New Title Policy Forms Coming to New York

All New York title insurance policy and endorsements forms as well as the premium rates must be filed with and be approved by the New York Department of Insurance. Title underwriters almost always file with the Department through the Title Insurance Rate Service Association ('TIRSA'), a state sanctioned rating bureau comprised of the great majority of title underwriters licensed to do business in New York. In developing new forms, TIRSA, in turn, receives guidance from the American Land Title Association ('ALTA'), an organization whose membership includes title companies from across the nation. The title insurance policy forms currently in use in New York are based upon those promulgated by ALTA in 1992. However, because the ALTA forms are national, TIRSA often suggests modifications to the forms to account for New York's laws and local practices. Upon approval by the Insurance Department, these modifications are implemented through the provisions of the TIRSA Rate Manual, which sets forth premium rates, coverage limitations or expansions from the national policy, as well as the rules and guidelines governing title underwrites. The coverage expansions or limitations are then carried over to the New York Endorsement to the title policy which is attached to every policy and specifically modifies the terms of the policy to account for rules and regulations set forth in the Rate Manual. There are two basic title policy forms: 1) the owner's or fee policy, which insures the owners of the insured premises; and 2) the mortgage or loan policy, which insures the lender whose loan is secured by a mortgage on the owner's property. Each policy has its own New York Endorsement.

Revised Forms

After three years of meetings and discussions not only with title companies, but also with other players in the real property industry such as lenders, realtors and government regulators, ALTA revised the 1992 forms in 2006. On Nov. 8, 2006, TIRSA filed with the Insurance Department for approval to issue the 2006 ALTA forms in New York. On March 5, 2007, the Insurance Department approved the issuance of the new 2006 forms in New York, effective May 1, 2007. The 2006
forms contain many changes from the 1992 forms with which New York real estate practitioners have grown very much acquainted. Most of the changes are rather technical and most real estate attorneys will not encounter them in their day-to-day operations. (When was the last time someone requested a Last Dollar Endorsement from you?) However, there are five (5) significant changes of which real estate practitioners should be aware:

Survey Coverage

Both the 2006 owner's (fee) and mortgage (loan) policy forms contain survey coverage within the policy. Upon reading the 2006 policy, it will appear that the title company is giving both fee and lender policyholders coverage against '[a]ny encroachment, encumbrance, violation, variation, or adverse circumstance' that would be shown by an accurate survey without the insureds actually having to present a survey to the title company which is to be read into the policy. That is not the case. The New York Endorsement and the TIRSA Rate Manual amend the 2006 policy forms to provide automatic survey coverage only in the loan policy, and only for 1-4 family residential property. If the property is mixed use, commercial or vacant land, then the loan policy provides no survey coverage to the lender. Similarly, the owner's or fee policy includes no survey coverage ' even for 1-4 family residential property. Except in the case of loan policies for 1-4 family residential property, the TIRSA Rate Manual requires that the title company must except from coverage any loss due to the lack of a survey by inserting a survey exception in the loan policy ('subject to any state of facts an accurate survey would show'). Of course, if the fee owner of the mixed use, commercial or vacant land provides the title company with a survey of the property, the survey will be 'read into' the policy and the title company will take exception in the policy for any problems the survey reveals. With respect to fee owners and with respect to lenders of commercial, mixed use properties and vacant land, this represents no change from the coverage in the 1992 policy.

Because the 2006 lender's policy by its terms automatically provides survey coverage to lenders for 1-4 family residential property, TIRSA and the Insurance Department have withdrawn the Survey Endorsement through which lenders obtained the coverage under the 1992 policy. Since lenders almost always required the borrower to pay the cost of the Survey Endorsement (10% of the policy premium), the withdrawal results in a financial savings to the borrower. The Insurance Department, at least for now, has not elected to increase the base title premium by 10% to make up for the loss to the title companies.

Building Loan Coverage

An attorney reading the 2006 loan policy jacket could reasonably come away believing that building loan advances are covered by the policy and protected against intervening mechanic's liens. That is not the case. The policy's coverage for 'construction loan advances' is limited to advances which the lender obligates itself to make after the Date of Policy. In reality, no lender in its right mind in New York obligates itself to make advances after the closing without a title continuation search ('contin') or 'run-down.' That practice is maintained. The TIRSA Rate Manual and the New York endorsement have been amended to provide lenders with coverage only against loss resulting for 'any statutory lien for services, labor or materials,' i.e., for mechanic's liens, which are filed prior to the 'Date of Policy.' The 'Date of Policy,' as we shall soon see, is the date on which the instruments are recorded. TIRSA has maintained traditional New York practice by requiring that title companies place a 'pending disbursement' clause in all policies insuring a construction or building loan. The pending disbursement clause provides that the policy only insures to the extent of the funds actually advanced by the lender (including interest), but the amount of coverage may increase as the lender makes further advances, provided that the title company runs down the title prior to each advance and finds no new liens or encumbrances or record. Therefore, under the 2006 loan policy as approved for use in New York, there is no coverage against loss arising from liens and encumbrances, including mechanic's liens which arise after the Date of Policy, unless the title is 'run-down' or continued and the title company endorses the policy to the date of the construction advance and increases the policy amount by the amount of the advance. (TIRSA Rate Manual, Section 1, paragraph N; New York Endorsement (Loan policy, paragraph 3)

Gap Coverage

The 'gap' is the period of time between the closing date and the date on which the County Clerk or City Register finally gets around to recording the instruments after bouncing them a few times for good measure. To the dismay of claims attorneys and to the glee of serial borrowers with fraud on their minds everywhere, the New York Endorse-ment used to provide coverage against loss arising from liens or encumbrances (except taxes and assessments) which arose in the gap. The 2006 ALTA policy forms, by re-defining 'Date of Policy' to the date on which the instruments are recorded, now provide gap coverage within the policies themselves. As a result, the gap coverage provision contained within the New York Endorsement will be removed. This is an instance where the rest of the nation will be following New York's lead, for better or worse. (ALTA Owners and Lenders Policy, Schedule A, 1(b). Also, Owner's Policy, Section 10 and Loan Policy, Section 14)

Continuation of Coverage

This is another area where the nation will be following concepts with which we are familiar here in New York. Title policies in general provide for continuation of coverage only when a transfer of title occurs by operation of law. For example, the policy coverage continues to the spouse of a deceased policy holder (as of the policy's original date and in the policy's original amount) because the spouse inherits the property by operation of law as opposed to through a transfer of title through a conveyance by deed. However, traditionally there was no continuation of coverage for a conveyance by the spouse to the spouse's children since the transfer in title could not occur by operation of law but could occur through a deed conveyance. The general rule was that if a deed was required to effectuate the transfer of title, then coverage, and thereby claims liability did not continue after the conveyance. Many inter-family title transfers therefore resulted in the cancellation of the policy as well the end of coverage and the end of the title underwriter's liability to the policy holder. The TIRSA Rate Manual now provides that for certain no consideration, inter-family transfers, both for natural and corporate families, policy coverage would continue to the transferee even if the transfer is by deed conveyance. (TIRSA Rate Manual, Section 32) The 2006 ALTA policy forms have adopted the TIRSA position and provide for continuation of coverage when no consideration deed transfers occur within the same natural, limited liability or corporate family.

The continuation of coverage also extends to no consideration conveyances by individuals to a trust they establish as well as conveyances from the trust to the individuals. Note that the title company retains any defenses it had against the original policyholder. (ALTA 2006 Policy, Definition of 'Entity' and 'Insured'; Covered Risk 2(a) (ii))

Amount of Policy

Remember when, a long, long time ago, like last week, the policy amount was the coverage amount shown on Schedule A? That is so last century. When a third party claims title adverse to a policyholder, the title underwriter has the right under the policy to establish title through litigation against the adverse claimant all the way to the Supreme Court if necessary. In this day and time, even litigating title through a trial court can take years, without even considering the appeals process. Throughout litigation, the lender's insured mortgage would be a non-producing 'asset' and the fee owner may not have the full use of the property. The 2006 ALTA policy provides that when the title company decides to litigate to establish title and if the title company loses that litigation, then the insured is entitled to receive a ten per cent (10%) premium over and above the amount shown in Schedule A in recovery for its loss. In effect, if there is a total loss of title, then the insured receives 110% of the policy amount. If the title company prevails in the litigation, then the insured obtains its title as insured, free and clear of the adverse claim. This is the same result as would have occurred under the 1992 policy forms.

In addition, the policyholder has the right to elect the date on which the loss is determined. The date can be either: 1) the date on which the policy holder made the claim to the underwriter; or 2) the date on which the claim is settled and paid. As property values go up and down, this flexibility gives the policyholder the ability to choose the point in time which would result in the greater recovery. Claims counsels are probably less than thrilled. (ALTA Owner's and Loan Policy Definition of 'Amount of Insurance')

As noted above, the 2006 policy forms contain a great many changes from the 1992 forms. There are expanded coverages, definition changes, the elimination of endorsements and several new endorsements, all of which will merit future articles in and of themselves. However, the five changes set forth above are the ones, which the author believes are the most significant. Others may disagree. If you wish to decide for yourself, you can visit the ALTA Web site (www.alta.org) and review a line by line comparison of the 1992 policy with the 2006 policy with explanations. This would take the place of Ambien any evening- without the food cravings.

Marvin N. Bagwell is Vice President and Eastern Divisional Counsel for United General Title, based in White Plains.

All New York title insurance policy and endorsements forms as well as the premium rates must be filed with and be approved by the New York Department of Insurance. Title underwriters almost always file with the Department through the Title Insurance Rate Service Association ('TIRSA'), a state sanctioned rating bureau comprised of the great majority of title underwriters licensed to do business in New York. In developing new forms, TIRSA, in turn, receives guidance from the American Land Title Association ('ALTA'), an organization whose membership includes title companies from across the nation. The title insurance policy forms currently in use in New York are based upon those promulgated by ALTA in 1992. However, because the ALTA forms are national, TIRSA often suggests modifications to the forms to account for New York's laws and local practices. Upon approval by the Insurance Department, these modifications are implemented through the provisions of the TIRSA Rate Manual, which sets forth premium rates, coverage limitations or expansions from the national policy, as well as the rules and guidelines governing title underwrites. The coverage expansions or limitations are then carried over to the New York Endorsement to the title policy which is attached to every policy and specifically modifies the terms of the policy to account for rules and regulations set forth in the Rate Manual. There are two basic title policy forms: 1) the owner's or fee policy, which insures the owners of the insured premises; and 2) the mortgage or loan policy, which insures the lender whose loan is secured by a mortgage on the owner's property. Each policy has its own New York Endorsement.

Revised Forms

After three years of meetings and discussions not only with title companies, but also with other players in the real property industry such as lenders, realtors and government regulators, ALTA revised the 1992 forms in 2006. On Nov. 8, 2006, TIRSA filed with the Insurance Department for approval to issue the 2006 ALTA forms in New York. On March 5, 2007, the Insurance Department approved the issuance of the new 2006 forms in New York, effective May 1, 2007. The 2006
forms contain many changes from the 1992 forms with which New York real estate practitioners have grown very much acquainted. Most of the changes are rather technical and most real estate attorneys will not encounter them in their day-to-day operations. (When was the last time someone requested a Last Dollar Endorsement from you?) However, there are five (5) significant changes of which real estate practitioners should be aware:

Survey Coverage

Both the 2006 owner's (fee) and mortgage (loan) policy forms contain survey coverage within the policy. Upon reading the 2006 policy, it will appear that the title company is giving both fee and lender policyholders coverage against '[a]ny encroachment, encumbrance, violation, variation, or adverse circumstance' that would be shown by an accurate survey without the insureds actually having to present a survey to the title company which is to be read into the policy. That is not the case. The New York Endorsement and the TIRSA Rate Manual amend the 2006 policy forms to provide automatic survey coverage only in the loan policy, and only for 1-4 family residential property. If the property is mixed use, commercial or vacant land, then the loan policy provides no survey coverage to the lender. Similarly, the owner's or fee policy includes no survey coverage ' even for 1-4 family residential property. Except in the case of loan policies for 1-4 family residential property, the TIRSA Rate Manual requires that the title company must except from coverage any loss due to the lack of a survey by inserting a survey exception in the loan policy ('subject to any state of facts an accurate survey would show'). Of course, if the fee owner of the mixed use, commercial or vacant land provides the title company with a survey of the property, the survey will be 'read into' the policy and the title company will take exception in the policy for any problems the survey reveals. With respect to fee owners and with respect to lenders of commercial, mixed use properties and vacant land, this represents no change from the coverage in the 1992 policy.

Because the 2006 lender's policy by its terms automatically provides survey coverage to lenders for 1-4 family residential property, TIRSA and the Insurance Department have withdrawn the Survey Endorsement through which lenders obtained the coverage under the 1992 policy. Since lenders almost always required the borrower to pay the cost of the Survey Endorsement (10% of the policy premium), the withdrawal results in a financial savings to the borrower. The Insurance Department, at least for now, has not elected to increase the base title premium by 10% to make up for the loss to the title companies.

Building Loan Coverage

An attorney reading the 2006 loan policy jacket could reasonably come away believing that building loan advances are covered by the policy and protected against intervening mechanic's liens. That is not the case. The policy's coverage for 'construction loan advances' is limited to advances which the lender obligates itself to make after the Date of Policy. In reality, no lender in its right mind in New York obligates itself to make advances after the closing without a title continuation search ('contin') or 'run-down.' That practice is maintained. The TIRSA Rate Manual and the New York endorsement have been amended to provide lenders with coverage only against loss resulting for 'any statutory lien for services, labor or materials,' i.e., for mechanic's liens, which are filed prior to the 'Date of Policy.' The 'Date of Policy,' as we shall soon see, is the date on which the instruments are recorded. TIRSA has maintained traditional New York practice by requiring that title companies place a 'pending disbursement' clause in all policies insuring a construction or building loan. The pending disbursement clause provides that the policy only insures to the extent of the funds actually advanced by the lender (including interest), but the amount of coverage may increase as the lender makes further advances, provided that the title company runs down the title prior to each advance and finds no new liens or encumbrances or record. Therefore, under the 2006 loan policy as approved for use in New York, there is no coverage against loss arising from liens and encumbrances, including mechanic's liens which arise after the Date of Policy, unless the title is 'run-down' or continued and the title company endorses the policy to the date of the construction advance and increases the policy amount by the amount of the advance. (TIRSA Rate Manual, Section 1, paragraph N; New York Endorsement (Loan policy, paragraph 3)

Gap Coverage

The 'gap' is the period of time between the closing date and the date on which the County Clerk or City Register finally gets around to recording the instruments after bouncing them a few times for good measure. To the dismay of claims attorneys and to the glee of serial borrowers with fraud on their minds everywhere, the New York Endorse-ment used to provide coverage against loss arising from liens or encumbrances (except taxes and assessments) which arose in the gap. The 2006 ALTA policy forms, by re-defining 'Date of Policy' to the date on which the instruments are recorded, now provide gap coverage within the policies themselves. As a result, the gap coverage provision contained within the New York Endorsement will be removed. This is an instance where the rest of the nation will be following New York's lead, for better or worse. (ALTA Owners and Lenders Policy, Schedule A, 1(b). Also, Owner's Policy, Section 10 and Loan Policy, Section 14)

Continuation of Coverage

This is another area where the nation will be following concepts with which we are familiar here in New York. Title policies in general provide for continuation of coverage only when a transfer of title occurs by operation of law. For example, the policy coverage continues to the spouse of a deceased policy holder (as of the policy's original date and in the policy's original amount) because the spouse inherits the property by operation of law as opposed to through a transfer of title through a conveyance by deed. However, traditionally there was no continuation of coverage for a conveyance by the spouse to the spouse's children since the transfer in title could not occur by operation of law but could occur through a deed conveyance. The general rule was that if a deed was required to effectuate the transfer of title, then coverage, and thereby claims liability did not continue after the conveyance. Many inter-family title transfers therefore resulted in the cancellation of the policy as well the end of coverage and the end of the title underwriter's liability to the policy holder. The TIRSA Rate Manual now provides that for certain no consideration, inter-family transfers, both for natural and corporate families, policy coverage would continue to the transferee even if the transfer is by deed conveyance. (TIRSA Rate Manual, Section 32) The 2006 ALTA policy forms have adopted the TIRSA position and provide for continuation of coverage when no consideration deed transfers occur within the same natural, limited liability or corporate family.

The continuation of coverage also extends to no consideration conveyances by individuals to a trust they establish as well as conveyances from the trust to the individuals. Note that the title company retains any defenses it had against the original policyholder. (ALTA 2006 Policy, Definition of 'Entity' and 'Insured'; Covered Risk 2(a) (ii))

Amount of Policy

Remember when, a long, long time ago, like last week, the policy amount was the coverage amount shown on Schedule A? That is so last century. When a third party claims title adverse to a policyholder, the title underwriter has the right under the policy to establish title through litigation against the adverse claimant all the way to the Supreme Court if necessary. In this day and time, even litigating title through a trial court can take years, without even considering the appeals process. Throughout litigation, the lender's insured mortgage would be a non-producing 'asset' and the fee owner may not have the full use of the property. The 2006 ALTA policy provides that when the title company decides to litigate to establish title and if the title company loses that litigation, then the insured is entitled to receive a ten per cent (10%) premium over and above the amount shown in Schedule A in recovery for its loss. In effect, if there is a total loss of title, then the insured receives 110% of the policy amount. If the title company prevails in the litigation, then the insured obtains its title as insured, free and clear of the adverse claim. This is the same result as would have occurred under the 1992 policy forms.

In addition, the policyholder has the right to elect the date on which the loss is determined. The date can be either: 1) the date on which the policy holder made the claim to the underwriter; or 2) the date on which the claim is settled and paid. As property values go up and down, this flexibility gives the policyholder the ability to choose the point in time which would result in the greater recovery. Claims counsels are probably less than thrilled. (ALTA Owner's and Loan Policy Definition of 'Amount of Insurance')

As noted above, the 2006 policy forms contain a great many changes from the 1992 forms. There are expanded coverages, definition changes, the elimination of endorsements and several new endorsements, all of which will merit future articles in and of themselves. However, the five changes set forth above are the ones, which the author believes are the most significant. Others may disagree. If you wish to decide for yourself, you can visit the ALTA Web site (www.alta.org) and review a line by line comparison of the 1992 policy with the 2006 policy with explanations. This would take the place of Ambien any evening- without the food cravings.

Marvin N. Bagwell is Vice President and Eastern Divisional Counsel for United General Title, based in White Plains.