Title Insurance 101 – Who is the Insured? Loan Policies

In Schedule A of both the ALTA Owner’s Policy and the ALTA Loan Policy, the first paragraph identifies 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 my last blog, I discussed the Owner’s Policy.  This time I will discuss the Loan Policy definition of an Insured.

Like the Owner’s Policy, the main definition of an Insured in the Loan Policy refers back to Schedule A:

  1. 1.        Definition of Terms

(e)  “Insured”:  the Insured named in Schedule A.

And like the Owner’s Policy, the policy goes on to give examples or clarifications as to what the term “Insured” includes, but this time focusing on any assignees or successors in ownership of the Indebtedness or promissory note. [1]

(i)       The term “Insured” also includes

(A)    The owner of the Indebtedness and each successor I ownership of the Indebtedness, whether the owner or successor owns the Indebtedness for its own account or as a trustee or other fiduciary, except a successor who is an obligor under the provisions of Section 12(c) of these Conditions[2];

The idea behind this example is that, generally speaking, the mortgage follows the promissory note.  This may not be the case in some deed of trust states, where an assignment of the note requires an assignment of the deed of trust in order for the lien to follow the note.  But this fact does not change the intent that under the policy, if the insured lender properly endorses and assigns the promissory note, the policy will continue to insure the holder of the Indebtedness, subject to any defenses under the policy, which defense may include failure to properly execute and record an assignment of the deed of trust.

 

When the ALTA Forms Committee was drafting the 2006 ALTA Loan Policy, they were aware of the growing use of electronic transactions, and considered this trend to be so important that they included a reference to transferable records in the definition of Insured.

(B)    The person or Entity who has “control” of the “transferable record,” if the Indebtedness is evidenced by a “transferable record,” as these terms are defined by applicable electronic transactions law;

 

The next examples mimic the examples in the Owner’s Policy, making it clear that the Insured includes successors of the Insured by reason of dissolution, merger, intra-corporate transfer, etc.

(C)   Successors to an Insured by dissolution, merger, consolidation, distribution, or reorganization;

(D)   Successors to an Insured by its conversion to another kind of Entity;

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

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

(ii)                If the grantee wholly owns the named Insured, or

(iii)               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;

 

The next example deals with situations where the Indebtedness is insured under a contract with a government agency such as the Department of Veterans Affairs (VA), the Department of Housing and Urban Development (HUD), Fannie Mae or Freddie Mac in order to make it clear that should one of those agencies be forced to purchase the loan under its guaranty, it will continue to enjoy the benefits of an Insured under the title policy.

(F)    Any government agency or instrumentality that is an insurer or guarantor under an insurance contract or guaranty insuring or guaranteeing the Indebtedness secured by the Insured Mortgage, or any part of it, whether named as an Insured or not;

 

Like the Owner’s Policy, all of these examples are subject to the caveat that the title Company has the right to raise any defense against any of these successors (except for the government agencies mentioned in (F) ) that it could have raised against a predecessor Insured.  However, the caveat in the Loan Policy is more limited than that in the Owner’s Policy because if the successor acquired the Indebtedness as a purchaser for value without Knowledge of an asserted defect, lien encumbrance or other matter insured against by the policy, that important BFP status will protect the successor Insured against any defenses the title Company could have raised against the original Insured lender.

(ii)                 With regard to (A), (B), (C), (D), and (E) reserving, however, all rights and defenses as to any successor that the Company would have had against any predecessor Insured, unless the successor acquired the Indebtedness as a purchaser for value without Knowledge of the assert defect, lien, encumbrance, or other matter insured against by this policy.

In the event of a claim, it is important for any successor Insured under a Loan Policy to be able to prove that they were a bona fide purchaser for value without Knowledge of the Indebtedness in order to fall under the exemption of sub-section (ii).

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And, as usual, here is my caveat:  The opinions stated in this blog are those of the writer, 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.


[1] Capitalized terms used herein such as “Indebtedness” and “Knowledge” are defined terms in the policy, and you should refer to Section 1 of the policy Conditions for these definitions.

[2] Condition 12(c) states in part:  “The Company’s right of subrogation shall not be avoided by acquisition of the Insured Mortgage by an obligor (except an obligor described in Section 1(E)(i)(F) of these Conditions) who acquires the Insured Mortgage as a result of an indemnity, guarantee, other policy of insurance, or bond, and the obligor will not be an Insured under this policy.”

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