Title insurance is available in Texas to protect owners and lenders from monetary loss resulting from defects in title to real estate. Closing at a title company that issues a title insurance policy to both buyer (a T-1 owner’s policy) and lender (a T-2 loan policy) is the usual way to do business in Texas, but it is not the only way. Closings can legitimately occur without title insurance—for example, in a lawyer’s conference room or even at the kitchen table of the parties.
Title policies and regulations are a complicated and evolving area. This article is intended only as an introductory overview for real estate investors. Further resources can be found at the websites for the Texas Land Title Association (www.tlta.com) and the Texas Department of Insurance (https://www.tdi.texas.gov/), which has a very useful site. TDI is the regulatory body charged with overseeing title insurance in Texas.
The websites of major title companies also contain helpful guides and explanations. For example, Stewart Title’s website (www.stewart.com) offers a thorough non-technical explanation of what title insurance is and how it is used.
Reasons for Title Insurance
There are good reasons why obtaining title insurance is generally a considered beneficial:
(1) The title company maintains a database of real estate resources that can be searched in order to produce a title commitment, which is a summary review of the status and chain of title. The title commitment is important to the buyer because each prior transfer in the chain (including instruments used to effect those transfers) has legal effect; and “a purchaser is bound by every recital, reference and reservation contained in or fairly disclosed by any instrument which forms an essential link in the chain of title. . . .” Wessels v. Rio Bravo Oil Co., 250 S.W.2d 668 (Tex.App.—Eastland 1952, writ ref’d). In other words, the title one receives at closing is only as good as the chain of title behind it.
(2) The title company acts as a clearinghouse for closing documents that need to be drafted, signed, and recorded, as well as for funds to be collected and disbursed. The closer is the contact person who creates the file (which is assigned a file number or GF number), assembles the closing disclosures, and supervises the execution and notarization of documents on the day of closing.
(3) The title policy provides an avenue of recourse and recovery in the event either lender or buyer sustains a monetary loss as a result of a title defect. What kind of issue could result in monetary loss? The following is a partial list:
defects or gaps in the chain of title
incorrect legal description
failure by necessary parties to execute documents
documents not correctly drafted or recorded
pending litigation and judgments
mistakes of abstractors
fraudulent sellers and forged documents
probate matters, missing heirs, and intestate estates
invalid, incorrect, or ambiguous wills
faulty affidavits of heirship
title in trusts that do not exist
improper transfers by heirs and successors
heirs and successors undisclosed, missing, or deceased
community property and marital status issues
unpaid liens including tax liens
entities (LLCs) with suspended charters
persons lacking legal capacity including minors
documents executed by false or fictitious persons
UCC financing statements
property tax records that contain mistakes
homestead issues including liens against the homestead
eminent domain and condemnation issues
special tax assessments
involvement and legal capacity of foreign persons
undiscovered easements and prescriptive rights
adverse possession claims
defective or unrecorded powers of attorney
judicial proceedings that excluded necessary parties
incorrect or expired notaries
duress or fraud in execution of legal documents
documents and conveyances that violate public policy
criminal forfeitures of real property
Ideally, the title company should work to resolve such issues and, if appropriate following a proper claim, pay compensation for monetary loss.
Correctly Identifying the Parties and their Capacities
The title company’s duties commence when it receives the executed earnest money contract along with a check for the earnest money. It is the contract that kicks off the process, so it should correctly identify the buyer and seller as well as the respective capacities in which those persons are acting (personally or on behalf of an entity). This is the responsibility of the parties’ brokers and attorneys.
Since the title company closer will be ordering closing documents (the deed and so forth) from their law firm, and the law firm will want to know about identity and legal capacity, it is always the better practice to make sure the TREC contract is correct and complete as to parties and capacities. Unfortunately, many contracts are quite casual about this, which can cause delays and issues at the title company.
Capacity is as important as identity. Title companies want the correct person executing closing documents in the capacity in which that person is operating in the transaction. If a document calls for a party to sign both personally and in the capacity of a manager of an LLC, then you should expect two signature lines, one in each capacity. Let’s say, for example, that the seller is shown as “John Jones.” Here are just some of the ways that John Jones may actually be conveying the property:
John Jones, an unmarried person
John Jones, Trustee of the Armadillo Trust
John Jones, Manager of Armadillo LLC
John Jones, Executor of the Estate of Jesse James, Deceased
John Jones, General Partner of the Armadillo Partnership
John Jones, Owner of a Life Estate
and so on. It should not be left to the last minute to determine in which capacity an individual is acting.
Registered Entities as Parties
Identity and capacity issues are equally important in the case of registered entities (LLCs, corporations, and limited partnerships). The name of the LLC on the closing documents must be exactly as filed with the secretary of state, like a screenshot, including commas and capitalizations. Putting a comma in the wrong place can require the filing of a correction instrument. Avoid this by correctly stating identity and capacity in the earnest money contract.
Also: how does a title company know that someone acting on behalf of an LLC actually has necessary authority? Property Code Section 12.019 provides a method: in real estate transactions not exceeding $1M, an authorized person “may execute and record an affidavit identifying one or more individuals with authority to transfer on behalf of the entity . . . if the entity is: (1) a limited liability company, a limited partnership, or a professional entity . . . and (2) active or in good standing under the laws of the entity’s jurisdiction of formation. . . . An estate or interest in real property in the name of a domestic entity or foreign entity may be transferred on behalf of the entity by one or more individuals identified as authorized to do so in [such] an affidavit. . . .”
Seller=All Parties who have an Interest in the Property
The contract should identify the names and capacities of all parties who (at the time the contract is entered into) own any interest in the property—and that means any interest at all. All such persons in their respective capacities should be listed on the contract as being included under the umbrella of seller. Failure to obtain the signature of all “sellers” is an incomplete contract.
In a recent case, fee simple title to an expensive property was held by one person but a life estate (the right to reside on the property and possess it for life) was held by someone else, who happened to be rather young. Everyone in the process was starry-eyed, eager, and of course in a rush. The buyer was in love with the property and the brokers were enamored of their commissions.
The attorney for the buyer inconveniently pointed out that unless the owner of the life estate signed off on the contract as one of the sellers, then possession of the property would not pass to the buyer at closing. In other words, the buyer would not receive the entire bundle of fee-simple legal rights to the property.
The life tenant refused to sign the contract declaring that (according to his attorney) it wasn’t necessary. The buyer’s attorney objected. Instead of insisting that this problem be cured early on, the buyer instead fired his attorney and signed the contract anyway. Unsurprisingly, the life tenant refused to sign the deed at closing (Why would he, since no one was paying him for his life estate?). This eight-figure transaction crashed and burned as a consequence.
Whom does the title company represent?
The title company does not advocate for the buyer, seller, realtor, or lender and has no obligation to give advice or guidance to any of these parties. The title company is an insurance company. Its primary purpose is to sell insurance on conservative terms that will yield a profit and not threaten the interests of the title company.
What about the title company’s attorney—the attorney who drafts the deed, note, and deed of trust? Surely this attorney does his best to represent all parties to the transaction, right? Wrong. Generally speaking, the title company attorney represents only the interests of the title company, but it gets more complicated than that, especially when drafting the lender’s note and deed of trust. Even if the title company attorney is being paid by the seller to draft a warranty deed (as is customary), there is no incentive or obligation to produce anything but a minimalist conveyance without any seller-favorable clauses.
The exception is when the earnest money contract expressly requires the inclusion of such clauses—an “as is” clause in the deed, for instance, to protect the seller. However: if an “as is” clause or any other custom clause is to be included in the deed, the contract must expressly provide for inclusion of that clause, word for word.
Reliance on Title Company Advice and Documents
Reliance on a title company to protect one’s special interests is simply not justified. At no point in the process is the title company or its attorney called upon to represent the particular interests of either buyer or seller, or to give legal advice to either side, or to draft documents that include clauses favorable to either side. They are not asked to do this, nor will they agree to do this unless expressly mandated to do so by the earnest money contract (or a special provisions addendum to the contract).
The truth about title companies is the same truth that prevails across the insurance industry generally: to the extent that core interests of insurer and insured overlap, they do so incidentally but not as a primary purpose of the insurance contract.
The moral of the story is that there is no substitute for the services of a real estate attorney specifically tasked with protecting one’s interests as buyer or seller—whether in connection with contract drafting, execution, interpretation, status of title, curative issues, or the contents of the warranty deed and other closing documents. This is not said in order to diminish the diligent work of professionals in the title and closing process, but one must be clear about the reality of what it takes to protect one’s own interests in a real estate transaction.
Fiduciary Duty of the Title Company
What does the title company owe the parties? The IQ Holdings case (citation below) states that a “title insurance company assumes a fiduciary duty to both parties when it acts as an escrow agent in a transaction”—i.e., when it collects and holds money. This consists of “(1) the duty of loyalty; (2) the duty to make full disclosure; and (3) the duty to exercise a high degree of care to conserve the money and pay it only to those persons entitled to receive it.” Again, however, these duties pertain to funds in escrow, not the status of title. Beyond this fiduciary duty, the title company’s only obligation is to honor the terms of its policy and indemnify the insured owner or lender against covered losses.
Does the title company at least have a duty to point out issues or defects that affect title? Surprisingly, no. A title company examines title but does so primarily for its own information and benefit in order to determine whether or not it will issue a title policy. “A title insurance company is not a title abstractor [acting on behalf of the parties] and owes no duty to examine a title or point out any outstanding encumbrances.” IQ Holdings, Inc. v. Stewart Title Guaranty Company, 451 S.W.3d 861 (Tex.App.—Houston [1st Dist.] 2014, no pet.).
A title company will search title and produce a title commitment listing conditions that must be cured before issuing a policy; however, that is not the same as acting for the direct benefit of buyer, seller, or lender. The company’s goal is merely to achieve a level of certainty as to the status and chain of title such that it is willing to take the risk of insuring it.
The Title Commitment
The results of the examination of title are reflected in the title commitment. Production of the commitment begins shortly after the title company receives a copy of a signed sales contract and a check for the earnest money. Under the TREC 1-4 contract, the title company has 20 days to produce the commitment with an automatic 15-day extension if needed.
The commitment consists of Schedules A through D plus various notices and disclaimers. The schedules review the status of title, list title issues and defects that need to be addressed or cured before closing, and state any other preconditions to issuance of a title policy.
Schedule A indicates the type of transaction that will be insured plus the current owner of record and the legal description of the property to be conveyed (lot and block or metes and bounds). It also lists the proposed amount of the policy (for prospective owners, this amount should be the contract sales price) and the name of the prospective new owner (who will also be the insured under the owner’s policy).
Schedule B lists exclusions and exceptions to coverage including such matters as restrictions, setback requirements, and utility easements. Items 1 through 9 are “standard exceptions” and are general in nature, covering restrictive covenants; area and boundaries; community property; water rights; ad valorem taxes; terms of documents creating insured interest; homestead construction; subordinate liens and leases; and exceptions applicable to a short-form mortgagee policy. Items which follow these nine standard exceptions are called “special exceptions” pertaining to the property being conveyed. Look for easements, encroachments, and mineral leases. In certain cases, curative action will need to be taken in order to close with title insurance.
Note that the second item on Schedule B excepts (i.e., declares that the title policy will not cover) discrepancies, conflicts, or shortages in area or boundary lines, or any encroachments or protrusions, or any overlapping of improvements. By checking box 6.A.(8) on the TREC 1-4 contract, the buyer may amend the commitment and delete this “survey exception”—except for the part that refers to “shortages in area,” which will remain regardless of whether the survey exception is deleted or not. Why? Because title companies insure title, specifically the chain of title, not surveys.
Schedule C is central to the process. It lists problems such as unreleased liens and judgments— and the title company will routinely require payment and release of these. Other issues and requirements may appear on Schedule C, such as the requirement for a marital status affidavit, a not-same-name affidavit if there is a judgment in a name similar to that of the seller, an affidavit as to debts and liens, and other relatively easy clerical-level actions. More serious issues such as gaps in the chain of title, pending lawsuits affecting title, or heirship and intestacy problems will require a greater level of effort and time to cure. The commitment will indicate what must be done in the way of curative action if title is to be insured in the name of the new owner.
Schedule D is usually of less concern. It discloses, among other things, the price of the policy and the parties who will receive any part of the title policy premium.
The Texas Title Examination Standards
A special section of the State Bar of Texas (the Title Examination Joint Editorial Board) has since 1997 published the Texas Title Examination Standards, a set of guidelines to be used by practitioners in curing various title issues. While these do not have the force of law, they are an instructive and influential resource for those seeking to follow best practices. In working with (or against) a title company or its attorney on a thorny title issue, indicating that one is following these standards may provide a useful edge.
Here is a trivial but common example: What if a prior deed in the chain of title refers to a grantee as “John J. Jones” but the deed out of Mr. Jones is signed by “John Jones?” Title Examination Standard 3.20 states “Unless otherwise put on inquiry, an examiner may presume that the use of a middle name or initial in one instrument and its nonuse in another instrument does not raise an issue of identity that affects title.”
Standard 17.10 is an historical favorite: “A title examiner should determine whether title to the land under examination has been severed from the sovereign. Title that has not be severed [by grant or patent] from the sovereign [i.e., the Crown of Spain or the Republic of Mexico] belongs to the State of Texas.”
Curing Objections in the Commitment
Paragraph 6.D of the TREC 1-4 contract provides a blank for insertion of a time period during which the buyer may object to issues raised by the title commitment. The time period inserted in this blank is usually 7 to 10 days—but if title problems are anticipated, then prudence suggests that more time should be allowed. If the buyer does not make timely objections, any such issues are waived. Despite a buyer’s waiver, however, the title company may insist that Schedule C items be cured before a title policy issues. It is, after all, the title company’s liability that is on the line. If the buyer raises timely objections then the seller must cure them or paragraph 6.D of the TREC contract provides that the contract may be terminated:
Provided Seller is not obligated to incur any expense, Seller shall cure any timely objections of Buyer or any third party lender within 15 days after Seller receives the objections (Cure Period) and the Closing Date will be extended as necessary. If objections are not cured within the Cure Period, Buyer may, by delivering notice to Seller within 5 days after the end of the Cure Period: (i) terminate this contract and the earnest money will be refunded to Buyer; or (ii) waive the objections. If Buyer does not terminate within the time required, Buyer shall be deemed to have waived the objections.
Affidavits as a Means of Curing Objections
According to Standard 13.20 of the Texas Title Examination Standards, a title “examiner may rely upon an affidavit unless the examiner has a reasonable basis to question its reliability.” Accordingly, the use of affidavits as curative tools at closing is common.
Comments to Standard 13.20 go on to say that “an examiner may find it necessary to rely upon affidavits in the interpretation of title documents, clarification of title ownership, or establishment of title. In deciding whether to rely upon an affidavit, the title examiner may consider relevant factors such as:
(1) the date on which the affidavit was made and, if recorded, the length of time it has been recorded;
(2) whether the party or parties making the affidavit were interested or disinterested;
(3) the completeness of the affidavit, whether it recites facts or merely draws conclusions, and whether it discloses the basis of the maker’s knowledge;
(4) the value of the interest in the property under examination;
(5) whether more reliable and readily obtainable proof is available; and
(6) the cost and feasibility of alternative procedures to establish title.
“On many occasions, the examiner has no practical alternative but to rely upon an affidavit. . . . [However, an] examiner should be very hesitant to rely upon an affidavit in lieu of more reliable and readily obtainable proof, such as a conveyance or the existing proceedings of a court of record.”
Types of Title Policies
Two policies are usually issued in Texas: one for the buyer (the T-1 owner policy) in the amount of the sales price of the land and improvements; and one for the lender (the T-2 loan policy, formerly called the “mortgagee policy”) for the value of the property or the amount of the loan, whichever is less. If the property is intended to be residential homestead then the title policies that will be used are T-1R and T-2R.
The owner policy continues so long as the insured retains an estate or interest in the land but terminates when the insured owner transfers title to the property for valuable consideration—which need not be monetary, only something of benefit. It does not necessarily end when the insured dies, however, since heirs and legal successors who take title automatically or by operation of law continue to be covered.
A relevant point for real estate investors: if the investor transfers title to the investor’s LLC for asset protection purposes, that would be a voluntary transaction of benefit to the owner (not automatic as a result of operation of law); thus the LLC would not be considered to be an insured without the purchase of an additional-insured endorsement to the original owner policy.
For lenders, the loan policy terminates when their note matures and the four-year statute of limitations for foreclosure on the lender’s lien expires.
A real estate investor will not get a loan on Texas property from an institutional lender without a T-2 loan policy, so plan on using a title company if the intent is to borrow purchase-money from a bank. A private hard-money lender may do the deal without title insurance, however (so long as the property is not homestead), since the private market is far less regulated.
Continuing Coverage for Warranties Made by the Insured Owner
Notwithstanding the above, owners can continue to be covered under a T-1 policy after transferring the property, even if done for valuable consideration, “so long as the Insured shall have [continuing] liability by reason of warranties [that the Insured previously made] by reason of warranties [general or other title warranties contained] in any transfer or conveyance of title [made by the Insured].” (T-1 policy, continuation of insurance provision, paragraph 2). This is sometimes called warrantor’s coverage. “The effect of this provision is to protect an insured who subsequently conveys his interest against any loss occasioned by a defect in the title warranted [by the insured in] the conveyance.” Southwest Title Ins. v. Plemons, 554 S.W.2d 734 (Tex.Civ.App.—Dallas 1977).
Note, however, that if an insured transfers title for consideration by means of a special (rather than general) warranty deed, warrantor’s coverage ends with the conveyance. Stewart Title Guaranty Co. v. Lunt Land Corp., 347 S.W.2d 584 (Tex. 1961). Why is this true? Because breach of a special warranty (which warrants title by, through, or under the grantor but not otherwise) accrues only as a consequence of the insured’s own actions during the period of ownership.
Owner’s Coverage is a Form of Indemnity of Title
As is the case with any insurance policy, a policy of title insurance is a contract of indemnity between insurer and the insured. “A title insurance policy is a contract of indemnity that imposes a duty on the insurance company to indemnify the insured against losses caused by defects in title. The alleged defect must involve a flaw in the ownership rights of the property to trigger coverage. An irregularity that merely affects the value of the land, but not the ownership rights, is not a defect in title.” McGonagle v. Stewart Title Guaranty Company, 432 S.W.3d 535 (Tex.App.—Dallas 2014, pet. pending). In other words, a title policy makes no assurances as to value or price, present or future.
Marketability Versus Indefeasibility of Title
A Texas T-1 title insurance policy insures against “lack of good and indefeasible” title (see section 3 of the T-1 form under Covered Risks), a slightly lower bar than the good and marketability standard most people assume is the case. This has a statutory basis contained in Insurance Code Section 2502.002: “An insurance company may not insure against loss or damage by reason of unmarketability of title.”
The distinction between marketability and indefeasibility goes back to the Great Depression when many properties were sold at sheriffs’ sales. Issues of marketability were raised, and this led to Texas adopting the “good and indefeasible” title rule—stating, in effect, that your title is assured to be better than anyone else claiming it, but we’ll leave the marketing to you.
Interestingly, Title Examination Standard 2.10 states “All title examinations should be based on marketability of title. A marketable title is a record title that is free from reasonable doubt such that a prudent person, with knowledge of all salient facts and circumstances and their legal significance, would be willing to accept it. To be marketable, a title need not be absolutely free from every possible suspicion. The mere possibility of a defect that has no probable basis does not show an unmarketable title.”
What to make of this apparent conflict? The answer may be that in Texas one should examine title with marketability in mind even though a title company may insure only to the standard of good and indefeasible title.
Title Insurance Rates
The cost of title insurance is set by the Texas Department of Insurance which regulates this industry pursuant to Title XI of the Texas Insurance Code (the “Texas Title Insurance Act”). The form of a title insurance policy and the various available amendments are prescribed. The basic premium for a $100,000 policy is less than a $1,000, which is a one-time fee for coverage that lasts as long as the buyer has an insurable interest in the property. A formula applies for amounts higher than that. Hearings on rate increases occur biennially in even-numbered calendar years. Further information is contained in the Texas Title Insurance Basic Manual which can be found at https://www.tdi.texas.gov/title/titleman.html.
It is customary in Texas for the seller to pay the cost of the buyer’s owner policy. However, this is negotiable. It is all a question of price.
Exclusions and Exceptions to Owner’s Coverage
As with any insurance policy there are exclusions, exceptions, and conditions. The residential owner’s policy expressly excludes such items as building and zoning ordinances; condemnation; title problems created by or undisclosed by the insured, or arising from fraud by the insured; title problems that result in no actual loss; access issues; refusal of anyone to lend money; and physical condition of the land.
Exceptions are specific limitations on coverage. These include standard printed exceptions on Schedule B—restrictive covenants and deed restrictions; the survey exception (“discrepancies, conflicts, or shortages in area”) which can—and for buyers usually should—be deleted for a fee; homestead, community and survivorship rights; the exception for riparian rights, water-rights, and tidelands; the tax exception, including rollback taxes; the mechanic’s lien exception; the exception for leases and subordinate liens; the rights of parties in possession; and, if there is no survey, easements and encroachments. The title company may also add special exceptions that it deems necessary after doing its research.
Title companies do not insure fraudulent conveyances or preferential transfers (transfers made to avoid payment of creditors). Excluded is “any claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction vesting the Title as shown in Schedule A is (a) a fraudulent conveyance or fraudulent transfer, or (b) a preferential transfer for any reason not stated in Covered Risk 9 of this policy.” So if one is engaged in edgy practices, do not look to a title company for assistance or indemnification.
Optional Added Coverage for Buyers
Two available upgrades are almost always a good idea for buyers:
(1) Survey Coverage. For a modest extra cost a buyer can obtain an endorsement covering cases where the survey does not correctly delineate boundaries or easements, resulting in loss. Real estate lawyers see a good number of these cases.
(2) Shortages in Area. An amendment should be made to the standard printed exception as to discrepancies, conflicts, shortages in area of boundary line, encroachments, or protrusions, or overlapping improvements should be amended to read “shortages in area.” Again, the cost is minimal compared to the potential benefit. The TREC 1-4 contract offers this option at paragraph 6.A(8).
Minerals and Coverage for Surface Damage
Title insurance companies are not required to insure the mineral estate (Ins. Code Sec. 2703.0515). Title companies have traditionally taken the view that the job of determining title to minerals belongs not to title insurers but to landmen and oil and gas attorneys, although the title company will provide copies of mineral leases and conveyances if a buyer or the buyer’s attorney wishes to review them prior to closing (never a bad idea).
Since minerals in producing regions have usually long-since been conveyed away (especially in the typical urban residential setting) the principal concern of a homeowner is damage to the surface of the land (surface estate) by a mineral-interest holder seeking to gain access to underground minerals. Optional endorsements are available that will protect against damage to the surface estate (T-19.2 or T-19.3). The Texas T2-R already protects lenders against such surface damage. As to the buyer, the likelihood of a surface damage issue is nearly nonexistent in larger developments but might well be worth the extra cost of an endorsement if the property is rural and undeveloped.
Community Property and Heirship Property
Texas is a community property state and, as such, all property acquired by either spouse during marriage is presumed to be a community asset (Fam. Code Sec. 3.003). It is common for a title company to either require joinder of a seller’s spouse on a deed or, in the alternative, a marital status affidavit and a non-homestead affidavit.
If someone in the chain of title died without a will, one should also expect that the title company will require a conveyance of some kind (perhaps a special warranty deed) from each and every heir and, if an heir is deceased, from the heirs of that heir. Alternatively, the title company may be satisfied with an affidavit of heirship if there are no other heirs and the circumstances of family history can be sufficiently well established. It can get complicated and expensive to cure defects in heirship property.
Differences between Title Companies
Since rates are regulated, there is nothing to gain from comparing title companies for the cheapest policy. Title companies do, however, vary in at least two significant respects: first, in the level and quality of service they (or a particular closer) may provide; and second, in their willingness to “insure around” certain potential defects or insure nonstandard transactions (wraparounds, trusts, and the like). Title companies are by nature conservative institutions. If a title company sets out requirements that are difficult or impossible to satisfy—and this happens—then it may be telling you something: the underwriter does not want to do this deal. The title company may in fact just plainly say so. Accordingly, it may be necessary to shop title companies until one is found that is willing to insure your transaction.
Closing Transactions in an Attorney’s Office
Some lawyers enter into an arrangement with title underwriters to act as “fee attorneys” meaning these attorneys are permitted to close transactions in their offices and issue title policies as an agent for the underwriter. Effectively, one is still dealing with a title company, just through an attorney who is its agent. Of course, if title insurance is not being issued, there is no necessity for the attorney to have a relationship with a title underwriter.
While this arrangement may seem convenient, some argue that it is a conflict of interest—that the lawyer’s job is to advocate for the buyer or the seller or the lender, not merely to act as neutral escrow officer in order to collect insurance premiums and fees. We agree. The interests of buyers and sellers differ, sometimes immensely, and lawyers should choose a side and represent it fully. Since real estate documents can often be highly customized to favor one party or another, a lawyer trying to represent everyone may mean that no one gets adequate representation.
An owner policy is not required by law, nor is it mandated that every transaction close at a title company. It is always possible to obtain a title report or abstract, thereby providing a comfort level regarding the status and chain of title, the absence of liens, and the like—and then proceed to close on that basis. Many real estate attorneys who are not fee attorneys are equipped to do this sort of closing.
The Title Company’s Duty to Defend
If a title defect or lien appears after closing, the title company must investigate and:
(1) commence legal proceedings to clear title;
(2) indemnify the insured pursuant to the policy;
(3) reinsure the title to the property at current value;
(4) indemnify another insurer if another company does the reinsuring; or
(5) cure the defect or obtain a release of the lien.
If the title company does not take one or more of the above actions, it can be sued by the insured for breach of contract. Note that the company’s duty to defend against a claim is contingent upon and activated by the insured providing timely written notice of the defect or lien. The duty to defend is not triggered by demands for money and the like that do not constitute a true cloud on title.
The Title Company’s Liability for Damages
Recovery under an owner’s policy is limited to the owner’s actual monetary loss or the amount of the policy, whichever is less. “The only duty of a title insurer is to indemnify the insured against losses caused by a defect in title” states the court in the McGonagle case (cited above), in which the plaintiffs alleged liability on the part of Stewart Title for failing to point out the existence of restrictive covenants. In a judgment that might alarm many real estate investors, the court went on to conclude that Stewart had no such duty. Accordingly, it should be part of an investor’s routine procedure to specifically request copies of any applicable restrictive covenants from the title company and do so before expiration of the option period.
Making a Claim against the Title Company
In an insurance contract dispute, the initial burden falls on the insured to establish coverage under the terms of the policy. Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 188 (Tex.App.—Houston [14th Dist.] 2003, pet. denied). The insured must give the title company prompt notice and cooperate in furtherance of the claim. The old requirement that the policy itself be produced in order to recover has been eliminated. Payment must be made by the company within 30 days of determination of liability and the extent of the loss. If the title company settles a covered claim, it is subrogated to the rights of the insured as to that claim (i.e., it assumes the insured’s right of recovery).
The usual four-year statute of limitations for written contracts applies, commencing when a claimant knew or, through the exercise of ordinary diligence, should have discovered the breach and ensuing injury (sometimes called the “discovery rule”). This places a duty upon policyholders to thoroughly read closing documents and discover obvious errors. In one case, the title company was supposed to insure title to both lots 8 and 9; however, the warranty deed and the deed of trust referred only to lot 9. The court ruled that the claimant should have reasonably raised this issue at closing and not waited over nine years to bring his claim. Dunmore v. Chicago Title Insurance Company, 400 S.W.3d 635 (Tex.App.—Dallas 2013, no pet.).
Lessons for Real Estate Investors
Working with title companies to get deals closed is an inescapable part of being a real estate investor. In doing so, one learns a couple of important lessons. The first of these is respect for the chain of title. Grantor and grantees must form a sequential link that conveys the same property (correctly described) over the course of the property’s history. The legal description must be consistent and correct. Spousal interests must be accounted for since Texas is a community property state. Owners in the chain who are deceased must have a will or an affidavit of heirship (at the very least). And so forth. Experienced professional investors are careful about all of these matters, preferring to use an attorney for most transactions rather than trying to DIY the legal documentation which may then require expensive clean-up later. There is a saying that when one acts as one’s own attorney, one has picked the most expensive attorney there is—since the clean-up can be much more costly than doing the documentation correctly in the first place.
A second important lesson is to view every transaction from the perspective of a future title company and anticipate their objections. Underwriters will never admit it, but they just love to raise these, which is the primary purpose of Schedule C. Anticipate objections and eliminate them in advance by documenting the conveyance accordingly.
Information in this article is provided for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well as we are not tax advisors. This firm does not represent you unless and until it is retained and expressly retained in writing to do so.
Copyright © 2023 by David J. Willis. All rights reserved. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com.