Title Insurance 101 – Who is an “Insured”? Part One

In Schedule A of both the ALTA Owner’s Policy and the ALTA Loan Policy, the first paragraph deals with identifying  the Insured.   For the Owner’s Policy, the Insured will be the Grantee named in the conveyance, usually a conveyance by deed.  In the Loan Policy, the Insured will be the lender named as the mortgagee or beneficiary under a deed of trust.  In the boilerplate of the policies, there is a section dealing with Definitions, and in this section, the Insured is defined as “The Insured named in Schedule A”.   This doesn’t really help much, but following this, the policy definition now sets out a laundry list of entities and situations that are included in the definition of Insured.  The examples of an Insured are different in the Loan Policy than in the Owner’s Policy, so this time, we’ll discuss the Owner’s Policy.   Next time, we’ll discuss the differences in the Loan Policy.

Owners Policy

Historically, the coverage under the title policy was always intended to apply to the named insured in Schedule A, and to any subsequent owners of the title who took the title by operation of law, as opposed to purchase.    This left things a little vague, so when the ALTA revised the policies in 2006, they expanded the definition section and now there is a better  definition of “Insured”, along with a listing of the types of subsequent owners who would be included in the idea of taking the title by operation of law.  So, in the Owner’s title policy, here is how the Insured is defined:

(d)  “Insured”:  The Insured named in Schedule A.

Then the policy sets forth a list of who would also be considered an Insured.  But it is important to remember that while this is a long list of potential insureds, the original idea of coverage continuing to a successor by operation of law, as opposed to purchase, has not changed.  All of the situations listed under (d)(i) are examples of title passing not through a conveyance of purchase, but under theories of descent and distribution, or through corporate reorganization, or through changes in partnership structures.

(i)      The term “Insured” also includes

(A).          successors to the Title of the Insured by operation of law as distinguished from purchase, including heirs, devisees, survivors, personal representatives, or next of kin;

This section makes it clear that if the Insured dies while still owning the property that is the subject of the title policy, the protections given in the policy will continue in force, and the heirs, devisees, etc.,  of the original named Insured will automatically succeed to the rights of the original Insured under the title policy.

 

(B).    successors to an Insured by dissolution, merger, consolidation, distribution, or reorganization;

This section makes it clear that in the event of a corporate dissolultion, the shareholders will step into the shoes of the named Insured and will become the Insureds.  Also, if a corporation merges into another corporation, the successor by merger will become the new Insured.  This is limited, of course, to those situations where the transfer occurs through operation of law, not through a purchase of a particular corporate asset.

 

(C).    successors to an Insured by its conversion to another kind of Entity;

This section is a reflection of the changing laws dealing with partnerships and limited liability companies.   There are cases where state law allows a limited partnership to convert to a limited liability company through filing of conversion documents.  This type of conversion, and the resulting transfer of title from one entity form to another is considered to be a transfer under the operation of law, and the converted entity would be eligible to be a successor Insured under the title policy.

 

(D).    a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the Title

                (1)   if the stock, shares, memberships, or other equity interests of the grantee are wholly-owned by the named Insured,

                (2)   if the grantee wholly owns the named Insured,

                (3)   if the grantee is wholly-owned by an affiliated Entity of the named Insured, provided the affiliated Entity and the named Insured are both wholly-owned by the same person or Entity, or

                (4)   if the grantee is a trustee or beneficiary of a trust created by a written instrument established by the Insured named in Schedule A for estate planning purposes.

The first three parts of this section deal with intra-corporate transfers, such as upstream and downstream transfers between parent and subsidiary corporations, as well as transfers between subsidiaries which are wholly-owned by the same parent.  The idea behind this section is that while the transfers may be between different corporations, they are all part of the same corporate family, and many times corporations shift assets among subsidiaries for corporate restructuring purposes.   This section also applies to similar transfers among partnerships and limited liability companies.  Subsection (4) deals with conveyances by individuals who transfer assets to a trust for estate planning purposes, with the same idea that while the entity holding the title may have changed, the ultimate ownership of the asset has not.

The last part of the definition of the Insured is a statement that makes it clear that despite the laundry list of who may be an Insured, the title company reserves all the same rights and defenses against any successor that the title company would have had against any predecessor Insured.

 

(ii)                With regard to (A), (B), (C), and (D), reserving, however, all rights and defenses as to any successor that the Company would have had against any predecessor Insured.

So, in the event of a claim, if the title company could have had a defense to that claim against the original Insured, the title company has the right to use those same defenses against any successor Insured.

 

It is also important to note that in the event that there is a successor Insured who,  of course, would take the title after the original Date of Policy, the original Date of Policy does not change just because of the succession, and any post-policy matters are not covered.  This includes the question of the validity of any of the above-mentioned transfers.  So, while a corporate successor may be an insured, if the documents transferring the title are not valid, the title policy does not insure the validity of the transfer, nor the title into the transferee successor.   If there is any question as to the validity of any transfer, or the status of the title at the time of the transfer, it is always recommended that the successor obtain a new title policy.

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