This is the final episode in our new video series demonstrating vital title insurance principles and how they relate to your practice.  

The title insurance series covers:

Why this episode matters – Not all title insurance policies are created equal. Watch the final episode of our title insurance series to learn the pros and cons of the two primary title insurance policies.  

Standard or extended

There are two primary types of title insurance coverage available in California:

  • a California Land Title Association (CLTA) standard policy;  and
  • an American Land Title Association (ALTA) owner’s extended coverage policy.

The CLTA standard policy is purchased solely by buyers, carryback sellers and private lenders.

The CLTA standard policy insures against all encumbrances affecting title which can be discovered by a search of public records prior to issuance of the policy. Any encumbrance not recorded, whether or not observable by an inspection or survey, is not covered due to the CLTA policy exclusions and standard exceptions.

Additionally, the CLTA standard policy as well as the ALTA policy protects the insured against:

  • the unmarketability of title or the inability to use it as security for financing;
  • lack of ingress and egress rights to the property; and
  • losses due to the ownership being vested in someone other than the buyer.

All title insurance policies provide coverage forever after the date and time the policy is issued. Coverage is limited to the dollar amount of the policy, which is generally adjusted for inflation. Coverage is further limited by the exclusions, exceptions and conditions on claims.

Policy exclusions and exceptions

Both the CLTA standard policy as well as the ALTA policy contain Schedule A exclusions to coverage.

The CLTA standard policy contains pre-printed exceptions listed in the policy as Schedule B, also called standard exceptions or regional exceptions. It is the inclusion of these pre-printed boilerplate exceptions which makes the CLTA policy a “standard” policy.

Critically, an ALTA owner’s policy does not contain pre-printed exceptions, only the typewritten exceptions listing the encumbrances which are known to the title company and affect title to the property.

The pre-printed standard exceptions in Schedule B of the CLTA standard policy eliminate coverage for losses incurred by the buyer due to:

  • taxes or assessments not shown in the records of the county recorder, the county tax collector or any other agency which levies taxes on real property;
  • unrecorded rights held by others which would have been discovered by the buyer on an inspection of the property or inquiry of persons in possession;
  • easements or encumbrances which are not recorded and indexed by the county recorder;
  • unrecorded encroachments or boundary line disputes which a survey would have disclosed; and
  • recorded or unrecorded, unpatented mining claims or water rights.

A lower premium is charged to issue a CLTA policy since the title company undertakes a lower level of risk for indemnified losses due to the CLTA pre-printed exceptions, as compared to the extended risks covered by the more expensive ALTA owner’s policy.

The ALTA owner’s policy and survey

The ALTA owner’s policy provides greater coverage than the CLTA policy. When the pre-printed exceptions are included in Schedule B and attached to the ALTA policy, the policy becomes an ALTA standard policy, comparable in cost and coverage to the CLTA standard policy since unrecorded encumbrances will not be covered.

As the ALTA owner’s policy covers off-record matters not covered under the CLTA standard policy, prior to issuance of a policy, the title company may require:

  • the parcel to be surveyed; and
  • those in possession of the property to be interviewed or estopped.

The exclusions section of an ALTA owner’s policy is identical to exclusions in the CLTA policy, except for additional exclusions relating to an insured lender or carryback seller. The ALTA owner’s policy is not issued to secured creditors.

Variations on the ALTA policy exist which provide different levels of coverage, such as:

  • an ALTA residential (ALTA-R) policy; and
  • an ALTA homeowner’s policy.

Settling a claim and extent of liability

To begin the claims process on becoming aware of an encumbrance covered as a loss by the policy of title insurance, the insured promptly gives the title insurance company written notice of claim.

Upon being notified of the claim, the title company has 15 days to:

  • acknowledge receipt of the claim or pay the claim;
  • provide the insured with all forms, instructions, assistance and information necessary to prove the claim; and
  • begin any investigation of the claim. [10 Calif. Code of Regulations §2695.5(e)(1-3)]

Further, the insured needs to provide the title company with a proof-of-loss statement within 90 days after incurring the loss.

The title company may require the insured party to make available records, checks, letters, contracts, insurance policies and other papers related to the claim.

After receipt of the 90-day proof-of-loss statement, the title insurance company has 40 days to accept or reject the claim, in whole or in part. [10 CCR §2695.7(b)]

On accepting a claim, the title company may handle the claim in one of several ways, including:

  • pay policy limits, plus any authorized costs, attorney fees and expenses incurred by the insured;
  • pay the loss incurred by the insured, plus costs, attorney fees and expenses;
  • negotiate a settlement;
  • bring or defend a legal action on the claim; or
  • for an insured lender, purchase the mortgage from the lender for the amount owed by the borrower, plus any authorized costs, attorney fees and expenses incurred by the insured lender.

The conditions section of a title insurance policy limits the amount the title company is required to pay to settle a claim made by an insured.

For owners, the title company may settle a claim by paying the lesser of:

  • the full dollar amount of the policy; or
  • the reduction in value of the insured’s ownership interest caused by the title defect or encumbrance missed by the title company and not listed in the policy exceptions.

For lenders, the title company may settle a claim by paying the lesser of:

  • the full dollar amount of the policy;
  • the impairment or reduction in value of the security interest due to the title defect or encumbrance not listed in the policy exceptions; or
  • the amounts due on the unpaid mortgage at the time of the loss caused by a defect or encumbrance not listed in the policy exceptions.

The title company will not pay a claim:

  • when the title company is able to remove the encumbrance from title;
  • until any litigation over the encumbrance has become final; or
  • when the owner or lender settles the claim without written permission of the title company.

All claim payments made by the title insurance company, except payments made for costs, attorney fees and expenses, reduce the dollar amount of coverage remaining under the title policy.