Title Insurance Against What?
Buyers of real property in California routinely purchase a policy of title
insurance. In the case of single-family residential property, the buyer
usually receives a CLTA form of policy; in commercial and industrial and
large acreage purchases, the buyer usually requests an ALTA policy affording
broader coverage, but requiring a survey of the land. Explaining what
these policies cover and don't cover is a subject for a treatise,
not a newsletter. However, when the buyer learns that his policy does
not cover something which he reasonably believed would be covered, and
when an appellate court confirms the surprising lack of coverage, then
I see a topic worth highlighting.
Let us start with the general rule: A title-insurance policy insures good
and marketable title to the property based upon documents recorded in
the Official Records, unless the policy lists as "exceptions"
specified documents in the Records. Therefore, if an item exists in the
Official Records, but the policy fails to list it as an "exception,"
then the insured owner can make a claim against the insurance company
for any loss caused by the missed "exception." Simply stated,
there is coverage for the omitted "exception."
Examples of commonly missed "exceptions" include tax liens,
judgments, easements, and sometimes even a deed of trust. But let us take
a less common example - a notice recorded by a city stating that a violation
exists on the property. The violation may concern zoning, lack of permits,
non-compliance with the building code - in short, anything covered by
the city's ordinances. Would you believe that you could make a claim
on your policy if the company missed such a notice of violation altogether?
If you do, you will be disappointed.
In the case of Elysian Investment Group v. Stewart Title Guaranty Company
, decided in 2002, the appellate court ruled that a notice of violation
recorded by a city, but not listed as an "exception" in the
policy, did not trigger coverage under the policy. The violation consisted
of a garage conversion done without permits and creating a second dwelling
unit. The city wanted the garage reconverted to its original condition.
The buyer purchased the property from a lender who had foreclosed and
who therefore sold the property in 'as-is' condition. The lender
knew about the code violation, but did not disclose it to the buyer.
In ruling that the insurance company rightfully denied the claim, the
appellate court made a number of distinctions which only a lawyer (but
not this lawyer) could love. First, the court pointed out that a title-insurance
policy insures against "defects in title" and the notice of
violation did not make the buyer's title defective in any way. While
the notice signaled physical problems with the property, the buyer still
had good title to the property, albeit that the property would have to
be re-constructed.
Second, the court acknowledged that the city held the right to re-convert
the garage on its own and then to assess a lien against the property to
recover its costs. In other words, the notice of violation was really
a monetary lien about to be born. Yet the court reasoned that future action
by the city would have to occur before the lien was imposed and "title
insurance does not insure against future events." The fact that the
buyer might have to use his own money for the re-conversion apparently
did not impress the court either.
Third, the court explained away express language in the policy which seemed
to create, through a process of exclusion and exception, coverage for
the buyer. The policy's language stated that the policy did not cover
any loss resulting from governmental regulations, "except to the
extent that a notice of the enforcement thereof . . . has been recorded
in the public records at Date of Policy." I would have thought that
language would have turned the tide in favor of the buyer. But it did
not. The court invoked the hyper-technical rule that an exception to an
exclusion does not create coverage. Even without that rule, the court
went on to explain, since a notice of violation is not a "notice
of enforcement," coverage could not exist anyway. The court gave
no definition for "notice of enforcement."
Finally, the court denied that the notice of violation affected marketability
of the buyer's title to the property. The court quoted another enigmatic
rule to the effect that: "One can hold perfect title to land that
is valueless; one can have marketable title to land while the land itself
is unmarketable." To translate, loss of market value due to a physical
problem with the property makes no difference.
The final count looks like this: A title company can miss a recorded notice
of code violation; the buyer cannot use the property without curing the
violation; the buyer cannot re-sell property without conceding a price
discount for the trouble and expense created by the violation; and the
buyer cannot walk away from the violation without having the city put
an assessment lien against the property; and still the title insurance
company need do nothing at all. I have difficulty accepting that predicament.