This is the third 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 is important – Can you fully describe the function of the six operative sections of a title insurance policy to your clients? Didn’t think so. Watch and read to get fully up to speed.

Taking a peek under the hood

Title insurance is purchased to assure real estate buyers, tenants and lenders the interest in title they acquire is what they bargained for.

A policy of title insurance is broken down into six operative sections, including:

  • the risks of loss covered, called insuring clauses, which are based on a completely unencumbered title at the time of transfer;
  • the risks of loss not covered, comprised of encumbrances arising after the transfer or known to or brought about by the insured, called exclusions, which are a boilerplate set of title conditions;
  • identification of the insured, the property, the vesting, the dollar amount of the coverage, the premium paid and the recording, called Schedule A;
  • the recorded interests, i.e., any encumbrances affecting title and any observable on-site activities which are listed as risks agreed to and assumed by the insured and not covered by the policy, called exceptions, which are itemized for all types of coverage in Schedule B;
  • the procedures, called conditions, for claims made by the named insured and for settlement by the insurance company on the occurrence of a loss due to any encumbrance on title which is not an exclusion or exception to the coverage granted by the insuring clauses; and
  • any endorsements for additional coverage or removal of exclusions or pre-printed exceptions from the policy.

Insuring clauses

Coverage under the broadly worded insuring clause of a policy of title insurance indemnifies the named insured for risks of loss related to the title due to:

  • anyone making a claim against title to the real estate interest;
  • the title being unmarketable for sale or as security for financing;
  • any encumbrance on the title; and
  • lack of recorded access to and from the described property.

Exclusions and exceptions from coverage

All title insurance policies contain an exclusions section.

The exclusions section eliminates from coverage those losses incurred by the insured buyer, tenant or lender due to:

  • use ordinances or zoning laws;
  • unrecorded claims known to the insured, but not to the title company;
  • encumbrances or adverse claims created after the date of the policy;
  • claims arising out of bankruptcy or due to a fraudulent conveyance to the insured;
  • police power and eminent domain; and
  • post-closing events caused by the insured.

Further, all policies of title insurance on Schedule A set forth:

  • the property interest the insured acquired;
  • the legal description of the insured property;
  • the date and time coverage began;
  • the premium paid for the policy; and
  • the maximum total dollar amount to be paid for all claims settled.

In addition to the policy exclusions, a policy’s coverage under its “no-encumbrance” insuring clause is further limited by Schedule B exceptions in the policy.

The exceptions section contains an itemized list of recorded and unrecorded encumbrances which are known to the title company and affect the insured title.

While the existence of these known encumbrances is insured against in the insuring clauses, they are removed by Schedule B as a basis for recovery under the policy.

You’ll notice we’re using two very similar terms here – exceptions and exclusions. There’s a critical difference.

Exclusions are the risks of loss not covered. Again, this consists of encumbrances arising after the transfer, or known to, or brought about by, the insured. Exclusions exist outside of the policy.

Alternatively, exceptions are carved out of the policy.  Recall that exceptions are recorded interests agreed to and assumed by the insured, and therefore are removed from the policy.

These exceptions are itemized in Schedule B, such as taxes or assessments which are not shown as existing liens in the public records.

Claims and settlements

Lastly, a policy of title insurance includes a conditions section. The conditions section outlines the procedures the insured policy holder needs to follow when making a claim for recovery under the policy. Also set forth are the settlement negotiations or legal actions available to the title company before paying a claim.

Editor’s note – The final episode in this series provides a detailed study of the California Land Title Association (CLTA) standard policy versus the American Land Title Association (ALTA) owner’s extended coverage policy.