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2009 Hot Legal Topics.Title Insurance


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2009 Hot Legal Topics.Title Insurance

  2. 2. A title is the evidence, of right, that a person has to the ownership and possession of land. It is possible that someone other than the owner has a legal right to the property. If that right can be established, this person can claim the property outright or make demands on the owner as to its use. WHAT IS A TITLE?
  3. 3. <ul><li>A title policy insures the condition of your title or ownership rights to a certain piece of property </li></ul><ul><li>Before a policy of title insurance can be issued in North Carolina, a title examination must be conducted under the supervision of an independent attorney licensed to practice law in North Carolina </li></ul><ul><li>This requirement has directly led to North Carolina having one of the very lowest costs in this country, to the owner, for assuring title. </li></ul>WHAT IS A TITLE?
  4. 4. <ul><li>The attorney carefully researches all relevant recorded documents affecting ownership of the property being examined necessary to determine the status of the title. The attorney will then submit a title opinion to the company </li></ul><ul><li>Typically, the title company will then issue a &quot;binder&quot; or &quot;commitment&quot; to the lender and owner, which obligates the company to insure the title as described by the attorney, with certain limitations and requirements </li></ul>WHAT IS A TITLE?
  5. 5. <ul><li>Even the most thorough search will not reveal any &quot;hidden defect&quot; that is not shown on the public records. Such a defect may be a problem caused by an inadequate survey, a clerical error, confusion over names, forgery, fraud, unrecorded claims for improvements or numerous other possible problems. Careful attorneys can not reasonably be expected to discover title problems that are not revealed in the public records. Therefore, the examining attorney is not responsible to you for dealing with these issues when they arise after closing. </li></ul>WHAT IS A TITLE?
  6. 6. <ul><li>Without title insurance, the companies advertise that you are on your own! </li></ul><ul><li>Although title insurance does not guarantee that title defects do not exist or will never occur, it supposed to insure you against possible losses through certain claims against your title as a result of conditions not revealed on your policy. </li></ul>WHAT IS A TITLE?
  7. 7. <ul><li>“ Do I need Title Insurance? Most definitely! Title insurance is a means of protecting yourself from financial loss in the event that problems develop regarding the rights to ownership of your property. There may be hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim . ” </li></ul>ACTUAL VERBAGE SEEN ON THE WEBSITES OF SOME NC TITLE COMPANIES
  8. 8. ACTUAL VERBAGE SEEN ON THE WEBSITES OF SOME NC TITLE COMPANIES <ul><li>“ What can make a Title Defective? Any number of problems that remain undisclosed after even the most meticulous search of public records can make a title defective. These hidden &quot;defects&quot; are dangerous indeed because you may not learn of them for many months or years. Yet they could force you to spend substantial sums on a legal defense, and still result in the loss of your property.” </li></ul>
  9. 9. <ul><li>So what happens if you are a successor in interest and you receive a Claim of Lien via certified mail just after you closed on your house? </li></ul><ul><li>What can you expect if you’re the supplier or subcontractor filing a Claim of Lien against an otherwise innocent home-purchaser? </li></ul>
  10. 10. SCENARIO 1 <ul><li>Supplier S has an open account with Builder B. </li></ul><ul><li>Builder B has built a spec house with S’s materials. </li></ul><ul><li>B enters into an Offer to Purchase Agreement with first time home purchasers, Mr. & Mrs. Naïve. </li></ul><ul><li>Naïves obtain a loan for 80% and use up all of their savings for the remaining 20% necessary to purchase the property. </li></ul><ul><li>Lender requires the purchasers to obtain title insurance. </li></ul>
  11. 11. SCENARIO 1 <ul><li>At closing B fails to disclose S, or commits fraud by claiming S has been paid in full. </li></ul><ul><li>Closing Attorney charges the Naïves and purchases a title policy, effective the date of closing. </li></ul><ul><li>30 days after the closing S files an inchoate claim of lien on the property. </li></ul><ul><li>Is the claim of S recoverable from the title policy? </li></ul>
  12. 12. IN THE PAST…. <ul><li>Taxes and special assessments that become due and payable subsequent to the date of policy; </li></ul><ul><li>Covenants or restrictions appearing in the Public Records (however if damages or loss resulted prior to the date of the policy they would be covered); </li></ul><ul><li>Easements or servitudes appearing in the Public Records; and </li></ul><ul><li>Any lease, grant or reservations of minerals or mineral rights appearing in the Public Records. </li></ul>A policy’s exceptions and limitations would include the following:
  13. 13. A NEW TREND…. <ul><li>ADDENDUM TO SHORT FORM RESIDENTIAL LOAN POLICY – SCHEDULE B </li></ul><ul><li>In addition to the matters set forth on Schedule B of the policy to which this addendum is attached, this policy does not insure against the loss or damage (and the company will not pay costs, attorneys’ fees or expenses) that arise by reason of the following: </li></ul><ul><ul><li>Any lien, or right to a lien for services, labor, material </li></ul></ul><ul><ul><li>or rental equipment heretofore or hereafter furnished, </li></ul></ul><ul><ul><li>imposed by law and not shown on the public records. </li></ul></ul>
  15. 15. SO WHERE DOES THE DENIAL LEAVE THE SUPPLIER? <ul><li>You are left with the remedy of proving the validity of the lien claim, suing the homeowner and foreclosing on the successor in interest’s interest in the property. Assuming the inchoate lien is valid and pre-dates the interest of the Lender, the supplier should get paid out first. </li></ul>
  16. 16. SO WHERE DOES THE DENIAL LEAVE THE SUPPLIER? <ul><li>The homeowner faces foreclosure with no recourse against anybody but the builder. They are most likely in default in the terms of their mortgage. Perhaps they also have a claim against the closing attorney for negligence, if they can show that they paid for a product that is inferior to others in the market. If all title companies exclude this coverage, then the attorney has not committed a negligent act. </li></ul>
  17. 17. WHAT CAN “I” DO? <ul><li>Be diligent – know your builders and stay on top of accounts </li></ul><ul><li>File liens early – these new contractual changes only apply to inchoate liens not on the public record </li></ul>
  18. 18. WHAT CAN “I” DO? <ul><li>Educate people you know are in the industry – once people realize they’re buying an inferior product they may shop around and use another title company that is willing to properly insure purchasers and lenders </li></ul><ul><li>Contact your legislatures and trade groups – policy costs are legislated – why are policy contents and coverages not legislated as well? </li></ul>
  19. 19. LEGISLATIVE DEVELOPMENTS <ul><li>Senate Bill 803 </li></ul><ul><li> </li></ul><ul><li>Sponsored by Senator Tony Rand, 19 th District </li></ul><ul><ul><li>Bladen & Cumberland Counties </li></ul></ul><ul><ul><li>(910) 222-8096 </li></ul></ul><ul><li>Whose behind the legislation? </li></ul><ul><ul><li>Guess??? </li></ul></ul>
  20. 20. PURPOSE OF SB 803 <ul><li>According to the proposed Bill… </li></ul><ul><ul><li>“ To address hidden liens to protect third-party purchasers for value and lenders in real estate transactions” </li></ul></ul><ul><li>What this really means… </li></ul><ul><ul><li>To limit the title insurance companies’ exposure to ( hidden ) lien claims </li></ul></ul>
  21. 21. WHAT IS A “HIDDEN” LIEN <ul><li>Owner hires Contractor to perform work </li></ul><ul><ul><li>Begins work on January 15 </li></ul></ul><ul><ul><li>Concludes work on January 30 </li></ul></ul><ul><li>Owner sells property February 15 </li></ul><ul><li>Contractor, having never received payment from Owner, files lien on February 18 </li></ul><ul><li>Contractor’s lien is valid from (relates back to) January 15, his first date of work…now what? </li></ul>
  22. 22. WHAT IS A “HIDDEN” LIEN <ul><li>In other words… </li></ul><ul><ul><li>Contractor filed a lien on a property for work performed prior to sale, but after the property was sold. </li></ul></ul><ul><ul><li>The lien is valid, but the person with whom Contractor “contracted” no longer owns property. </li></ul></ul><ul><ul><li>The lien attaches to the property, in the hands of the new owners who had no idea they were exposed to a lien… a hidden lien </li></ul></ul>
  23. 23. WHAT IS A “HIDDEN” LIEN <ul><li>So, who is responsible for the lien? </li></ul><ul><ul><li>The property, in the hands of the new purchaser, is subject to the lien…so the new purchaser </li></ul></ul>
  24. 24. WHAT IS A “HIDDEN” LIEN <ul><ul><li>But…that’s why the new purchaser has TITLE INSURANCE! </li></ul></ul><ul><ul><ul><li>To insure that the new purchaser is protected from defects or claims against the title of the property, like liens </li></ul></ul></ul><ul><ul><ul><li>New purchaser would “tender” the lien to the Title Insurance Company to pay or defend. </li></ul></ul></ul>
  25. 25. LEGISLATIVE DEVELOPMENT REVISITED <ul><li>What does the proposed legislation do? </li></ul><ul><ul><li>“ A claim of lien shall not be effective against real property owned by purchasers…whose interest has been registered in the office of the register of deeds of the county…in which the property is located after the date of first furnishing of labor or materials…but prior in time to the filing of the claim of lien.” </li></ul></ul>
  26. 26. LEGISLATIVE DEVELOPMENT REVISITED <ul><li>In other words… </li></ul><ul><ul><ul><li>If the owner sells the property before the lien is filed, then you loose your lien! </li></ul></ul></ul><ul><ul><ul><li>Even if you are within you statutory period of time (120 days) to file the lien! </li></ul></ul></ul>
  27. 27. EXAMPLE REVISITED (UNDER PROPOSED LEGISLATION) <ul><li>Owner hires contractor to perform work </li></ul><ul><ul><li>Begins work on January 15 </li></ul></ul><ul><ul><li>Concludes work on January 30 </li></ul></ul><ul><li>Owner sells property February 15 </li></ul><ul><li>Contractor, having never received payment from Owner, files lien on February 18 </li></ul><ul><li>Contractor’s lien is valid from (relates back to) January 15, his first date of work </li></ul><ul><ul><li>But, under the new legislation, Contractor lost his lien rights on February 15! </li></ul></ul>
  28. 28. EXAMPLE REVISITED (UNDER PROPOSED LEGISLATION) <ul><li>What does this mean for Title Insurance Companies and Contractors? </li></ul><ul><ul><li>Title Insurance Companies no longer have to pay or defend against “hidden” liens. </li></ul></ul><ul><ul><li>Contractors loose their lien rights if the property is sold before lien is filed. </li></ul></ul><ul><ul><ul><li>No longer will the lien attach to the property in the hands of the new purchaser </li></ul></ul></ul><ul><ul><li>Direct attack by Title Insurance Companies against the lien rights of Contractors </li></ul></ul><ul><ul><ul><li>If Contractor doesn’t file his lien prior to the sale of the property, then Contractor is out of luck. Title Insurance Company not paying! </li></ul></ul></ul><ul><ul><li>Commentary </li></ul></ul><ul><ul><ul><li>Title Insurers are legislating themselves our of work! </li></ul></ul></ul>
  29. 29. WHAT CAN “I ” DO? <ul><li>Be diligent </li></ul><ul><ul><li>Keep project info (owner, dates, location) </li></ul></ul>
  30. 30. WHAT CAN “I ” DO? <ul><li>File liens early </li></ul><ul><ul><li>If this legislation is passed, then waiting to file liens could actually kill your lien rights </li></ul></ul>
  31. 31. WHAT CAN “I ” DO? <ul><li>Contact your local Representatives and oppose the legislation </li></ul><ul><ul><li>Get involved in trade associations and vocalize opposition to SB 803; Protect your lien rights! </li></ul></ul>
  32. 32. THANK YOU! THANK YOU! 1720 Hillsborough Street, Suite 200 | Raleigh, NC 27605 Tel: 919-510-8585 | Fax: 919-510-8570 1200 East Morehead Street • Suite 251 • Charlotte, NC 28204 Phone: 704-496-7495 • Facsimile: 704-496-7480