the court incorrectly
dismissed the claim of an insuredmortgagee who discovered a loss and notified the
title insurersolely on the basis that the insured thereafterassigned the subject note
and mortgage. 901 F. Supp. 1122 (M.D. La. 1995). Therefore, the assignee, the new
insured,was required to repeat all of the legal actions and expenses inpursuing the
claim that had already been taken by the assignor. Instead, the court should have
questioned whether the assignee paid the insured assignor the full amount that the
assignor had paid for the note, so that the assignor sufferedno loss. If the insured
mortgagee had to discount the note and mortgage because of the titleproblems that
were discovered, then the assignor certainly should not have lost the claim thatbegan
while the assignor was an insured solely on the basis that a subsequent assignment
made the assignee a successor insured under the policy.

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WINTER 1997 Who Does the Title Insurance Cover 615

insured's interest by operation of law as discussed in the context of


owner's titlepolicies?also are included in theALTA Loan Policy's
definition of insured. Like the ALTA Owner's Policy, the Loan
Policy explicitlyreserves the insurer'srightsand defenses against any
who succeed to the original insured by operation of law.29 Those
who became insuredsby purchasing the indebtedness secured by the
insured mortgage are free of any defenses the insurer may have had

against the named insured,provided the purchase was forvalue and


without notice of any title defects or encumbrances.30

Loan policy conditions also provide thatan insured,an insured's


corporate parent or subsidiary, and a governmental instrumentality
may continue to be covered by the loan policy upon acquiring title to
the property through foreclosure, trustee's sale, deed in lieu of
foreclosure,or "other legalmanner which discharges the lien of the
insured mortgage."31 A mortgagee in foreclosure, workout, and
bankruptcy situations should be aware that the insured's transforma
tion from mortgagee to owner will not transform the original loan
policy into a new owner's policy. The continuing protection extended
to the mortgagee as owner will only be as per the loan
policy's
original terms. Thus, the policywill not indemnifyfor losses caused
by defects, liens, or encumbrances created after its original date,
includingany losses stemmingfrom theproceeding throughwhich the

29The 1987
revision ofALTA policies modified the language of this condition
of the 1970 ALTA Loan policy but not its effect. See Palomar, supra note 1,
App. F (comparing the 1970 ALTA Loan Policy with the 1992 Loan Policy,
Conditions and Stipulations ? l(a)(i)). Courts have disagreed about whether the
D'Oench Duhme Doctrine, which states that "private parties may not rely on any
secret agreements between themselves and bankfs] in order to defeat [a] claim by
[the]Federal Deposit Insurance Corporation (FDIC)," prevents enforcement of the
title insurance policy's standard exclusions formatters known or created by the
insured lender against theFDIC and RTC. National Credit Union Admin, v. Ticor
Title Ins. Co., 873 F. Supp. 718 (D. Mass. 1995); Title Ins. Co. ofMinnesota v.
Smith,Debnan, Hibbert & P?hl, 459 S.E.2d 801 (NC. Ct. App. 1995).
30See
Southern Title Ins. Co. v. Crow, 278 So. 2d 294 (Fla. Dist. Ct. App. 1973)
(finding that the assignees were themselves insureds and were not subject to the
insurer'sdefenses against the named party under a policy that named as the insured
a party "and/or itsassigns").
31ALTA Loan
Policy, Conditions & Stipulations ? 2(a) (1970); ALTA Loan
Policy, Conditions & Stipulations ? 2(a)(ii) (1990).

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616 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

insured acquired title.32Additionally, recoveryunder a loan policy


is limited to the lesserof the amount of insurance stated in thepolicy
or the amount of the unpaid principal of the debt plus interest,
foreclosure expenses, and amounts the insured mortgagee paid to
protect the lien. In contrast, an insured under an owner's policy
would recover either the amount of insurance stated in the policy or
the amount of the loss, whichever is less. Generally, the amount of
principal and interestdue at the time of default should be sufficient
to give a lender a return on the investment. However, if the insured
lender intends to keep the real property acquired, the insuredmay
want to be covered for its full value. For either of these reasons, an

acquiring lender should be counseled regardingwhether itwould be


prudent to obtain a new owner's policy rather than relyingon the
continuation of coverage under the loan policy.33

The Loan Policy's extension of coverage to purchasers of the


indebtedness secured by the insured mortgage should not be
confusedwith an assignment of the policy. Like theALTA Owner's
Policy, theALTA Loan Policy provides that the insured's coverage
terminateswhen the insuredno longerholds an interest in the land
described in the policy.34 Therefore, an insured mortgagee who
acquires title to the land may not assign to a purchaser the title
insurance policy along with the conveyance of a deed to the land.

32 See Moe v. Transamerica Title Ins. Co., 98 Cal. Rptr. 547 (Dist. Ct. App.
1971).
33See
CMEI, Inc. v. American Title Ins. Co., 447 So. 2d 427 (Fla. Dist. Ct. App.
1984) (finding that an insured lender that became the owner of property through
foreclosure was not entitled to recover the decrease in the property's value
attributable to two recorded easements not shown on the loan policy because the
value of the property?even encumbered by the easements?was still inexcess of the
amount of insurance in the loan policy, and ruling that a loan policy is not converted
intoan owner's policy as a resultof foreclosure); Green v. Evesham Corp., 430 A.2d
944 (N.J. Super. Ct. App. Div. 1981) (disallowing a mortgagee thatacquired titleby
deed in lieu of foreclosure from recovering for a prior mortgage discovered on a
small portion of the propertybecause the appraised value of the property,even after
subtracting the amount of themortgage, was still enough to cover the amount of
insurance under the loan policy,which was the remaining amount of the indebted
ness).
34
See ALTA Loan Policy, supra note 1,Conditions and Stipulations 1?1?1(a), 2.

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WINTER 1997 Who Does the Title Insurance Cover 617

Instead, the loan policy's coverage ends upon conveyance unless such
an insured mortgagee of title or takes back a
gives warranties
purchase money mortgage from the purchaser of the land. In the
latter situations, the loan policy will continue to cover losses resulting
from claims against the insured mortgagee's title.35

Despite the standard policy terminationclause, title insurerswill


sometimes specificallynegotiate a general clause to permit condition
al assignments of a lender's title policy. Additionally, title insurers
may agree to issue an endorsement that assigns an individual lender's
policy to a particular purchaser who is buying the land either at a
foreclosure sale or from the lender directly.36 When a
policy
provides for assignment with the insurer's permission, that permission
may not be unreasonably withheld.

An insured's coverage under a loan policy also will terminate


when theunderlying indebtednesshas been fullypaid and the insured
mortgage or trust deed released.37 A mortgagee's release of some
of the land from the lien has been held not to terminate the title
insurancepolicy but only to reduce the insurer's liabilitypro tanto.38

35Id see
; Young v. Chicago Fed. Sav. & Loan Ass'n, 535 N.E.2d 977 (111. App.
Ct. 1989) (finding that denying coverage in favor of any purchaser of an estate or
interest in the land from the insuredhas been held to have no application when the
claim had arisen prior to the assignment and determining that the assignee was not
seeking continuing coverage, but was asserting the claim of the insuredwhich arose
prior to the assignment).
36See
First Fin. Sav. & Loan Ass'n v. Title Ins. Co. ofMinn., 557 F. Supp. 654
(N.D. Ga. 1982) (holding that title insurance binders expressly ran in favor of
"successors and assigns" of the insured mortgagee but could create no to
liability
assignees until the insuredhad met all conditions forcoverage); Southern Title Ins.
Co. v. Crow, 278 So. 2d 294 (Fla. Dist. Ct. App. 1973) (finding that a policy named
a party "and/or itsassigns" as the insured); Schoeneman v. Bloom, 151 A. 272, 273
(N.J. Super. Ct. Ch. Div. 1930) (holding thata policy required notice to the insurer
of an assignment of the insuredmortgage before the policy could be transferredto
the assignee). See generally Title Ins. Co. of Richmond v. Industrial Bank of
Richmond, 157 S.E. 710, 713 (Va. 1931) (requiring insurance company approval for
the policy to continue after a transfer).
37See
Paramount Properties Co. v. Transamerica Title Ins. Co., 463 P.2d 746
(Cal. Ct. App. 1970).
38See
Palomar, supra note 1, ? 14.0.

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618 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

Furthermore, coverage under the policy terminates if the


underlying indebtedness is extinguished for any other reason. For
example, when an originating lender did not fund a loan, the court
held that the assignee of a note and mortgage had no claim under
the title insurance policy.39 And, when a bankruptcy court ruled
thata mortgage assignee's prior sales of a debtor's personal property
had extinguished all of the debtor's indebtedness to the assignee, the
absence of any "'indebtedness secured by the insured mortgage'"
prevented any liabilityunder the title insurance policy for the
assignee's inability to enforce the insured mortgages.40

As discussed more fully in Section XII below, courts generally


reject purchaser-mortgagors' claims of coverage under title insurance
that name their mortgagees as the insured. This has been
policies
the case even when themortgagorwas required to provide the policy
as a condition to receiving the loan and also paid the premium.41

Similarly, a lender has been held to have no duty to mitigate the


borrower's a claim on the lender's title insurance
damages by making
policy.42

39
Gerrold v. Penn Title Ins. Co., 637 A.2d 1293 (N.J. Super. Ct. Ch. Div. 1994).
40See McClellan
Realty Corp. v. Institutional InvestorsTrust, 714 F. Supp. 733,
735 (M.D. Pa. 1988) (quoting provision of applicable titlepolicy).
41
Sherrill v. Louisville Title Ins. Co., 214 S.E.2d 410 (Ga. Ct. App. 1975);
accord Indem. v. Freedom House Dev. 487 F. 839
Capitol Corp. Corp., Supp. (D.
Mass. 1980); Walters v.Marler, 147 Cal. Rptr. 655 (Dist. Ct. App. 1978); Grable v.
Citizens Nat'l Tr. & Sav. Bank of Riverside, 331 P.2d 103 (Cal. Ct. App. 1958);
Capital Am., Inc. v. Indus.Discounts, Inc., 383 So. 2d 936 (Fla. Dist. Ct. App. 1980);
Gaines v. American Title Ins. Co., 220 S.E.2d 469 (Ga. Ct. App. 1975); Ortego v.
First Am. Title Ins. Co., 569 So. 2d 101 (La. Ct. App. 1990); Trosclair v. Chicago
Title Ins. Co., 374 So. 2d 197 (La. Ct. App. 1979); Chicago Title Ins. Co. v.Mertens,
878 S.W.2d 899 (Mo. Ct. App. 1994); American Title Ins. Co, v.M-H Enter, 815
P.2d 1219 (Okla. Ct. App. 1991);Warrington v. Transamerica Title Ins. Co, 596 P.2d
627 (Or. Ct. App. 1979); Cherry v. People's Tr. Co, 127 A. 320 (Pa. 1925).
42 See
Marine Midland Bank v. Virginia Woods, Ltd, 574 N.Y.S.2d 485, 489
(App. Div. 1991).

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WINTER 1997 Who Does the Title Insurance Cover 619

TV. Corporate Insureds

When a corporation owns interests in real property and insures


themwith title insurance, thepolicy's Schedule A generallywill name
the corporate owner as the insured. The policy's definition of
insured extends the policy's coverage to the named corporate owner
as well as "thosewho succeed to the interestof thenamed insuredby
operation of law as distinguished frompurchase including,but not
limited to . . . corporate . . . successors."43

A. Corporate Successors

By operation of state corporation codes, successor corporations


assume all the rights and liabilities of each predecessor when
corporations are consolidated or merged. Under the ALTA title
policy definition of insured, successor are insured under
corporations
title insurance policies owned by their predecessors.44 However, this
provision extends coverage only to a successor that has
corporation
succeeded to the interests of one or more predecessor corporations
because of dissolution, merger, or consolidation. It will not make a

corporation the insuredwhen the corporation acquires an interestin


real property from insured individuals in exchange for shares of its
capital stock.45

Regarding corporate restructurings,corporate dissolutions, and


distributions to shareholders, questions may arise as towhether the
successor to a corporation's real property interests continues as an
insured under the corporation's title insurance policies. The cases
that have dealt with this issue focus on whether the successor

acquired the property interestby operation of law or by purchase.


When a corporate owner insured to a
conveys property by deed
subsidiary or sister corporation, the grantee corporation will not

43ALTA Owner's
Policy, supra note 1, Conditions & Stipulations 111(a).
44See id.
45Hawkins v.
Oakland Title Ins.& Guar. Co., 331 P.2d 742 (Cal. Dist. Ct. App.
1958).

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620 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

continue to be coveredby the original corporate owner's title


insurance policy unlessthe grantee can demonstrate that it is a

corporate successor and acquired the property by operation of law


rather than by purchase.46 However, a conveyance by deed does
not alone prove that the grantee took by purchase rather than by

operation of law because a deed could be issued simply to confirm


thepassage of title to a grantee that succeeded to the interestsof the
original insured corporation because of a dissolution, merger, or
consolidation. Conversely, a factor that usually will prove that the

grantee did not take by operation of law as a corporate successor


would be the continued independent existence of both the named
insured and the subsidiary or sister corporation that
corporation
acquired the real property.

In a Delaware case, an owner's title insurance policy named the


Child Foundation as the insured.47 When the Foundation was found
to be ineligible for taxexempt status, itchanged itsname to the 1066
Foundation and conveyed the insuredpropertyback to the original
grantors.48 The grantors then conveyed the insured real property to
a new
entity, also called Child Foundation, which later was succeeded
by the plaintiff Child, Inc.49 The Delaware Supreme Court held
that the transfers were voluntary conveyances and not successions by

operation of law.50 According to the Delaware court, the phrase


"operation of law" describes only situations where the transfer of
occurs reason of the law's a
rights involuntarily by impact upon
particular transaction.51

In New Jersey,a partnership acquired the stock of an insured


corporation and then received title to the insuredpropertyby deed
ina distributionto shareholderswhen the corporationwas voluntarily

46See
Lawyers Title Ins. Corp. v. CAE-Link Corp., 878 F. Supp. 767 (D. Md.
1994).
47
Child, Inc. v. Rodgers, 377 A.2d 374 (Del. Super. Ct. 1977), rev'd sub. nom.
Pioneer Nat'l Title Co. v. Child, Inc., 401 A.2d 68 (Del. 1979).
48Id. at
375.
49Id.
50
Pioneer, 401 A.2d at 71.
51Id.

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WINTER 1997 Who Does the Title Insurance Cover 621

liquidated.52 The court held that the partnership was insured under
the title policy as a distributee and corporate successor to the named
insured.53 The insurer argued that because the liquidation was

voluntary and the transferof titlewas by deed, the partnershipwas


a purchaser and not a successor of the insured interestby operation
of law.54Applying themaxim that ambiguities in the policy are to
be construed against the insurer, theNew Jersey Superior Court
rejected the insurer's argument and held that a reasonable interpreta
tion of the policy compelled the conclusion that the policy was
intended to cover the successor in title to a dissolved corporation.55
The court noted that voluntary actions frequently precede the passing
of title to other successors expressly listed in thepolicy's definitionof
insured and that Delaware law required the transfer of the deed from
the corporate directors to the shareholder in thedissolution proceed
ing.56

Whiletitle insurance policies generally are not assignable, if


uncertaintyexists regardingwhether a successorwill continue to be
insured under a predecessor's title insurance the successor
policies,
may request the title insurer's consent to assignment of the rights
under the policies. Title insurers have been willing to give this
consent in the instance of corporate restructurings, corporate
dissolutions, or distributions to shareholders.57 Another avenue to
certainty would be for the acquiring company to purchase a successor
endorsement from the title insurer.

52Historie SmithvilleDev. Co. v. Chelsea


Title & Guar. Co, 445 A2d 1174
(N.J. Super. Ct. Ch. Div. in
1981), aff'd part, rev'd on other grounds, 464 A.2d 1177
(N.J. Super. Ct. App. Div. 1983).
53Id. at 1180.
54Id. at
1176.
55/d.atll80.
56
Id.; see also Hawkins v. Oakland Title Ins. & Guar. Co, 331 P.2d 742 (Cal.
Dist. Ct. App. 1958); Sandler v. New JerseyRealty Title Ins. Co, 178 A.2d 1 (NJ.
1962).
57
Raymond J.Werner, The Basics ofTitle Insurance, inTitle Insurance: The
Lawyer's Expanding Role 36-41 (1985).

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622 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

B. Stock Transfers

A corporation that is the named title holder to certain real


property and the named insured in an owner's title insurancepolicy
will continue to be insuredas long as itexists and remains the named
titleholder of the insuredpropertydespite transfersof its stock. If
new shareholders gain control of a corporation's real property by
buying the corporation's stock rather thanby actually purchasing the
land, the corporation's original title insurance policy continues to
provide protection. If the same parties had directlypurchased the
land from the corporation, the corporation's title insurance coverage
would have terminated except for warranty coverage. According to
one writer, "[b]y structuring a transfer of real property as a stock
transfer, a transfer of personalty, the new shareholders enjoy the
benefits of the corporation as the 'insured' without the need to pay
any additional premium."58 However, the same writer provides two

warnings to those who would acquire controlover real property by

acquiring the stock of its title holder.

First, the title insurancepolicy speaks only as of the "effec


tive date," the date of its issuance. The new shareholders
cangain coverage for matters arising from and after the
effective date only by obtaining a "date-down endorsement"
or, in certain filed-rate states, a new at a "reissued
policy
rate." . . .

The second downside . . . arises as a result of what the


formerofficersor directorsof an acquired corporate insured
knew at the time the title policy was issued but failed to
disclose to the titlecompany. Under Section 3 of the [title
insurance policy's] Conditions and Stipulations, the insured
has an affirmative obligation to "notify the Company
... in case shall come to an
promptly in writing knowledge
insured hereunder of any claim . . .which is adverse to the
title to the estate or interest,as insured, and which might
cause loss or damage forwhich the [title insurance]Compa

58See Marc
Weinreich, Commercial Transactions: Who Does theTitle Insurance
Cover?, Prob. & Prop, 1992, at 42, 43.
Mar.-Apr.

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WINTER 1997 Who Does the Title Insurance Cover 623

nymay be liable by virtue of thispolicy." Failure to give this


notice may constitute a defense to coverage if the company
is prejudiced by the failure: an entity thateffects a transfer
of certain property througha corporate acquisitionmay have
the title insurance?but also may not.

The device that is frequently used to close the gap


created by the "knowledge defense" in coverage is an
endorsement commonly called a "non-imputation endorse
ment" . . . [which] denies the title insurer a defense to
coverage based on what some other party (that was or
continues to be constitutiveof the insured) knew but failed
to disclose.59

C. Corporate Mergers

If a corporation owning insured real property acquires another


company, the acquisition does not change the corporation's title to
the insured land or affect in anyway itsrightsunder a title insurance
policy.60

However, if the real property owner and named insured is the


target of an acquiring company, and the insured company's assets are

merged into the acquiring company, the insured company's interest


in the title insurancepolicy passes to the acquiring company.61 The
transferof the insured real property to the acquiring company is
deemed to be by operation of law and not by deed or purchase, and
the titlepolicy definitionof insuredencompasses fiduciarysuccessors
who acquire a named insured's land by operation of law.62

59Id. at 43-44.
60See id. at
44.
61See id.
62Id.

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624 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

D. Corporate Dissolutions

If a corporation in dissolution sells its real property to third


the grantees must purchase their own title insurance
parties,
policies.63 On the other hand, if the corporation transfers real
property "to its shareholders in liquidation and in exchange for
cancellation of the corporation's capital stock, for title insurance
purposes, the shareholders are deemed to be corporate successors"
who continue to be protected by the corporation's title insurance

policies.64 However, such stockholder-successors must be advised


that the policy does not insure that title is vested in them. Instead,
the policy insures that title to the landwas vested in the corporation
on the date that itwas issued to the corporation. The corporation's
successors have only the insured corporation's right to recover under
the policy. They will not be protected against encumbrances or
adverse claims to title resultingfromacts of the insured corporation
subsequent to the policy date. Such corporate successors' claims also
will be subject to any defenses to policy coverage thatwould have
applied to the corporation.65

E. Standing toAssert Claim or Bring Legal Action Against Insurer

Standard title insurance policies define an insured claimant as


"an insured claiming loss or damage."66 Therefore, the insurer is
likelyto reject a claim by a partywho is neither the named insured

63See
Weinreich, supra note 58, at 44.
64
Id.; see also Historic SmithvilleDev. Co. v. Chelsea Title & Guar. Co., 445
A.2d 1174 (N.J. Super. Ct. Ch. Div. 1981), aff'd inpart, rev'd on othergrounds, 464
A.2d 1177 (N.J. Super. Ct. App. Div. 1983) (findingthatupon corporate dissolution,
a stockholder acquires title by operation of law and is insured under the title
insurance policy issued to the company).
65See
supra part IV.B; see also title insurance policies' standard exclusions from
coverage for title defects created or assumed by the insured and for title defects
known to the insured.
66
T. Mary McDonald et al., Policy of Title Insurance, Conditions and
Stipulations 1i 1(b), 1993, inTitle Insurance 1993?Obtaining the Coverage
You Want at 253,255 (PLI Real Estate Law and Practice Course Handbook Series
No. N-397, 1993).

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WINTER 1997 Who Does the Title Insurance Cover 625

in Schedule A nor a successor thereof by operation of law. Never


theless, citing general property and casualty insurance cases, one
court has held that the sole shareholder of a corporate insured is a
proper party plaintiff in an action against a title insurer for bad
faith.67Without considering that the corporation rather than the
shareholderwas named as the insured in the policy's Schedule A, the
court held that the the shareholder's reasonable expectation of loss
sufficed to give him an insurable interestand make him a proper
party to bring suit, along with the corporation, against the title
insurer.68

V. General Partnerships

Another issue is whether one partner who is substituted for


another partner in a general partnership will be insured as a
successor under the original partnership's title insurance policies.
The answer may depend upon which theory of partnership a
particular jurisdictionfollows. In a jurisdiction inwhich a partnership
is deemed to be a legal entityable to hold title to real property, the
partnership itselfmay be the insured. In such a jurisdiction, the
partnershipmay continue to be insured,regardlessof substitutionor
addition of individualpartners.69

Conversely, in a jurisdiction that defines a partnership not as a


legal entity,but as the sum of its individualmembers, partners either
own partnership property in joint tenancy or in a tenancy in
partnership. Title insurancepolicies coveringpartnershipproperty in
these jurisdictions may name each of the partners as the insureds. A
new partner or a partner substituted for an insured partner presum

67 . Safeco Title Ins. Co., 498 N.W.2d 905, 907


Heyden (Wis. Ct. App. 1993),
overruled inpart byWeiss v. United Fire and Cas. Co., 541 N.W.2d 753 (Wis. 1995).
68Id.
69
See, e.g.,Mississippi Valley Title Ins. Co. v.Malkove, 540 So. 2d 674 (Ala.
1988) (finding that two individualswho conveyed insured property to a general
partnership composed of themselves and other partners did not terminate their
insured interests in the property).

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626 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

ablywould not be covered by the original title insurance policy.70

Another view is that of the Uniform Partnership Act, which


states that a "dissolution of a partnership is . . . caused by any
to be associated in the carrying on ... of the
partner ceasing
[partnership]business."71 Under this view, "[w]hen a partner sells
his or her entire partnership interest, the original partnership
dissolves and may terminate. On termination, the newly formed
partnershipwill have no standingas the 'insured'under theoriginally
issued owner's title policy."72 This would be true even if the new
partnership has the same name as the insured in the original title
policy.

One court has proposed in dicta that a substitutedpartnermay


be considered a fiduciary successor to an original partner named in
a policy insuringpartnership property.73 For this argument to be
successful, the jurisdictionwould have to accept the view that every
partner in a partnership is the fiduciaryof every other partner. To
resolve any doubt, some title insurers will issue an endorsement

expressly continuing the original title insurance policy in favor of a


new general partnership that results from the substitution of a new
partner for one of the original partners.74

If a general partnership, after being issued a title insurance


policy on partnership real property,chooses to change itsform to a
limitedpartnershipor to a corporation, the question again may arise
whether the new entity continues
as an insured under the general

70
See, e.g., Fairway Dev. Co. v. Title Ins. Co. ofMinn, 621 F. Supp. 120 (N.D.
Ohio 1985) (finding that the transferof the interestsof twomembers of an insured
partnership to the remainingmember and an outside party terminated the original
partnership and gave rise to a new one thatwas not insured under the original
partnership's title insurance policy).
71Unif. Part. Act
? 29, 6 U.L.A. 752 (1914).
72
Weinreich, supra note 58, at 45.
73Historic SmithvilleDev. Co. v. Chelsea Title & Guar.
Co, 445 A.2d 1174,
1178 (N.J. Super. Ct. Ch. Div. 1981), aff'd inpart, rev'd on othergrounds, 464 A.2d
1177 (N.J. Super. Ct. App. Div. 1983).
74See
Weinreich, supra note 58, at 45.

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WINTER 1997 Who Does the Title Insurance Cover 627

partnership's title insurance policy. A court could find that the new
entity is a successor to the insured property interest by purchase, and
the original title insurance policy in the partnership's name will be
terminated except as to warranty coverage. On the other hand, if, as
inHistoric Smithv?le Development Company v. Chelsea Title and
Guaranty Co.?5 the new entity is deemed a successor by operation
of law, itmay be insuredunder the original titlepolicy. The question
stillmight arise as to exactlywho is insured.Are the formergeneral
partnerswho occupy similarpositions in the new limitedpartnership
or corporation insured individually,or is theentity thatsucceeded the
general partnership by operation of law the insured? It has been
suggested that the answer might again depend on whether a
jurisdiction applies the aggregate or legal entity theoryof partner
ship.76

Perhaps, rather than focusingon form, the better approach to


the preceding questions might be to consider the substance of the
change in the general partnership, togetherwith the purpose behind
the title insurance policy condition prohibiting assignments of
policies, while permittingcontinuing coverage in favorof thosewho
succeed to the insured interest by operation of law. What is
important to the title insurer iswhether the change in the general
partnership could have resulted in the attachment of intervening liens
or claims against the insured property interest. If the change in the
partnership could not have modified or increased the risks the title
insurer originally agreed to cover, no reason exists to rule that the
old title insurance policy was terminated by the change in the
partnership. Conversely, ifa transferof the insured real property
made in conjunctionwith the change in the partnership creates title
risks that did not existwhen the original policywas issued, then the

75 445 A.2d
1174, 1178 (N.J. Super. Ct. Ch. Div. 1981), aff'd inpart, rev'd on
othergrounds, 464 A.2d 1177 (N.J. Super. Ct. App. Div. 1983).
76 See D.
Barlow Burke, Jr., Law of Title Insurance ? 5.1.1.1 (2d ed.
1993) (distinguishingbetween the legal entity theoryof partnership inwhich a new
partnership is not the same entity insured in the policy and the aggregate theoryof
partnership inwhich the individualpartnerswho originallywere the insuredsmay still
be covered by the original title insurance policy if theymoved into similar positions
in the new entity).

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628 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

insurer is justified in requiring the purchase of a new title insurance


policy.

To prevent loss from a court's adverse characterization in the


situation in which an insured general partnership has chosen to
change its form,counsel should always advise the parties to consult
with their title insurer. The insurermay offer an endorsement that
will continue the policy in favor of the newly created limited
partnership
or
corporation. At a minimum, the parties should obtain
the insurer'swritten opinion as towhether thenew entitywill remain
insured under the general partnership's original title insurance

policy.77

VL Limited Partnerships

A limitedpartnership isnot dissolvedwhen a limitedpartnership


interest is sold or assigned.78 On the other hand, thewithdrawal of
a general partner from the limited partnership may result in a
dissolution of the limited partnership.79 Thus, a limited partner
ship's status as the insured under a title insurance policy will not be
affectedwhen limitedpartnership interestsare transferredbut that
status may be terminated by a general partner's withdrawal.80

VII? shareholders and limited partners

A party not holding a legal interest in a parcel of real property


might still have a stake in insuring its title. Examples include
shareholdersof corporations and partnersof limitedpartnerships that
hold real property among theirassets. For example, in a Pennsylva
nia case, a
prospective purchaser of stock in a corporation wished to

77 Seealso Palomar, supra note 1, ? 9.09 (discussing Non-Imputation


Endorsements which may be added to the policy).
78See
Weinreich, supra note 58, at 45.
19Id.
80
M

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WINTER 1997 Who Does the Title Insurance Cover 629

verify that the stock's value was still supported by a major real
property asset.81 The prospective purchaser, Ferry, contacted the
corporation's title insurerforan update of the titlesearch the insurer
had made when the corporation purchased and insured theproperty.
The title insurer responded, by letter addressed to the insured
corporation, that the corporation's title to the property remained
unchanged since the purchase. The letter failed to mention a
mortgage that the corporation had granted on the property as
securityfora loan. Ferry purchased the stock and then sued the title
insurer when he discovered the mortgage. The Pennsylvania
Superior Court found in favorof the title insurerbecause Ferrywas
not a named insured under the corporation's title insurance policy.82

Certainly the court's holding was correct. Yet, in some areas,


Ferry would have been unable to purchase a title policy naming
himself as the insured,because he held no legal interest in the title
to the real property.83 The case raises the policy question of
whether parties interested in the status of title to certain real
property should be permitted to become insuredseven though they
lack a legal interest in the property.

One commentator states that title insurersshould issue policies


to shareholders and limitedpartners that insure that title is in the
corporation or limited partnership. Such entities may have a greater
burden in proving that theysustained a losswhen title is discovered
not to be vested in the corporation or limited partnership as
or corporate to
insured.84 "[A] limited partner shareholder will have

81
Ferry v. Lawyers Title Ins. Corp, 452 A.2d 1094 (Pa. Super. Ct. 1982).
Accord Lyons Bldg. Corp. v. Home Title Ins. Co, 295 N.Y.S. 161 (App. Div. 1937).
82
Ferry, 452 A2d at 1094.
83But see
Peachtree Management & Inv.Co. v. Pioneer Nat'l Title Ins. Co, 541
F. Supp. 51, 54 (N.D. Ga. 1981) (explaining that the sole shareholder of an insured
corporation might be considered an insured under the policy).
84See
Weinreich, supra note 58, at 45, ("Cautious and sophisticated practitioners
almost always will require that the issuing title company attach a non-imputation
endorsement to the policy, thereby assuring that the knowledge or acts of the
partnership or corporation before the effective date of the new policy will not be
imputed to the new partner or shareholder so as to preclude coverage of an
otherwise valid claim. In addition, counsel for the newly admitted partner should

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630 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

firstprove that it holds a valid personal property interest in the


partnership or corporation and that the partnership or corporation
sustained an unreimbursed loss as a result of a title failure."85 But,
the commentator goes on to say:

When available, this typeof policy can be extremelyuseful


and cost-effective where a new partner or shareholder in a

closely-held corporation is admitted and where that new


admittee requires financial assurance that the partnership or

corporation holds title to the underlying partnership or


corporate property. In certain filed-rate states, or in those
jurisdictions where date-down endorsements may not be
available, this type of policy should enable the entity to
avoid the premium expense associated with purchasing a
new policy and, instead, should enable the entity to obtain a
policy exclusivelybenefittingthe new shareholder or limited
partner. on state insurance the new
Depending regulations,
policy probably could be written for an amount equal to the
partner's or shareholder's proportionate economic interest in
the property, rather than for the full fair market value.86

However, according to another commentator, the principle


problem with insuringsuch indirectlyinterestedparties is that the
insurer would lose many of the normal defenses against covering
losses. For example, the policy's exceptions and exclusions for
encumbrances or defects agreed to by the insured would be
unavailable because the insured would not be the property owner
who entered intoa mortgage or contract conveyingan interestin the
property.87 Additionally, the concept of bona fide purchaser for
value in states' recording laws could not be relied upon to cure title

make certain that, if the title company requires the partnership to execute an
affidavit and indemnity as a condition to the issuance of the non-imputation
endorsement, the titlecompany also waives the rightof subrogation and rightsunder
the affidavitand indemnityuntil the newly admitted partner is no longer a partner
of the 'owner'.").
85See id.
86Id.
87
Werner, supra note 57, at 43, 44.

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winter 1997 Who Does the Title Insurance Cover 631

claims for such insureds.1

vni. Joint Ventures

A joint venture has been held to be a general partnership for the


purpose of taking title to real property.89Whether the insured in a
titlepolicywill be the joint venture or the individual joint venturers
will again depend upon the theory of partnership held in the
particular jurisdiction. In a Ninth Circuit case, the court found that
the individual joint venturerswere insuredby a title insurancepolicy
issued in the name of the joint venture; therefore,an individualwas
stillentitled to a claim against the title insurereven though he was
no longer a member of the joint venture.90

IX. Unincorporated Associations

The same question?whether the entityor itsmembers are the


insureds?may arise when an unincorporated association takes title to
real property and purchases a title insurance policy. In most states,
where unincorporated associations are not statutorily authorized to
hold titleto real property,title insurancepolicies insuringland owned
by an unincorporated association should be issued to a trustee in
trust for the association.91

88Id. at
43, 44.
89Hoskin v. New Groveton
Assocs, 492 N.Y.S.2d 685 (Sup. Ct. 1985).
90Ticor Title Ins. Co. of California v. American
Resources, Ltd, 859 F.2d 772
(9th Cir. 1988). See also Van Winkle v. Transamerica Title Ins. Co, 697 P.2d 784
(Colo. Ct. App. 1984) (holding that the insurer's duty was only to the named
individual insured even though he subsequently transferredproperty to a joint
venture of which he was a part).
91Frank E.
Sprower, Conveyances ofReal Estate Failing to TransferTitle, N.Y.
L.J, Mar. 16, 1988, at 25.

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632 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

X. Trusts

Both trusteeswho hold legal title and beneficiaries who hold


equitable titlemay be named insuredsunder policies insuringtitle to
real property held in trust. Usually, the trust itselfor the trustee
holding legal titlewill be the named insured,but the policy of title
insurancewill run for the benefit of the owners of equitable title,
though theyare not named insureds in the policy. In a Texas case,
a title insurer unsuccessfully contended that the policy's non
assignability clause precluded the beneficial owners from asserting
any claim on the policy issued in the trustee's name.92

If the record title and the policy are in the trust's name, a
transferof the beneficial interests in the trustdoes not require a
record transferof the real property and, therefore,may not require
the issuance of a new title insurance policy.93 Neither would the
resignation of the named trustee and appointment of a new trustee
defeat the trust's protection under the title insurance
policy.94 As
summarized by one writer, "in a title insurance analysis, a trust shares
in the corporate attributeof continuityof existence until the trusthas
been terminated by operation of law, by statute or an express trust
provision."95

XI? Limited Liability Companies

A limited liabilitycompany (LLC) is a typeof business organiza


tion throughwhich it is possible to combine the organizational
structureand tax benefits of a general partnershipwith the protec
tion against individual liabilitythat is available to shareholders of a

92
Spellings v. Lawyers Title Ins. Corp, 644 S.W.2d 804, 807 (Tex. Ct. App.
1982).
93
Weinreich, supra note 58, at 46.
94
See id. at 46.
95Id.

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WINTER 1997 Who Does the Title Insurance Cover 633

An LLC's owners, called members or transferees, are


corporation.96
not personally liable for the organization's liabilities.97

State LLC acts have many variations but do contain


common elements.98 Most acts provide that (i) members
are not liable for the debts or obligations of the LLC; (ii)
the LLC's only public filing is a brief charter document
containing minimal information; (iii) the LLC's basic
operative document is an unfiled operating agreement,
containing provisions governing the operation and manage
ment of theLLC, comparable to a partnership agreement;
(iv) theLLC ismanaged by itsmembers or, in the case of
some statutes, by a manager or managers who need not be
members; (v) death, bankruptcy,withdrawal and similar
events affecting a member normally terminate the LLC
unless the remaining members consent to continue the
business, and (vi) LLC interestsmay not be transferred
without the consent of other members.99

Liability protection and partnership tax treatmentcoupled with


the ability of all partners to be involved in management encourages
the use of LLCs in real estate development.100Also, the ability of
an LLC to hold and pass titleafter thedeath or incompetencyof an
owner, whether the remaining members elect to wind-up or to
continue the company, may help to avoid estate issues.101 It also
has been suggested that theLLC might be used as a mortgage substi
tute.102A lender and borrower could form an LLC and, in the
operating agreement, make the lender a member who has preference

rights, "a fixed percentage of return on its investment (interest),


a

96William
Landers & David Worrell, Uses of theLimited Liability Company in
Real Estate, Lawyers Title News 18 (Fall 1993).
97See id
98Id.

"I? at 18.
100
William D. Bagley, The Limited Liability Company, A New Entity for the
United States, 65 okla. Bar J. 1103,1109 (1994).
101I?
102Id.

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634 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

prioritycapital return(amortized payout), and the rightto own in the


event of failure of the company to pay as agreed (foreclosure).This
method avoids problems and delays associated with bankruptcy and
redemption periods."103 For all these reasons, it has been predicted
that "LLCs will become the entityof choice formany, ifnot most,
non-public real estate arrangements."104

Because theLLC is such a new formof business organization in


theUnited States, title insurerscannot be certain at this time how
courtswill decide questions concerning an LLC as the transfereeor
transferor of real property. Courts may try to answer questions that
arise by analogizing to corporations or partnerships. Because LLCs
have features in common with both partnerships and corporations,
the same kinds of title insurance concernsmay be raised. As with a
partnership,membership in an LLC is not freely transferable,and
the organization may terminate if a member dies, withdraws, or
becomes insolvent. Also, depending on the LLCs articles of
organization or operating agreement, the members may either
manage its business, or appoint managers who may or may not be
members of theLLC.105 As with a limitedpartnership or corpora
tion, the LLC constitutes an entity separate from its members. As
one author notes, "[I]f analogy to corporate and partnership law
would produce differentanswers to a particular question, itwill be
unclear which is the correct reference forLLCs in a particular case
or whether yet a third result is proper."106

The issues are in multi-state transactions because


complicated
the law of the state inwhich the land is located is the law that
governs transfersof that land, not the law of the state inwhich the
land-owning LLC was organized.

103MatllO9.
104Landers
& Worrell, supra note 96, at 21.
105Jack S.
Levey, Title Insurance and theLimited Liability Company, inABA
Section of Real Prop. Prob. & Tr. L, Real PropertyPrograms, Vol 2, J-149 (Fifth
Annual Spring CLE and Committee Meeting May 5-6,1994).
106Landers
& Worrell, supra note 96, at 21.

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WINTER 1997 Who Does the Title Insurance Cover 635

In a state thathas not yet adopted legislationauthorizingLLCs,


a foreignLLC could be characterized as a general partnership or as
an unincorporated association. In many states, unincorporated
associations cannot hold title to real property. Thus, an LLC that is
properlyorganized inone statemight not be able to hold title to real
property in another state before the latterhas adopted itsown LLC
Act.

When a title insureris issuinga policy to insurean LLC's interest


in real property, the insurermay make one or more of the following
requirements in order to assure that the transfer,in fact,will vest
legal title in theLCC:

1) Evidence of due organization of theLLC.

(a) a certificateof good standing,where available.

(b) a copy of theLLC's articles of organization and all


amendments thereto, bearing the filing stamp of the
Secretary of State.

(c) ascertainment that no certificate or decree of


dissolution or termination is on file.

2) Foreign LLC.

(a) theLLC's registrationto do business in the state


where the land is situated.

(b) characterization of the LLC as an unincorpo


rated association or a general partnership and style
transaction accordingly if the land is being pur
chased in a statewith no LLC Act.

Furthermore, members and managers of an LLC need to be


aware that an LLC that has become an insured under an owner's or
lender's title insurancepolicy could lose that status upon the death,
bankruptcy, incompetency, or withdrawal of a member.
insolvency,
In most states, LLCs are subject to dissolution upon the death,

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636 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

bankruptcy, incompetency, insolvency, or withdrawal of a mem


ber.107 Dissolution does not have to occur if all of the remaining
members vote to continue the company.108 However, if fewer than
all remainingmembers decide to continue the company, coverage
under the LLCs owner's title insurance policy may terminate
pursuant to the rule inFairway Development Co. v. Title Insurance Co.

ofMinnesota.109 In Fairway Development, three persons had formed


a general partnership,which thenbought real property and acquired
an owner's title insurance policy. Approximately a year and a half
later,two of thepartners sold their interestsin the partnership to the
third partner and another person. These two then executed a new

partnership agreement thatset thedate theirpartnershipcommenced


as the date the new agreement was executed; it did not relate back
to formation of the original partnership. The new partnership
operated the business of the old partnership and used the same
name. When the parties discovered a titledefect, the partnership
made a claim on the title insurance policy,which had been issued
when the original partnership bought the land. The District Court
for theNorthern District of Ohio granted the title insurer'smotion
forsummaryjudgment,rulingthat the insuredunder theowner's title
insurance policy had ceased to exist when the two original partners
transferredtheir interests to the remaining partner and the third
party.110 The court held that the new partnership was a stranger to
the title insurance policy.111

The withdrawal of a member may similarlycause the dissolution


of an LLC. As a consequence of theFairway case, LLCs may want
to ask for the same type of endorsement to their owner's or lender's
title insurance policies as was developed for partnerships. The so
called Fairway endorsement protects against lapse of coverage
resulting from a change in membership or from any resulting

107
Levey, supra note 105, at J-151.
m Id.
109
621 F. Supp. 120 (N.D. Ohio 1985).
110Id. at
124-25.
111Id. at
125.

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involuntary dissolution.112 A standard form endorsement for this


purpose is not now available. Reportedly, thewording of such an
endorsement currently is negotiated on a case-by-case basis.113

XII. Claims of Uninsured Third Parties

A purchaser of real property is generally required to buy lender's


title insurance for the mortgagee. Additionally, a seller of real
property is commonly required to purchase owner's title insurancefor
thebuyer of the propertyor to pay for the loan policy for thebuyer's
mortgagee. These facts have prompted numerous lawsuits regarding
whether a party paying the title insurance premium is an insured
despite not being named in the policy. Sellers have claimed that
theirpayment of policy premiums either entitles them to the statusof
a third-partybeneficiary of the insurance contracts that they have

112
Levey, supra note 105, at J-151.
113Id.
Mr. Levey has suggested language such as the following,which isbased
on a Fairway endorsement that has been approved by theRorida Department of
Insurance for use with partnerships. Id. at J-153. This draft has not yet been
approved foruse with LLCs, butwas submitted byMr. Levey for consideration and
discussion bymembers of the real estate bar.
The Company agrees that in the event of an occurrence of loss insured
against by thispolicy, theCompany will not deny liabilityhereunder on the
ground thata dissolution of the limited liabilitycompany has occurred or
a new limited liabilitycompany has been formedby reason of one ormore
of themembers transferringtheir interestto another person or entity;by
reason of a withdrawal of one or more of themembers from the limited
liabilitycompany; or by reason of the addition of one or more persons or
entities as members.

Nothing contained herein shall be construed as extending the insurance


hereunder as to matters attaching or created subsequent to the date
hereof; or insuringthe status of the insuredas a limited liabilitycompany
after the transferof themember interest,thewithdrawal of a member, or
the addition of new members.
This endorsement ismade a part of the policy and is subject to all of the
terms and provisions thereof and of any prior endorsements thereto.
Except to the extent expressly stated, itneithermodifies any of the terms
and provisions of the policy and any prior endorsements, nor does it
extend the effective date of the policy and any prior endorsements, nor
does it increase the face amount thereof.

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638 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

purchased for theirbuyers or creates a separate duty of the insurer


directly to them.114 Similarly, real property purchasers have
claimed that theirpayments of premiums for theirmortgagees' title
policies either entitles them to a duty of care from the insureror
gives them the status of a third-partybeneficiaryof themortgagees'
title insurance policy.115

Parties who are even less directly connected to a title insurance


transaction have also attempted to recover from title insurers. An
uninsured purchaser of real property has asserted a claim against a
title insurer based on the insurer's of title evidence
preparation
regarding the property in another transaction.116 Uninsured
purchasers at foreclosure sales, who were shown title evidence that
insurersprepared for foreclosingcreditors,have sued for losses due
to title defects that the insurers failed to include.117 Also, an unin
sured plaintiffwho claimed a record interest in a tractof land sued
a title insurerbecause the insurer failed to disclose the plaintiffs
interest in the land by exception in an insured's title policy.118
Indeed, even an insured's counsel has sued a title insurer when the
counsel bringing a foreclosure action for the insured relied on title

114See
Kenny v. Safeco Title Ins. Co, 169 Cal. Rptr. 808 (Cal. Ct. App. 1980);
De Carli v. O'Brien, 41 P.2d 411 (Or. 1935); Logan v. Gans, 419 A.2d 772 (Pa.
Super. 1980); Klickman v. Title Guar. Co. of Lewis County, 716 P.2d 840 (Wash.
1986).
115See
Capitol Indem. Corp. v. Freedom House Dev. Corp, 487 F. Supp. 839,
842 (D. Mass. 1980); Mayo v. Title Ins. Co, 423 So. 2d 1357 (Ala. 1982); Walters v.
Marler, 147 Cal. Rptr. 655 (Cal. Ct. App. 1978); Grable .Citizens Nat'l Trust &
Savs. Bank ofRiverside, 331 P.2d 103 (Cal. Ct. App. 1958); Sherrillv. Louisville Title
Ins. Co, 214 S.E.2d 410 (Ga. Ct. App. 1975); Gaines .American Title Ins. Co, 220
S.E.2d 469 (Ga. Ct. App. 1975); Trosclair v. Chicago Title Ins. Co, 374 So. 2d 197
(La. Ct. App. 1979); Calamari v. Grace, 469 N.Y.S.2d 942 (1983); American Title
Ins. Co. v.M-H Enters, 815 P.2d 1219 (Okla. Ct. App. 1991); Cherry v. People's
Trust Co, 127 A. 320 (Pa. 1925).
116
Warrington .Transamerica Title Ins. Co, 596 P.2d 627 (Or. Ct. App. 1979).
117
Harrison v. Commonwealth Land Title Ins. Co, 159 Cal. Rptr. 209 (Cal. Ct.
App. 1979); Smith v. Boyd, 639 A.2d 413 (N.J. Super. Ct. Law Div. 1993).
118
Stagen v. Stewart-West Coast Title Co, 196 Cal. Rptr. 732 (Cal. Ct. App.
1983); Howard Savs. Bank v. Brunson, 582 A.2d 1305 (N.J. Super. Ct. Ch. Div.
1990).

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WINTER 1997 Who Does the Title Insurance Cover 639

evidence the insurer had Claimants who are not


prepared.119
named insureds in a title insurancepolicy rarelyhave succeeded with
such claims.

Several courts have ruled that a seller of real property is not an


intended thirdparty beneficiaryof a title insurance policy issued to
the purchaser's lender but is, at most, an incidental beneficiary.
Consequently, a seller has no rightto recover from the title insurance
company forbreach of that contract.120That the seller paid for the
title insurance does not change the result.121

Other courts have ruled that neither contract nor tort law

provides a legal theory for a seller to recover for an insurer's


nondisclosure of a recorded document in a title insurancepolicy that
names the buyers as the insureds.122In a Washington case, a seller
asserted claims of breach of contract and negligence because an
insurerfailed to disclose a recorded document in the title insurance
commitment issued in thenames of the buyers of the property. The
court held that the insurerhad no duty in tort to anyone other than
the insured buyers and thus could not have breached a duty to

119
Goldberg v. Chicago Title Ins. Co., 517 So. 2d 43 (Fla. Dist. Ct. App. 1987)
(dismissing this claim by reasoning that counsel did not become insuredmerely by
acting ina foreclosure action on behalf of the insuredprincipal). See abo John Platt,
Note, Does a Title InsurerQua Title InsurerOwe a Duty toAny But Its Insureds?, 1
OKLA. CITY U.L. REV. 293 (1982).
120
Litchin v. Lawyers Title Ins. Corp., 934 F.2d 323 (7th Cir. 1991); Kenny v.
Safeco Title Ins. Co., 169 Cal. Rptr. 808 (Cal. Ct. App. 1980); De Carli v. O'Brien,
41 P.2d 411 (Or. 1935); Logan v. Gans, 419 A.2d 772 (Pa. Super. Ct. 1980); Wolff v.
Commercial Standard Ins. Co., 345 S.W.2d 565 (Tex. Civ. App. 1961).
121
Id.; see abo Platt, supra note 119, at 293 (exploring the historyand trends in
title insurer liability);Mary Ellen Sandlie Trust v. Pioneer Nat'l Title Ins. Co., 648
S.W.2d 761 (Tex. Ct. App. 1983) (holding that the insured buyer, who had not
complied with policy conditions requiring notice to the title insurerprior to any
settlement of a claim, was held not to be entitled to a claim as a third party
beneficiary of the title insurance commitment that the insurer had issued to the
insured's vendor).
122See
Wolff, 345 S.W.2d at 565.

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640 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

disclose an item that did not damage the insured buyers' title.123
Additionally, the court concluded that the policy gave no contract
rightsto the seller because no privityof contractexisted between the
seller and the insurer.124 The same result occurs when an Owner's

policy is issued to purchasers under an installmentland contract or a


contract for deed. The policy covers the purchasers, who are the

equitable owners during the pendency of the contract.125 It does


not cover the sellers, although they stillhold legal title.126

In a recent Pennsylvania case, the ex-wife of a seller who had

fraudulentlyconveyed property that the couple owned in tenancyby


the entireties sued the title insurer that had issued a policy to the
purchasers. The Pennsylvania Supreme Court ruled that a title
insurer'sduty "runsonly to its insured,not to thirdparties who are
not party to the contract."127 Neither could the title insurer be
liable to the plaintiffin tort,no matter whether the insurer'srole in
the transaction was characterized as "an insurer, an abstractor, or a

conveyancer." Nor could a plaintiffclaim to be an intended third


party beneficiary of the title policy issued to the purchasers. The
court found nothing to suggest that the insured purchasers had
intended to benefit anyone other than themselves by purchasing their

123Klickman v. Title Guar. Co. of Lewis


County, 716 P.2d 840, 842 (Wash.
1986). The court ruled:
The preliminary commitment for title insurance is issued primarily
for the benefit of the buyer to informhim ofwhat will be covered by the
title insurance policy.... Hence, there is no basis for imposing ... a duty
to include items in the preliminarycommitment thatcan be of no concern
to the buyer....
We likewise dismiss appellant's claim foralleged breach of contract.
The only contractual obligations [the insurer] has assumed are those
expressed in the policy of title insurance. This policy gives contract rights
only to the insured/purchasers.No privityof contract exists between [the
seller and the insurer],
(citation omitted). Id. at 842.
124
Id.; accord Gaines v. American Title Ins. Co., 220 S.E.2d 469 (Ga. Ct. App.
1975); Calamari v. Grace, 469 N.Y.S.2d 942, 944 (App. Div. 1983).
125
Breuer-Harrison, Inc. v. Combe, 799 P.2d 716 (Utah App. 1990).
126Id.
127
Hicks v. Saboe, 555 A.2d 1241, 1243 (Pa. 1989).

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WINTER 1997 Who Does the Title Insurance Cover 641

title insurance policy.128

Nevertheless, statutes may broaden a title insurer's liability. The


New Mexico Supreme Court has held that title insurance companies
have a duty to both vendors and vendees based on a state statute
thatprohibits thewritingof any title insurancepolicy unless the title
insurer has conducted a reasonable search and examination of the
The court concluded that this statute imposes a duty on title
title.129
insurersthat is separate from theobligations that theyassume in the
title insurance contract. The insurer's statutory duty to search the
title is owed to both the vendor and to the vendee in the real estate
transaction because the statute'sstated purpose is to provide for the

protection of '"consumers and purchasers'" of title insurance.130

Courts also generally reject owners-mortgagors' claims of

coverage under title insurancepolicies thatname theirmortgagees as


the insureds.131 This has been the case even when the mortgagor
was required to sign the policy as a condition to receiving the loan
and had paid the premium.132 Courts also have refused to recog

128Id. dit 1243.


129See Ruiz v.
Garcia, 850 P.2d 972 (N.M. 1993); Cottonwood Enter, v.
McAlpin, 810 P.2d 812 (N.M. 1991).
130
Ruiz, 850 P.2d at 976 (quoting N.M. STAT. ANN. ? 59A-30-2(b)).
131See
Ortego v. First Am. Title Ins. Co., 569 So. 2d 101 (La. Ct. App. 1990);
Trosclair v. Chicago Title Ins. Co., 374 So. 2d 197 (La. Ct. App. 1979).
132Sherrill v. Louisville Title Ins.
Co., 214 S.E.2d 410 (Ga. Ct. App. 1975).
Accord Capitol Indem. Corp. v. Freedom House Dev. Corp., 487 F. Supp. 839 (D.
Mass. 1980); Walters v. Marler, 147 Cal. Rptr. 655 (1978) (refusing to extend
lender's insurance under any theory to protect the owner-borrower); Grable v.
Citizens Nat'l Trust & Sav. Bank of Riverside, 331 P.2d 103 (Cal. Ct. App. 1958)
(holding that a loan policy naming a lender as an insured provided no coverage to
borrowers even though theywere required to procure and pay for the policy to
receive the loan); Capital Am., Inc. v. IndustrialDiscounts, 383 So. 2d 936 (Fla.
Dist. Ct. App. 1980); Gaines v. American Title Ins. Co., 220 S.E.2d 469 (Ga. Ct.
App. 1975) (finding that the insurer'sduty to use reasonable care in searching and
disclosing the status of titleextends only to a lender named as an insuredand not to
a borrowerwho isnot a party to the contract even thoughborrower paid premiums);
Ortego, 569 So. 2d at 106 (holding that "title insurance issued only to a mortgagee
confers no benefits upon themortgagor"); Trosclair, 374 So. 2d at 197; Chicago Title
Ins. Co. v.Mertens, 878 S.W.2d 899 (Mo. Ct. App. 1994); American Title Ins. Co.,

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642 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

nize the owner-mortgagor as a third-party beneficiary of the

mortgagee's insurance contract.133

Regarding whether mortgagors may pursue a negligence action


against a title insurerwho failed to carefullysearch the titleprior to
issuing themortgagee's policy, a Georgia court has ruled that a suit
in negligence is not available to a mortgagor because the insurer's
only duty is to themortgagee named in the policy as the insured.134
It did not matter inGeorgia that themortgagor had paid for the
mortgagee's title insurance policy. Again, however, state statutes may
broaden the title insurer'sliability.The Oklahoma Court ofAppeals
has held that mortgagors who purchased theirmortgagee's title
insurancepolicies do have the rightto sue to recover losses suffered
due to the insurers' failure to find a recorded title defect.135 The
court essentially concluded that, whether or not the purchaser is
named as an insured in the title policy, any purchaser of title
insurancemay bring a private cause of action for negligence if the
insurer breaches a state statute requiring title insurers to have an

attorney examine a certifiedabstract of the titlebefore the insurer


may issue a title insurance policy.136

Similarly, creditors of a vendor of land are not third-party


beneficiaries to the contract of title insurance issued to the vend

v.M-H Enters, 815 .2d 1219 (Okla. Ct. App. 1991) (holding thatmortgagors were
not beneficiairies of the title insurance policy, so they could not recover on the
policy);Warrington v. Transamerica Title Ins. Co, 596 P.2d 627 (Or. Ct. App. 1979);
Cherry v. People's Trust Co, 127 A. 320 (Pa. 1925).
133
See Snervili, 214 S.E.2d at 410; Marine Midland Bank v. Virginia Woods,
Ltd, 574 N.Y.S.2d 485 (Sup. Ct. 1991), affirmedby 608 N.Y.S.2d 473 (App. Div.
1994) (holding that a lender has no duty tomitigate the borrower's damages by
making a claim on the lender's title insurance policy).
134
Gaines, 220 S.E.2d at 469; accord Trosclair, 374 So. 2d at 197 (findingno
remedywhen a Loan policy did not name the borrowers as insureds); cf.United Am.
Bank ofMemphis v. Gardner, 706 S.W.2d 639 (Tenn. Ct. App. 1985) (findinga loan
participant could not recover as a thirdparty beneficiary under an Owner's policy
naming the purchasers of the property as the insureds).
135American Title Ins.
Co., 815 P.2d at 1218.
136
See id.

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WINTER 1997 Who Does the Title Insurance Cover 643

ee.137 A title insurer has been found not liable to a vendor's


creditor for failingto informthe insuredvendee that the creditorhad
recorded a writ of attachment against the property one day after the
vendor and vendee closed their transaction, but two days before the
vendee's deed was recorded.138

Uninsured plaintiffswho have attempted to recover from title


insurerson the theorythat the insurernegligentlymisrepresented the
status of title have survived title insurers' motions for summary

judgment. However, courts have held that to actually recover under


this theorysuch plaintiffsmust show, first,that theyare "in the class
of persons forwhose guidance the informationwas supplied, and
second, that [they] . . . justifiablyrelied upon the information in a
transaction in which the title assurance was intended to influence

[their] conduct."139

The general rule stated in all of the preceding cases is that


parties who wish to be covered by title insurance should purchase
policies naming themselves as insureds.140

Most of the cases inwhich uninsured plaintiffshave successfully


sued title insurers have involved allegations of fraud, collusion, or

137See
Cape Cod Bank & Trust Co. v. Avram, 697 F. Supp. 8 (D. D.C. 1988).
138Id. at 11
("The Court is aware of no law thatwould suggest that a title
insurerowes a duty to a thirdparty in plaintiffs position.").
139
Stagen v. Stewart-West Coast Title Co, 196 Cal. Rptr. 732 (Cal. Ct. App.
1983); Kenny v. Safeco Title Ins. Co, 169 Cal. Rptr. 808 (Cal. Ct. App. 1980); Child,
Inc, v. Rodgers, 377 A.2d 374 (Del. Super. 1977), rev'd inpart on othergrounds sub
nom. Pioneer Nat'l Title Ins. Co. v. Child, Inc, 401 A.2d 68 (1979);
Warrington v.
Transamerica Title Ins. Co, 596 P.2d 627 (Or. Ct. App. 1979).
140See also
Mississippi Valley Title Ins. Co. v.Malkove, 540 So. 2d 674 (Ala.
1988) (finding that,when an endorsement to the policy stated that the two insureds
named inSchedule A had, the same day, conveyed property to themselves and two
others as tenants in common, the endorsement merely modified the clause in
Schedule A describing the instrumentcreating the insuredestate or interest in land
and did not add the two additional parties as insureds);Van Winkle v. Transamerica
Title Ins. Co, 697 P.2d 784 (Colo. Ct. App. 1984) (holding that the party named was
the only insured,not a joint venture on whose behalf that party had purchased the
land).

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644 31 REAL PROPERTY, PROBATE AND TRUST JOURNAL

as the insurer's affirmatively


other special facts,141 such assisting an
uninsured seller in perfecting title prior to an insured's purchase.142
In the latter case, an uninsured seller was able to maintain a suit to
recover for an undiscovered titledefect on the theory that the title
insurance services had been performed for the seller's benefit as well
as the
buyer's.143

The largenumber of cases inwhich uninsured purchasers of real


property have had to resort to one of the preceding theories to
attempt to recover from title insurers suggests that they too often pay
for title insurancepolicies for their lendersand inadvertentlyend up
without title insurancefor themselves. Recognizing theproblem, the
American Bar Association Special Committee on Residential Real
Estate Transactions has promulgated theModel Home Buyer's Title
ProtectionAct, which requires, inpart, that a buyermust be notified
that the lender's title insurance gives no protection to the buyer. A
buyer will then be able to make an informed choice regarding
whether to purchase owner's title insurance.144 Several states have

passed laws requiring that this sort of disclosure be made to


purchasers of real property.145The American Land Title Associa

141Calamari v.
Grace, 469 N.Y.S.2d 942 (App. Div. 1983). See also Fox v. Title
Guar. & Abstract Co., 337 So. 2d 1300 (Ala. 1976) (denying insurer'smotion for
summary judgment on the borrowers' claim that theywere thirdparty beneficiaries
under a Loan policy issued to their lender because the borrower contended that to
deny them a cause of action would be to permit the insurer to profit by its own
negligence when the borrowers alleged that the loan officer acted as the title
insurer's agent when representing to them that no tax lien existed against the
property at the time the loan proceeds were disbursed and the insurerpurchased the
property at a subsequent tax sale).
142
Happy Canyon Inv. Co. v. Title Ins. Co. ofMinn., 560 P.2d 839 (Colo. Ct.
App. 1976) (allowing complaints to survive insurers'motions for summary judgment,
though courts have pointed out that to ultimately prevail the plaintiffwould have to
prove that the titlepolicywas intended to benefit the plaintiffdirectly);Fox, 337 So.
2d at 1300;Wilson v. Palmer, 452 N.E.2d 426 (Ind. Ct. App. 1983).
143
Happy Canyon Inv. Co., 560 P.2d at 839.
144
JamesM. Pedowitz, Purchaser's Need for Title Insurance?Protection When
Lender is Insured, inABA Section of Real Prop. Prob. & Tr. L., Title Insurance and
You: What Every Lawyer Should Know!, 61 (1979).
145See N.J. Stat. Ann.
? 46:10A-3 (West 1989); Penn. Ins. Reg. ? 126.1
(Purdon Supp. 1985).

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winter 1997 Who Does the Title Insurance Cover 645

tion has a form available for this purpose entitled "Notice of


Availability of Owner's Title Insurance."146

XIIL Conclusion

Those who own interests in real estate choose the form of


business entity inwhich theyoperate for several reasons includingtax
considerations, riskof liability,
degree of control, legal flexibility,and
means of recouping their investments.Title insurance coverage will
almost never be a factor.

However, those involved in an entitythatholds ownership or lien


interestsin real estate should at leastbe aware of the constraintsthat
their entity formmay place on their individual ability to .recover
under the entity's title insurance policy. Similarly, they need to
understand inwhat situations the entitywill not be able to recover
because the title insurance is considered to cover individuals who
may or may not continue to have interests in the entity. Individuals
must ask these kinds of questions bothwhen the title insurancepolicy
is issued and at any time that a change occurs in the structureof the
entity or the ownership of the insured real property interest. At
those times, title insurance underwriterswill individualize a policy's
Schedule A and issue endorsementsto fill possible gaps in coverage.

Conversely, failure to carefully assess your title insurance coverage,

particularly when changes are made in the owning entity's structure


or in the name inwhich title to the real property is held, may mean
handing your title insurer a defense in the event you ever must
submit a claim.

146
Werner, supra note 57, at 49.

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