Title Insurance 101 – What is “Unmarketable Title”?

One of the Covered Risks in the 2006 ALTA Owner’s Policy and the 2006 ALTA Loan Policy is loss sustained by the Insured by reason of  “Unmarketable Title”.  (see:   Covered Risks, Paragraph #3).  “Unmarketable Title” is defined in Section 1 of the Conditions as:

(k)  “Unmarketable Title”:  Title affected by an alleged or apparent matter that would permit a prospective purchaser or lessee of the Title or lender on the Title to be released from the obligation to purchase, lease, or lend if there is a contractual condition requiring the delivery of marketable title.”  (paragraph (m) in the Loan Policy)

So, by using this definition, we are given a clue as to what “unmarketable” title is; but what is “marketable” title?

Most contracts for the sale and purchase of real estate, whether residential, commercial, or whatever, contain a requirement that the seller convey “marketable” or “merchantable” title.  Both terms are used to mean the same thing, i.e., that the seller is able to convey title that meets the local standards for a title that is free from doubt or free from the threat of potential litigation.  Recent cases have held that merchantable title is not perfect title, but rather title reasonably secure against the hazard, annoyance, and expense of future litigation, or title which a reasonable person will accept as not subject to a doubt or cloud that would affect its market value.  Humphries v. Ables, 789 N.E. 2nd 1025 (Ind.App. Jun 16, 2003), Nelson v. Anderson, 676 N.E.2d 735 (5th Dist. 1997).

In 77 Am. Jur. 2d, “Vendor & Purchaser,” §§131 et seq., marketable title is described as

. . .  a title that may be freely made the subject of resale, a title free from reasonable doubt both as to matters of law and fact, a title free from liens or encumbrances and dependent for its validity on no doubtful questions of law or fact, and a title which a reasonable purchase, well-informed as to the facts and their legal bearings, willing and ready to perform the contract, would, in the exercise of that prudence which purchasers ordinarily bring to bear upon such transactions, be willing to accept and ought to accept.

Several states have enacted marketable title statutes, which vary state by state, but which all have in common the intent that if an owner has a clear chain of title shown in the public records back to a root of title, such as a deed, for a specified period, then that title is free from all interests that were recorded before the root of title.   Most statutes require an unbroken chain of title of at least 25-40 years, and contain statutory exceptions for interests and title defects that are inherent in the title records, such as deed covenants and restrictions.  Florida, California, Kansas, North Carolina, Iowa, Connecticut, Maine, Rhode Island, Ohio, Indiana, Utah, North Dakota, South Dakota and Wyoming have all enacted marketable title acts.  The Uniform Commissioners have also drafted a Uniform Marketable Title Act, dated 1990, which has a 30 years chain of title requirement.

While there may have been questions in the past as to whether the Insured had to have gone through litigation and had an adverse judgment that the title was in fact, unmarketable, in order to be able to file a claim under the title policy, the definition in the 2006 ALTA policies now makes it clear that that is NOT necessary, and that an allegation of unmarketability is generally enough to trigger the title company’s duty to defend.

Note that the Texas promulgated title policies, while based on the ALTA policy forms, do not use the term “Unmarketable Title” as one of the covered risks.  Instead, the Texas policies insure against “Lack of good and indefeasible Title,” which is sadly not defined.  The Texas definitions continue to use the ALTA term “Unmarketable Title”, which creates an ambiguity since the Texas policy does not use that term.

For a more detailed explanation of “Unmarketable Title”, please see Joyce Palomar’s Treatise on Title Insurance, §5:8. ________________________________________________________________________________________

And, as usual, here is my caveat:  The opinions stated in this blog are those of the author, and should not be construed to be a statement of fact or conclusion of law.  Any statements herein should not be relied upon in any litigation, arbitration or mediation.  Statements herein have not been approved by the American Land Title Association, its officers or members.

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