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I.                   What is Title Insurance?

A “title insurance policy” is any written instrument purporting to show the title to real or personal property or any interest therein or encumbrance thereon, or to furnish such information relative to real property, which written instrument in express terms purports to insure or guarantee such title or the correctness of such information.[1]  In other words, title insurance is information on the status of title to real property (before the purchase or mortgage of real property) and protection against adverse claims that may affect the title.  Title insurance shifts the risk of covered title defects from the insured owner or lender to a title insurance underwriter.  It is a contract to indemnify if a loss occurs and if the loss is a covered defect.  Title insurance is utilized in both residential and commercial real estate transactions.

Title insurance differs from all other kinds of insurance.  The function of most other forms of insurance is to provide financial indemnity through a pooling of risks for losses coming from unforeseen events.  The purpose of title insurance, however, is to eliminate losses caused by defects in title that come from events which have happened in the past.  The title insurance policy relates essentially to the past; it protects the title as it stands when the policy is written and is unique among all the various types of insurance in that it ends where the other insurance begins, namely, at the date of the policy.

A title insurance policy provides the insured with peace of mind by taking the risk out of acquiring property whose legal history is unknown.  While there should be no risks in transferring property, they do exist.  Through the years, the insured’s property may have changed hands many times through sale, inheritance, foreclosure, or bankruptcy.  Each transfer was an opportunity for an error in title to arise.  If an error occurred, and has never come to light, it puts the insured’s title to the property in jeopardy.  The insured could lose the property and the money paid for it.  Among the many risks against which title insurance protects are:

–          Confusion from similarity of names

–          Forged documents

–          Signature of minors or mentally incompetent persons

–          Mistakes in recording legal documents

–          Undisclosed or missing heirs

–          Fraud

–          Invalid divorces

–          Misrepresentation of marital status

–          Unpaid taxes

–          Clerical errors in public records

–          Errors in the examination of title

The title insurance company will defend the insured’s title in the courts at its own expense in the event that a flaw in title is discovered and rights of ownership are challenged.

Premium rates are not regulated in Oklahoma and there are no state promulgated title insurance forms and endorsements.  The underwriter determines a premium based upon current market conditions and its own risk analysis and issues a title insurance policy and any other affirmative coverage on forms acceptable to said underwriter.  The American Land Title Association (ALTA), an organization consisting of title insurance underwriters, agents and abstractors, has developed standard policy and endorsement forms for voluntary use by its members.  These forms are probably the most widely used in Oklahoma.

a.      Title Commitment

A Commitment for Title Insurance (“Commitment”) is issued based upon the attorney’s title opinion.  A Commitment represents the agreement of the underwriter to issue a title insurance policy to an insured for a specified amount when all the requirements of the Commitment have been properly satisfied.  It is issued after a duly certified abstract of title has been examined by an attorney licensed to practice law in the State of Oklahoma.  The information contained in the attorney’s title opinion is transferred to the Commitment indicating the current status of title.

The most common form of Commitment is the 2006 ALTA Commitment form.  A Commitment consists of Schedule A, Schedule B – Section I, and Schedule B-Section II and is held together by a commitment jacket.  Schedule A contains the following parts:

File Number:  Commitment forms are not pre-numbered, which allows the agent to insert its own individual number or reference name at the top of Schedule A and at the top of each page of the Commitment.

Effective Date:  Item 1 of Schedule A of the 2006 ALTA Commitment form states the Effective Date of the Commitment.  The Effective Date of the Commitment should be the date, including the time of the day, through which the abstract has been certified.  This date should be consistent with the date reflected on the attorney’s title opinion.

Policies to Be Issued:  Item 2 of Schedule A of the 2006 ALTA Commitment form describes the type of policy or policies that are being issued, the amount of each policy, and the name of the proposed insured.  There are several different types of title insurance policies available, but the two most commonly used are the owner’s title insurance policy and the loan/mortgagee title insurance policy.

Estate or Interest in the Land:  Item 3 of Schedule A of the 2006 ALTA Commitment form describes the estate or interest in the land.  Most of the time, the estate will be FEE SIMPLE.  If the estate is a lesser estate, the Commitment should be amended accordingly to show the proper estate.  For example, leasehold and easement estates may be insured.

Record Owner:  Item 4 of Schedule A of the 2006 ALTA Commitment form states the record owner as reflected by the attorney’s title opinion as of the Effective Date of the Commitment.

Insured Property:  Item 5 of Schedule A of the 2006 ALTA Commitment form describes the property to be insured.  The complete legal description of the proposed insured property should be inserted.  This description should be the land shown on the abstract certificate and the attorney’s title opinion.

Schedule B-Section I of the 2006 ALTA Commitment form sets out the requirements, which are those things that must be accomplished before the examining attorney or the title insurance agent will pronounce the title to the real estate marketable.  Requirements are revealed by the title examination and are shown on the attorney’s title opinion.   Requirements may include title curative matters (i.e., correction deeds) or vesting requirements (i.e., a deed from seller to the new buyer to be insured).

Schedule B-Section II of the 2006 ALTA Commitment form sets out the exceptions, which are those title matters that represent encumbrances on the property.  These matters are excluded from coverage by the title insurance policy.  An example of a standard exception included in Schedule B-Section II is, “All interest in and to all oil, gas, coal, metallic ores or other minerals in and underlying the land, together with all rights, privileges, and estates relating thereto.”  The 2006 ALTA Commitment form is included in the Appendix to this material.

b.     Closing Process

Once the Commitment is issued by the title insurance company or its agent, the requirements and exceptions on the Commitment must be reviewed and addressed appropriately.  The contract between the parties to the transaction often determines the responsibility of each party in regards to satisfying requirements and deleting exceptions on the Commitment.  Typically, the seller is responsible for attaining title curative documents required by the Commitment prior to closing.  Often, attorneys are asked to aid in this process if a requirement on the Commitment requires legal services.  For example, suppose that the sole owner of subject property dies and the heirs wish to sell the property.  Once the examining attorney learns that the owner of the property is deceased, she will make a requirement for commencement of an action to probate the will or administer the estate of the owner and completion of valid sales proceedings as to the subject property.  Further, there will be a requirement for a deed by the duly appointed Personal Representative of the estate of decedent to the purchaser.  In this case, the seller’s estate will usually be responsible for meeting this requirement.

Closing documents must also be drafted, reviewed, and approved by all parties to the transaction including, but not limited to, deeds, notes, mortgages, affidavits, etc.    Most title companies will provide a proposed deed for use in the transaction.  However, title companies do not generally prepare title curative instruments or other closing documents which are not standard forms.  Therefore, attorneys for the parties or the lender usually provide any documents for the closing that require customized drafting.

Once the parties can properly satisfy all of the requirements on the Commitment, the parties are ready to close the transaction.  The closing is the procedure or event by which the ownership transfers from the seller to the buyer.  It can be handled at a meeting where the buyers and sellers are present, or it may be handled by an escrow agent who looks after the interests of both parties and completes the transaction if and when each party’s obligations has been fulfilled.  All documents needed to properly satisfy the requirements listed in the Commitment will be presented at the closing.

In some cases, an insured closing protection letter is issued by the title insurance company to protect the closing.  This letter states that the title insurance company will be responsible for any losses resulting from errors in the closing by the settlement or escrow agent.  Losses could result from the failure of the settlement agent to follow written closing instructions or also from the settlement agent mishandling closing funds.

After closing, the documents executed at the closing are recorded in the Office of the County Clerk in the county where the property is located.  Once the curative documents have been properly filed in the county records and a search is made by the abstractor to determine that no other documents adversely affecting the specific property have been filed, the title insurance policy may be issued.

c.      Types of Title Insurance Policies

There are a number of different types of title insurance policies available.  Title insurance can be used to insure virtually any estate in real property, including any estate in fee simple, a mortgage or deed of trust lien, a leasehold, a life estate, or an easement.  The two most commonly issued policies are the owner’s policy and the loan/mortgagee policy.  Most companies will offer a simultaneous issue premium rate when both an owner’s and a loan policy are purchased at the same time.  This allows coverage for both the owner and the lender at a reduced premium.

Title insurance for surface damages provides affirmative coverage to a lender or owner against damages to the surface estate resulting from the exercise of any right to use the surface of the property for the extraction or development of minerals.  This type of insurance is provided by the issuance of a mineral endorsement or comprehensive endorsements to the title policy.  On November 27, 1984, the Oklahoma Insurance Commission issued a bulletin to all title insurers licensed in the State of Oklahoma which stated that such affirmative insurance did not fall within the definition of “title insurance” under Oklahoma law and was, therefore, prohibited.  Accordingly, a mineral endorsement or a comprehensive endorsement which includes title insurance coverage against surface damages is not available in Oklahoma.

Title insurance in Oklahoma is regulated by Title 36 of the Oklahoma Statutes, which is known and may be cited as the Oklahoma Insurance Code, Title 365 of the Oklahoma Administrative Code, and the Real Estate Settlement Procedures Act (RESPA).  RESPA is a federal act that was passed by Congress in 1974.  RESPA specifically prohibits kickbacks, rebates, commissions and other payments as part of real estate settlements and the sale of title insurance policies, as well as things of value.  RESPA also allows only charges (with few exceptions) for real estate settlement services that are actually performed.  A referral fee is not considered to be a payment for services rendered and is prohibited.

                                                              i.      Owner’s Policy

An owner’s policy is a contract of indemnity between an insured owner and a title insurance underwriter.  It insures the title to real property subject to the exceptions and exclusions contained in such policy.  An owner’s policy is used to insure a fee simple estate and/or a lesser estate such as a leasehold estate or easement estate.  An owner’s title insurance policy will cover the insured as long as he/she and his/her heirs or devisees have an interest in the property.  Coverage continues after the insured sells the property if the insured remains liable for warranties of title.  However, the owner’s policy is not transferable.  Therefore, when the property is resold, the new purchaser should obtain his own title insurance policy naming him as the insured.

The owner’s policy is comprised of a policy jacket, a Schedule A and a Schedule B.  Policy numbers are pre-assigned by the underwriter before issuance to the agent.  Schedule A of the owner’s policy consists of the following information:

–          File number (agent’s individual file reference)

–          Policy number (pre-assigned by underwriter)

–          Date of policy (effective date should be the date and time the document vesting title in the insured is recorded)

–          Amount of insurance (selling price of property)

–          Name of insured

–          Estate insured

–          Owner of property

–          Mortgage encumbering property

–          Insured property (legal description)

Schedule B of the owner’s policy sets out the title matters which are excluded from coverage under the title insurance policy.  Schedule B will list any mortgages as referred to in Schedule A as an exception to title, if any are referred to in Schedule A.  Any additional title exceptions revealed by the title examination that have not been disposed of should also be listed here.  Also included would be prior liens, easements, rights of way, roadway reservations, mineral reservations, existing leases, etc.  The 2006 ALTA Owner’s Policy form is included in the Appendix to this material.

One recent change in Oklahoma law allows a prior owner’s policy issued by a title insurer licensed in Oklahoma to be used as base title for future transactions.  This means that the title need only be examined from the effective date of the prior owner’s policy.  This law is particularly helpful when dealing with a real estate transaction where abstracts have been misplaced or lost, since abstracting is only needed from the effective date of the policy forward.[2]

                                                           ii.      Loan Policy

A loan policy is a contract of indemnity between the insured lender and the title insurance underwriter.  It insures the validity and priority of a lien created in favor of the lender against a specific property subject to the exceptions and exclusions contained in the title insurance policy.  A loan policy provides protection for the lender as long as the lender (mortgagee) has an interest in the property.  In the event of a covered claim, the insurance company will pay the balance of the loan up to the face amount of the policy.  This type of policy ends once the mortgage is paid off.  This policy will also cover an assignee of the mortgage.

The loan/mortgagee policy is comprised of a policy jacket, a Schedule A and a Schedule B.  Schedule A consists of the following information:

–          File number (agent’s individual file reference)

–          Policy number (pre-assigned by underwriter)

–          Date of policy

–          Amount of insurance (amount of the loan secured by the mortgage creating the lien in favor of the insured)

–          Name of insured

–          Estate insured

–          Owner of property

–          Insured mortgage

–          Insured property (legal description)

Schedule B of the Loan/Mortgagee policy sets out the title matters which are excluded from coverage under the policy.  Schedule B lists title exceptions that are reflected on the attorney’s title opinion that would have priority over the lien being insured and that have not yet been disposed.  This would include prior liens, easements, rights of way, roadway reservations, mineral reservations, existing leases, etc.  The 2006 ALTA Loan Policy form is included in the Appendix to this material.

d.     Endorsements

Endorsements are riders attached to title insurance policies which modify the coverage of that policy.  They are mostly used to expand the coverage, but they can also be used to limit or interpret the coverage of the title policy.  There is a wide variety of endorsements available.  Different organizations have developed their own sets of endorsements that meet with their underwriting and state regulations.  Guidelines for underwriting endorsements vary from company to company.

 



[1] 36 O.S. § 5004(A) (2011)

[2] 36 O.S. § 5004(C)(1)