FEATURE ARTICLE, AUGUST 2006
NEW AND IMPROVED 2006 ALTA POLICIES
What you need to know about the new 2006 title insurance policies from the American Land Title Association.
James L. Gosdin
The predominant title insurance forms in use today are the American Land Title Association (ALTA) policies, although some proprietary policies are issued by title insurers. Standardization of forms occurred primarily because of lender demand for predictable forms that would not need to be read and negotiated.
Developed by the ALTA predecessor, the American Title Association, the 1929 Standard Loan Policy included standard coverage against lack of title, defects, liens or encumbrances on title, invalidity or lack of priority of the mortgage, lack of vesting of the mortgage by any described assignment, and any defect in execution of the mortgage. It also adopted a precedent of advancing coverage by incorporating coverage against unmarketability of title, and lack of priority over mechanic’s liens. The first owner’s policy was adopted in 1959 by ALTA.
ALTA subsequently adopted and revised a number of uniform title insurance policies for standard use in commercial and residential transactions. The 1970 ALTA Loan Policy is requested quite often in commercial transactions. The 1987 ALTA Owner’s and Loan Policies substantially rewrote the 1970 policies to clarify coverage, exclusions and defense provisions in the conditions and stipulations.
The 1987 policies were amended in 1990 and 1992. The 1992 policies, which are available throughout most of the United States, are issued in modified form in some states by endorsement or change to the text. For example, the arbitration clause must be modified in the text or endorsement in some states.
The 1970 policies remain available in most jurisdictions, but are not filed or promulgated, and thus are not available in Colorado, Delaware, Idaho, Michigan, Montana, New Jersey, New Mexico (promulgated form), New York, North Dakota, Ohio, Pennsylvania, South Dakota, Texas (promulgated form), Utah, and Wyoming. Currently the basic title insurance policies are the 1992 Owner’s and Loan Policies, and, in some commercial transactions, the 1970 ALTA Owner’s and Loan Policies.
The 2006 Owner’s Policy and Loan Policy
The new ALTA Owner’s Policy (6/17/06) and ALTA Loan Policy (6/17/06) revise and improve existing coverage.
The conceptual basis and motivation for the 2006 policy is significantly different from that of the 1992 and 1970 policies. It provides an acceptable — and more favorable — product that the customer can view as a sound base for title insurance coverage in both residential and commercial transactions. That base can be built upon by (1) endorsements to expand coverage, (2) extended coverage, and (3) closing protection letters. Each of these supplements can be essential to the attorney in providing the maximum title insurance coverage for his or her client, although other forms remain relevant in segments of the real estate lending business.
The 2006 policies are clearly superior in coverage to the insured. A similar analysis of the 1970 policies and the 2006 policies produce the same result: with the appropriate request of endorsements, the 2006 policies can provide the insured with superior coverage.
Commercial customers have desired the 1970 policies, where available, because they lack provisions such as a co-insurance clause, they have slightly more obscure defense obligations (than the 1992 policies), they do not contain pro tanto reduction (payment of principal reduces insurance) clauses, and they do not include an explicit creditors’ rights exclusion.
In part, the use of the 1970 policies has been a triumph of hope over clarity, because it was by no means more clear, for example, that a “clean policy” would provide creditors’ rights coverage, than would a “clean policy” provide carte blanche coverage for mechanic’s liens on a loan policy. The policy could be interpreted as not providing coverage, or an exclusion (such as acts of the insured, knowledge of the insured, post-policy matters) could be asserted as a defense.
The approach of requesting the 1970 policies should no longer be taken by counsel, and may teeter on the edge of malpractice, given the broader array of coverage in the 2006 policies and the available options of endorsements to improve on that basic coverage.
Format of New 2006 Basic Policy Forms
The 2006 policies have been designed to be organized and worded more logically and precisely. Changes include:
• Terms of art. While the prior policies included definitions, some key phrases were not defined, or were used inconsistently. The 2006 policies contains the following defined terms that will also be used in applicable endorsements: amount of insurance, date of policy, entity, indebtedness, insured, insured claimant, insured mortgage, knowledge, land, mortgage, public records, title, and unmarketable title.
• Reorganization of insurance and exclusions. The exclusions no longer have what were considered to be insuring or carve out provisions that could be construed as providing insurance. Those carve outs appear in insuring provisions that are now formally called “covered risks.”
• The insurance section is now formally characterized. The designation of insurance as “covered risks” is consistent with the language of the Homeowner’s Policy and the Expanded Coverage Residential Loan Policy.
• Reorganization of conditions. The conditions have been reorganized generally to place the particular paragraphs in order consistent with the timing of relevance to the insured.
• Revisions to increase consistency. The 2006 owner’s and loan policies are more consistent in language: there are fewer provisions that apply to one policy and not to the other.
Laundry Lists of Covered Risks
In a change that is reminiscent of the style of the Homeowner’s Policy and the Expanded Coverage Loan Policy, the 2006 policies include illustrative laundry lists of covered risks. Those lists are not exhaustive, however, and are not intended to prevent other matters that fall within the general category from being covered simply because of lack of reference in the laundry list.
The 2006 policies contain additional insurance that either appears not at all in the 1992 and 1970 policies, or was only indirectly addressed in those forms. The additional coverage appearing in the covered risks includes:
• Coverage for electronic transactions
• Survey coverage
• Tax coverage
• Gap coverage
• Covered risks relating to excluded matters
*This article is a very brief discussion of the changes involved in the new ALTA Title Insurance Policies. For additional information, please see http://www.vuwriter.com/.
James L. Gosdin is the senior vice president and senior underwriter for Stewart Title Guaranty Co.
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