Title Insurance: How to Obtain More Bang for Your Buck

Aside from Russian billionaires who spend tens of millions of dollars for ridiculously expensive Manhattan apartments, the rest of us learned the same lesson from the Great Recession as did our grandparents from the Great Depression: Money is tight. As consumers, we now want more bang or greater value for our dollars. The marketplace, aside from cellular companies and the airlines, now offers us seemingly more for less. Witness the television ads for chain restaurants that purport to offer more food and more choices for less money. We real estate attorneys are no less demanding; we want greater value, even from our staid title policies. Here is how title underwriters are in tune with your wishes.

Background

In title underwriter parlance, New York is a promulgated form state. That means that title underwriters and their agents can only issue title policy forms that, upon the application of the underwriters through the Title Insurance Rate Service Association (“TIRSA”), have been approved by the State's Department of Financial Services (“DFS”) or its predecessor, the Department of Insurance. Every policy issued in New York, whether for a billion-dollar commercial development on the West Side of Manhattan or a house in Jefferson County, must use the exact text found in a state-approved form. There are different forms of policies. For example, DFS has approved a form that can only be issued to the United States or its departments (the United States policy, so aptly named) or the TIRSA Owner's Extended Protection Policy (the “TOEPP”) that can be issued only to natural persons purchasing residential property. Aside from these two exceptions, the text within the owners'/fee policy is exactly the same as all other policies issued to purchasers, and the text of all mortgagee/loan policies is the same as that of all other policies issued to lenders.

How do you as an attorney obtain special or additional coverage for the particular fact situation of your transaction? There are two different methods, both of which can be used to obtain additional coverage in the same policy. The first method is through purchasing an endorsement to the policy and the second is by obtaining affirmative insurance.

Endorsements

An endorsement is a standard form promulgated by DFS that provides coverage in addition to that contained in the title policy. In other words, an endorsement to the policy usually expands and amplifies the policy's coverage sometimes by removing a policy requirement. For example, the Waiver of Arbitration Endorsement removes the policy provision that requires that certain disputes between the underwriter and the insured must go to arbitration, thereby, in the eyes of many insureds, increasing their coverage under the policy. On the other hand, the Condominium and Co-op endorsements add to the policy's coverage for the special issues raised by these forms of ownership that do not arise in the day-to-day purchases or mortgages. There are endorsements that can only be issued to natural persons, such as the Market Value Rider, and endorsements that can only be issued to lenders, such as the ALTA/TIRSA 9. There are endorsements that can be issued only in residential transactions, such as the Residential Credit Endorsement, and those that normally are issued in commercial transactions, such as the New York City Development Rights Endorsement.

Certain endorsements can be issued in both residential and commercial transactions. The Waiver of Arbitration Endorsement and the Standard New York endorsement come to mind. However, all endorsements, no matter what they cover, must be on forms promulgated by DFS. For a description of the 50 odd endorsements that DFS permits in New York, please see the author's article, “Policy Endorsements That are Available in New York,” New York Real Property Law Journal, Summer 2014, Vol 42, No. 3.

Affirmative Insurance

For specialized coverage, attorneys in the know will ask the underwriter or title agent for affirmative insurance. Affirmative insurance is specifically tailored coverage that insures the “Insured” as named in the policy against loss as a result of a certain, particular exception to title that is set forth in Schedule B of the policy. For example, the policy may except from coverage certain Covenants, Conditions and Restrictions (“CC&Rs”) shown on Schedule B. If the title underwriter or agent believes that the CC&Rs will never be enforced, the title company may add affirmative insurance to the effect, “Policy will affirmative insure the lender only that the CC&Rs recorded in Liber ___, page ___ will not result in a forfeiture or reversion of title.” As another example, suppose the building located on the real property being insured encroaches on adjoining land. The title underwriter or agent may be convinced to affirmative insure that the “structure may remain so long as it shall stand.”

As hinted above, affirmative insurance usually is issued only to lenders who will suffer loss only if the title defect results in a loss of lien priority or a reduction of the amount that the lender recovers in a foreclosure action. By contrast, underwriters are unwilling to affirmative insure a fee or owners' policy, which covers unmarketabilty of title that can be the result of a multitude of causes of loss to an insured. Whereas there is a cost for most endorsements (ranging from $25.00 to 20% of the policy premium), most underwriters do not charge for affirmative coverage, although they can do so under Part I, Section 1(G) of the TIRSA Rate Manual and DFS Regulations. This is another reason that many underwriters are stingy in providing affirmative coverage; they are rarely paid for the additional risk that they are assuming.

In an emerging trend, attorneys, in addition to requesting affirmative insurance or an endorsement, are requesting letters from the title underwriter consenting to the provision of affirmative coverage or to the omission of a title exception (especially if a title agent is writing the policy). Most underwriters will not issue such a letter. The reason is that the underwriters have a pretty good understanding of how the various policy and endorsement provisions work and how courts have ruled upon the provisions. Aside from the fact that the corporate legal department prohibits the issuance of letters, no underwriting counsel worth his or her training will want to give a court an opportunity to make new law based upon correspondence outside of the policy. The position taken by my employer is that the policy speaks for itself and we decline to modify it through outside correspondence.

More importantly, a letter, by providing additional coverage, has the effect of providing “comfort” to the Insured and its counsel. By specific Regulation, DFS in Circular Letter No. 14 (2010), dated Sept. 14, 2010, prohibited underwriters from issuing “comfort” letters when insuring mortgage modifications. “Comfort letters,” which were addressed to lender's counsel, provided that the coverage under an existing loan title policy, continued in full force to the lender notwithstanding a modification to the insured loan. Although loan modifications were at the crux of the Circular Letter, the basis for DFS's ban was that in effect, a title company's providing coverage for free when an endorsement to the policy was available, constituted a violation of Section 6409(d) of Insurance Law, the State's anti-kickback statute. A title underwriter cannot offer for free insurance coverage provided by a premium rate or policy endorsement.

As a result, no underwriter desires to risk a fine or loss of its license by issuing a letter that DFS could interpret as a comfort letter in any situation. (Note that the TIRSA Rate Manual permits, but does not require, an underwriter to charge for affirmative insurance. There is no such latitude for an endorsement.) Therefore, this new trend of requesting letters is probably going the way of the passenger pigeon.

Conclusion

It is my hope that the foregoing might be of assistance both to those with gray hair reading this as well as newcomers and those unfamiliar to the industry. For a further discussion of the industry's approach to endorsements, affirmative insurance or comfort letters, feel free to contact your local underwriting counsel. You will find that he or she can be most helpful.

Marvin N. Bagwell is Chief New York State Counsel for Old Republic National Title Insurance Company. He is based in Westbury, NY.

Aside from Russian billionaires who spend tens of millions of dollars for ridiculously expensive Manhattan apartments, the rest of us learned the same lesson from the Great Recession as did our grandparents from the Great Depression: Money is tight. As consumers, we now want more bang or greater value for our dollars. The marketplace, aside from cellular companies and the airlines, now offers us seemingly more for less. Witness the television ads for chain restaurants that purport to offer more food and more choices for less money. We real estate attorneys are no less demanding; we want greater value, even from our staid title policies. Here is how title underwriters are in tune with your wishes.

Background

In title underwriter parlance, New York is a promulgated form state. That means that title underwriters and their agents can only issue title policy forms that, upon the application of the underwriters through the Title Insurance Rate Service Association (“TIRSA”), have been approved by the State's Department of Financial Services (“DFS”) or its predecessor, the Department of Insurance. Every policy issued in New York, whether for a billion-dollar commercial development on the West Side of Manhattan or a house in Jefferson County, must use the exact text found in a state-approved form. There are different forms of policies. For example, DFS has approved a form that can only be issued to the United States or its departments (the United States policy, so aptly named) or the TIRSA Owner's Extended Protection Policy (the “TOEPP”) that can be issued only to natural persons purchasing residential property. Aside from these two exceptions, the text within the owners'/fee policy is exactly the same as all other policies issued to purchasers, and the text of all mortgagee/loan policies is the same as that of all other policies issued to lenders.

How do you as an attorney obtain special or additional coverage for the particular fact situation of your transaction? There are two different methods, both of which can be used to obtain additional coverage in the same policy. The first method is through purchasing an endorsement to the policy and the second is by obtaining affirmative insurance.

Endorsements

An endorsement is a standard form promulgated by DFS that provides coverage in addition to that contained in the title policy. In other words, an endorsement to the policy usually expands and amplifies the policy's coverage sometimes by removing a policy requirement. For example, the Waiver of Arbitration Endorsement removes the policy provision that requires that certain disputes between the underwriter and the insured must go to arbitration, thereby, in the eyes of many insureds, increasing their coverage under the policy. On the other hand, the Condominium and Co-op endorsements add to the policy's coverage for the special issues raised by these forms of ownership that do not arise in the day-to-day purchases or mortgages. There are endorsements that can only be issued to natural persons, such as the Market Value Rider, and endorsements that can only be issued to lenders, such as the ALTA/TIRSA 9. There are endorsements that can be issued only in residential transactions, such as the Residential Credit Endorsement, and those that normally are issued in commercial transactions, such as the New York City Development Rights Endorsement.

Certain endorsements can be issued in both residential and commercial transactions. The Waiver of Arbitration Endorsement and the Standard New York endorsement come to mind. However, all endorsements, no matter what they cover, must be on forms promulgated by DFS. For a description of the 50 odd endorsements that DFS permits in New York, please see the author's article, “Policy Endorsements That are Available in New York,” New York Real Property Law Journal, Summer 2014, Vol 42, No. 3.

Affirmative Insurance

For specialized coverage, attorneys in the know will ask the underwriter or title agent for affirmative insurance. Affirmative insurance is specifically tailored coverage that insures the “Insured” as named in the policy against loss as a result of a certain, particular exception to title that is set forth in Schedule B of the policy. For example, the policy may except from coverage certain Covenants, Conditions and Restrictions (“CC&Rs”) shown on Schedule B. If the title underwriter or agent believes that the CC&Rs will never be enforced, the title company may add affirmative insurance to the effect, “Policy will affirmative insure the lender only that the CC&Rs recorded in Liber ___, page ___ will not result in a forfeiture or reversion of title.” As another example, suppose the building located on the real property being insured encroaches on adjoining land. The title underwriter or agent may be convinced to affirmative insure that the “structure may remain so long as it shall stand.”

As hinted above, affirmative insurance usually is issued only to lenders who will suffer loss only if the title defect results in a loss of lien priority or a reduction of the amount that the lender recovers in a foreclosure action. By contrast, underwriters are unwilling to affirmative insure a fee or owners' policy, which covers unmarketabilty of title that can be the result of a multitude of causes of loss to an insured. Whereas there is a cost for most endorsements (ranging from $25.00 to 20% of the policy premium), most underwriters do not charge for affirmative coverage, although they can do so under Part I, Section 1(G) of the TIRSA Rate Manual and DFS Regulations. This is another reason that many underwriters are stingy in providing affirmative coverage; they are rarely paid for the additional risk that they are assuming.

In an emerging trend, attorneys, in addition to requesting affirmative insurance or an endorsement, are requesting letters from the title underwriter consenting to the provision of affirmative coverage or to the omission of a title exception (especially if a title agent is writing the policy). Most underwriters will not issue such a letter. The reason is that the underwriters have a pretty good understanding of how the various policy and endorsement provisions work and how courts have ruled upon the provisions. Aside from the fact that the corporate legal department prohibits the issuance of letters, no underwriting counsel worth his or her training will want to give a court an opportunity to make new law based upon correspondence outside of the policy. The position taken by my employer is that the policy speaks for itself and we decline to modify it through outside correspondence.

More importantly, a letter, by providing additional coverage, has the effect of providing “comfort” to the Insured and its counsel. By specific Regulation, DFS in Circular Letter No. 14 (2010), dated Sept. 14, 2010, prohibited underwriters from issuing “comfort” letters when insuring mortgage modifications. “Comfort letters,” which were addressed to lender's counsel, provided that the coverage under an existing loan title policy, continued in full force to the lender notwithstanding a modification to the insured loan. Although loan modifications were at the crux of the Circular Letter, the basis for DFS's ban was that in effect, a title company's providing coverage for free when an endorsement to the policy was available, constituted a violation of Section 6409(d) of Insurance Law, the State's anti-kickback statute. A title underwriter cannot offer for free insurance coverage provided by a premium rate or policy endorsement.

As a result, no underwriter desires to risk a fine or loss of its license by issuing a letter that DFS could interpret as a comfort letter in any situation. (Note that the TIRSA Rate Manual permits, but does not require, an underwriter to charge for affirmative insurance. There is no such latitude for an endorsement.) Therefore, this new trend of requesting letters is probably going the way of the passenger pigeon.

Conclusion

It is my hope that the foregoing might be of assistance both to those with gray hair reading this as well as newcomers and those unfamiliar to the industry. For a further discussion of the industry's approach to endorsements, affirmative insurance or comfort letters, feel free to contact your local underwriting counsel. You will find that he or she can be most helpful.

Marvin N. Bagwell is Chief New York State Counsel for Old Republic National Title Insurance Company. He is based in Westbury, NY.