This is the second episode in our new video series demonstrating vital title insurance principles and how they relate to your practice.
The title insurance series covers:
- preliminary title reports versus abstracts of title;
- the contents of a title insurance policy;
- exclusions and exceptions from title insurance coverage; and
- a detailed study of the California Land Title Association (CLTA) standard policy versus the American Land Title Association (ALTA) owner’s extended coverage policy.
Concepts this episode brings to the table – What sets forth the extent of the title insurance company’s obligation, if any, to indemnify the policy holder for money losses caused by an encumbrance on title? How is title insurance distinct from other forms of insurance? You have questions, we have answers.
Encumbrances unknown, undisclosed
A policy of title insurance is the contract under which a title insurance company reimburses or holds harmless a person who acquires an interest in real estate against a monetary loss caused by an encumbrance on title that:
- is not listed in the title insurance policy as an exception to coverage; and
- the insured policy holder was unaware of when the policy was issued. [Calif. Insurance Code §12340.1]
Thus, a policy of title insurance is a form of indemnity insurance.
Title insurance policies are issued on one of several general forms used by the entire title insurance industry in California. The policies are typically issued to:
- buyers of real estate;
- tenants acquiring long-term leases; and
- lenders whose mortgages are secured by real estate.
As an indemnity agreement, a title insurance policy is a contract. The terms of coverage in the policy set forth the extent of the title insurance company’s obligation to indemnify the policy holder for money losses caused by an encumbrance on title. [Ins C §12340.2]
Almost all losses due to the reduction in the value of real estate below the policy limits arise out of an encumbrance. An encumbrance is any condition which affects the ownership interest of the insured.
The word “encumbrance” is all encompassing. Any right or interest in real estate held by someone other than the owner which diminishes the value of the real estate is considered an encumbrance.
The word encumbrance first originated in the 1300s with a definition of “trouble, difficulty; ensnarement, temptation.” It comes from the Old French word encumbrance meaning “obstruction, calamity, trouble.”
Related video:
Encumbrances on title include:
- covenants, conditions and restrictions (CC&Rs) limiting use;
- reservations of a right of way;
- easements;
- encroachments;
- trust deeds or other security devices;
- pendency of condemnation; and
- [Evans v. Faught (1965) 231 CA2d 698]
Property improvements and use not covered
Physical conditions on the property itself are not encumbrances affecting title. Accordingly, title insurance policies do not insure against open and notorious physical conditions which exist on the property.
A buyer is always presumed to have contracted to acquire property subject to known and visible physical conditions on the property which impede its use or impair its value.
In the case of encumbrances, recorded or not, no such presumption exists.
Editor’s note – The next episode in this series takes a deep dive into the six operative sections of a policy of title insurance.
