Environmental Risks Continued: What Title Insurance Can Do For You

Last week, GRS’s Bill Tryon blogged about environmental risks.  Environmental issues can adversely affect the sale of real estate, since potential clean-up costs can be exorbitant.  Bill mentioned that one way property buyers can find out whether their target property has environmental clean-up exposure is to perform appropriate due diligence.  A Phase I Environmental Site Assessment (ESA) is one of the tools that can help you determine if there is potential liability for environmental risks.  Global Realty Group can provide a Phase I ESA to a prospective purchaser in order to identify activities and conditions on the subject property that may have resulted in contamination.

Under federal law, the Environmental Protection Agency, if it determines that property has been contaminated by hazardous materials, can order a property owner to clean up the contamination, and can place a lien on the property for anticipated costs that the federal government will be forced to spend in the event that the owner does not perform the required clean up.   These liens are filed in the records of the clerk of the United States district court for the district in which the land is located.

Generally speaking, title insurance policies do not cover losses caused by environmental risks, regulations and any losses arising from them.  Title policies contain a specific exclusion which states:

“The following matters are expressly excluded from the coverage of this policy, and the Company will not pay loss or damage, costs, attorneys’ fees, or expenses that arise by reason of: 

1. (a) Any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting, or relating to

                    . . . .

                    (iv) environmental protection;

                    or the effect of any violation of these laws, ordinances, or governmental regulations.”

One of the reasons why title policies exclude environmental risks is because when a title search is performed, the records that are searched are the land records, i.e., the records that “impart constructive notice to a bona fide purchaser of value without knowledge of the defect.”  Title searches are not performed in court records unless a specific reason arises for that additional search.  Therefore, your usual title search would not find a lien filed by the EPA for environmental clean-up, since the lien would be filed in the U.S. district court records, not the land records.

However, since the 1980’s, title companies have been willing, upon specific request by the proposed insured and for an additional premium, to perform an extra search in the U.S. district court records to determine if an environmental protection lien has been filed against the subject property.  If the title company’s search of the district court records reveals that an environmental protection lien has been filed against the property, the title company will take exception to the lien in the title policy, and no insurance is available for losses caused by the lien.  However, if the title company’s search of the district court records shows that no lien has been filed, the title company can issue a specific endorsement that can provide some protection to a purchaser – the ALTA 8.1 endorsement.

The ALTA 8.1 Environmental Protection Lien Endorsement is very specific and very limited. It does not insure that there has been no environmental contamination on the property.  It only insures the insured against loss if there is an environmental protection lien that has been properly filed against the property prior to the date of the policy, and that the title company’s search missed it.   If the title policy is issued with an ALTA 8.1 endorsement, and the search failed to turn up an environmental lien that had been properly filed against the insured property, then the insured has the right to file a claim for loss or damage suffered by reason of the missed environmental lien.  The endorsement insures only as to liens filed before date of policy, and provides no coverage for liens which may be filed in the future, nor does it insure that the property is free from contamination or hazardous material risk.

The ALTA 8.1 endorsement is commonly required by both lenders and purchasers on most commercial property sales or financing, as well as for most FNMA residential transactions, and is available in every state.  GRS Title Services can provide you with additional information regarding this endorsement, or any other title needs.

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