Abode Insurance
By Lawrence E. Green
REAL PROPERTY LAW: A newly revised title insurance policy addresses matters outside the public records that have not previously been the subject of indemnification under similar policies.
In virtually every California real estate transaction, the parties obtain title insurance. In a residential real estate transaction, the policy selection is typically made using the standard California Association of Realtors Residential Purchase Deposit Contract and Receipt (form RPA-14, Revised May 1997).
The form provides that the buyer "shall receive an ALTA-R [American Land Title Association] owner's title insurance policy, if reasonably available. If not, Buyer shall receive a standard coverage owner's policy (e.g. CLTA [California Land Title Association] or ALTA with regional exceptions)." The form also states that the title company, at the buyer's request, can provide information about availability, desirability and cost of various title-insurance coverages. CLTA and ALTA are title industry trade associations that develop standard title insurance policies.
A new homeowner's title insurance policy the CLTA recently filed with the Department of Insurance may change the title insurance recommendations that real estate brokers and agents make to their clients. It may also cause the California Association of Realtors to amend the RPA-14 to include the new CLTA policy.
Since the fiduciary duty of a real estate agent may include a duty to inspect public records or permits concerning title or use of the property (Field v. Century 21 Klowden-Forness Realty, 63 Cal App. 4th (1998)), any new title-policy provisions affecting that duty are significant. It has also been suggested that a real estate agent possesses a duty similar to that of an insurance agent’s duty to advise or inform an insured of the availability of additional or broader coverage. See Harry D. Miller and Marvin B. Starr, "California Real Estate 2nd," Section 3.17, Note 90 (2d ed. 1990). That broader coverage may now be available.
The new CLTA policy does not change the nature of title insurance as a contract of indemnity, with the preliminary title report being an offer to issue a policy and not a representation as to title. Siegel v. Fidelity National Title Ins. Co., 46 Cal.App.4th 1181 (1996); Southland Title Corp. v. Superior Court, 213 Cal.App.3d 530 (1991). But the policy addresses matters outside of public records that have not previously been the subject of indemnification under title policies.
The new policy expands the number of insuring provisions from four (CLTA Owners Policy-1990) to 29. However, the new policy is for use only with owner-occupied, one to four-family residences and single residential condominium units. It is not for use in transactions involving commercial properties or insureds that are not natural persons.
Some of the coverages in the new policy that were previously available by endorsement only (and some of those for an additional charge), including coverages for subdivision map act violations, zoning violations, encroachments of existing structures (with a deductible and a liability cap lower than the policy amount), conditions, covenants and restrictions (CC&R) violations and damage caused to improvements on the land by exercise of mineral rights.
Additional coverages that have not been given previously by title insurance policies are vehicular and pedestrian access coverage; building-permit violations coverage; post-policy coverage for forgeries; and post-policy coverage for encroachments onto the land, rights of others to limit use of the land and claims by others to rights arising out of leases, contracts or options claims.
As with all insurance policies, the coverages are subject to conditions, exclusions, and exceptions. Also, the policy may not be available in all areas or in a particular transaction due to individual company underwriting considerations.
Although the policy is not assignable, heirs of the insured, spouses who receive the property in divorce proceedings with the insured, and trustees and beneficiaries of a trust that has the property transferred to it by the insured as settlor of the trust are now included as additional insureds. The policy amount increases at a rate of 10 percent of the original policy amount each year, with a cap of 150 percent of the original policy amount. This helps new homeowners cover increases in the value of their property by raising the limit of insurance protection.
However, insured homeowners should not blindly rely on the new policy to cover items that may be disclosed to them pursuant to statutory disclosure requirements. Section 1102.6 of the Civil Code provides a standard form for a disclosure statement the seller in a residential real estate transaction is required to give. Although not a part of the contract between the parties (Braiser v. Sparks, 17 Cal.App.4th 1756 (1993)), the disclosure statement may be relevant to certain coverages under the new CLTA policy.
The disclosure form asks whether there are any encroachments, easements or similar matters that may affect the subject property; whether there are any zoning violations, nonconforming uses or violations of setback requirements; and whether there are room additions, structural modifications or other alterations or repairs not in compliance with building codes or without permit.
Those matters which are subject to deductibles and maximum dollar limits of liability and that are also referenced in the statutory transfer disclosure statements include the following:
Subdivision Map Act Coverage. This provision provides coverage in the event that the insured is unable to obtain a building permit, forced to correct or remove a violation or has unmarketable title by reason of a pre-existing/pre-policy violation of the Subdivision Map Act.
Zoning Coverage. This provision provides coverage in the event that the insured is forced to remove or remedy existing structures because they violate a zoning regulation existing at the date of the policy.
Encroachment Coverage. This provision provides coverage in the event that the insured incurs a loss arising from the forced removal of the insured’s structures because they encroach onto someone else's land, someone else's easement or a building set-back line.
Building Permit Coverage. This provision provides coverage in the event that the insured is forced to remedy or remove an existing structure other than a boundary wall or fence because the structure was built without obtaining a building permit from the proper government office.
A coverage issue may arise when one of these items in the statutory transfer disclosure statement is checked in the affirmative and the title insurer issues a policy indemnifying against a loss arising out of one of the items. In a claims context, the insurer may request a copy of the transfer disclosure statement from the insured. If the statement indicates the seller was aware of the matter, then acceptance of the claim may be in doubt. This situation can occur because the policy excludes risks that are created, allowed or agreed to by the insured whether or not they appear in the public records.
Even more relevant is the separate exclusion for risks that are known to the insured at the policy date but not to the title insurance company, unless they appeared in the public records at the policy date. The policy defines public records as "records that give constructive notice of matters affecting your title, according to the state statutes where the land is located."
Thus, although the policy provides coverage for certain matters which are outside of the "public records", knowledge of a risk may defeat a subsequent claim. This is appropriate, since a title company cannot rely on recorded documents in providing some of the new coverages when risks cannot be identified from the public records as defined in the policy.
Since title insurance affords continuous coverage, it would be a rare situation in which the entire policy would be rescinded. However, the concealment of facts known to an insured by reason of the transfer disclosure statement certainly sets the stage for either the denial of a claim or the rescission of the particular coverage. Concealment or misrepresentation may form the basis for rescission of the insurance contract or of a particular coverage. Insurance Code §331; Lunardi v. Great Western Life Assurance Co., 37 Cal.App.4th (1995); Merced County Mutual Fire Ins. Co. v. State of California, 233 Cal.App.3rd 765 (1991).
Section 330 of the Insurance Code defines concealment as neglecting to communicate that which a party knows and ought to communicate. However, Section 333 contains limitations on the duty of disclosure by parties to an insurance contract. The only California case on rescission involving a title policy is an unpublished case by the 4th District Court of Appeal. Bank of San Diego v. Commonwealth Land Title Insurance Co., DO12068 (May 31, 1991).
There the court upheld rescission when "the record clearly established that the Bank's failure to disclose the existence of an antecedent debt constituted concealment of a fact which Commonwealth considered material to its underwriting decision. Disclosure of the existence of the … antecedent debt with the Bank would have resulted in a determination not to issue the policies."
Apart from the statutory basis for rescission, the specific policy exclusion for risks known to the insured has been upheld as a basis for denial of a claim. Stearns v. Title Ins. and Trust Co., 18 Cal.App.3d 162 (1971).
Buyers and their real estate agents should be aware of the potential disclosure responsibilities surrounding the new CLTA policy, which does offer expanded coverage for residential real estate transactions. Title companies may want to consider the extent to which the statutory disclosure statement may be useful in either an underwriting or a claims context.
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