Posting for

Thursday, October 1, 1998

by: Bert Rush

brush@firstam.com

TITLE UNDERWRITING/COMMERCIAL PROPERTIES/LEASEHOLD POLICIES

At a National Accounts Sales meeting two weeks ago--and last week at a Special Underwriters Meeting--Cliff Morgan and Paul Hammann (Santa Ana) annnounced some "new" underwriting initiatives calculated to please our customers and aggravate the competition.

First, we should no longer require surveys in order to issue extended coverage loan policies--including the EAGLE and second-generation EAGLE loan policy. Actually, Cliff says this isn't really new--he has felt this would be safe practice for many years, but he hasn't promoted the idea thinking not many underwriters were ready for it. But now, after more than a decade of not requiring surveys for loan policies of $5 million or less, the time has come.

Paul offers this caution: Make sure your "good customer" lenders are agreeable before marketing this idea in your area. Lenders may have their own reasons for wanting surveys--and we don't want to be at cross-purposes with them in their (and our) marketplace.

And, of course, if state regulations require a survey, or if there's some indication of a potential problem which a survey might disclose or rule out--then we should require one.

Having said all of the above, this initiative can be used right away.

Second, we will soon be ready to offer to insure lessees, by endorsement, as additional insureds under an owner's policy --without performing a datedown and without charge for the endorsement. The form of this endorsement is now being worked on. The issues to be navigated are adding value to the owner's policy without diminishing or decreasing the owner's coverage, and without harming our efforts to market leasehold policies to lessees. The final form of this endorsement will likely limit each lessee's indemnity coverage to $25,000--with a cap of $1 million or so for all lessees under a given owner's policy--and provide no coverage for legal expenses other than the indirect benefit provided by the owner's policy. In other words, if title to a shopping center is disputed we won't be hiring a different law firm for each tenant.

Third, we should now be offering to issue leasehold owner's policies without an "engineered" legal description (Cliff's term), and without the necessity of recording the insured lease. Instead, we will require that the legal description to be insured be locatable by reference to a subdivision map. And, if the lease is not to be recorded, I suppose we should also require that the insured lessee or its successor-in-interest be in actual possession of the property throughout the period covered by the policy. This will be discussed at upcoming National Regional Underwriter Meetings in October and November. Till then anyone needing details may call the Senior Underwriting Dept. in Santa Ana.

Questions, comment, argument? Just press the "reply" button and send your thoughts....

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Following Thursday's posting, Hal Miller (VT) writes:

Does the "no survey" requirement also apply to commercial loan policies under $5,000,000.00, or just residential?

Reply to Hal: The no survey initiative applies to all loan policies--residential and commercial.

Meanwhile, Gregory Chaparro writes:

I was recently asked to issue a leasehold mortgagee's policy without having the lease or memorandum of lease recorded. After discussing the issue with Wayne Condict, I told the borrower's counsel a memo of lease would be required. In response, borrower's counsel offered a landlord consent, estoppel and subordination agreement signed by all parties to the lease that we could record to evidence the lease.

While we were considering his proposal, he got nervous and drafted memoranda for all leases. What do you think about the viability of his proposed method for getting the lease of record?

Reply to Gregory: If the landlord signed a consent which described and acknowledged existence of the lease, then I guess he was offering you everything you needed. I also suppose the reason borrower's counsel objected to recording a memoranda of lease is that he wanted to avoid payment of a transfer tax(?) Perhaps he got "cold feet" when he decided his approach wouldn't achieve his purpose--but would instead delay funding and closing.

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Following up on last Thursday's posting, Frank Melchior (Iselin, NJ) writes:

While I generally agree that issuing loan policies without a survey exception and without first requiring a survey is a minimal risk proposition, I urge you (and Cliff) to reconsider the advisability of extending that policy to construction loans unless the policy is issued before the commencement and is NOT "down-dated" during construction.

I've seen too many instances where the footings, foundations, etc. were mislocated and -- because of exuberant lending practices for good borrowers (customers) -- there are sufficiently many occasions (especially just after the periodic depression in spec building) where lenders become owners with serious encroachment problems as a result of the mislocation of the foundations.

For the above reasons, I would think that, in construction loans, we might want to continue to get at least foundation surveys before insuring over survey matters.

Reply to Frank: I've discussed your reply with Cliff--and here's our thoughts. First, the potential problem you describe hasn't been seen much in our experience. We've issued foundation endorsements (insuring that the foundation for improvements is on the insured land, doesn't violate CC&Rs or--in some cases--setback requirements) on loan policies for more than 35 years here in California. Typically these are issued without a survey--and lately without so much as a drive-by inspection by a title officer (examiner). Our claims experience is practically nil--I remember one claim up near Placerville (Gold Rush country) and another in San Diego. So it seems a reasonable risk to take--even in our current environment of 125% LTV loans where the equity cushion is gone from the loan policy.

Second, we're not telling lenders they shouldn't get surveys--and perhaps some should for the reasons you describe. We're just saying that the title underwriter should not require a survey in order to issue an extended coverage loan policy. Let the customer decide.

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Following up on Frank Melchior's (Iselin, NJ) objection to the initiative for issuing (virtually) all loan policies without a survey, Jim Dondero (Grand Rapids, MI) writes:

I respectfully disagree with this aspect of the new "assumption of risk" philosophy, and agree with Frank as to new construction. Especially in the commercial context with maximum financing, it does not take much of a "mis-location" of improvements to create a big loss on a single claim. In fact, Bert, I seem to recall a California "Claim Chronicle" where the top floors of an office building had to be removed due to height restrictions in favor of a neighboring air base, resulting in a rather healthy loss. N'est pas?

Reply to Jim: I remember the claim--it was Chicago Title's as I recall. The property was in Walnut Creek (inland of the Bay Area), near the civilian airport.

So that's one example in, what, the past 15 years? And that claim presented issues of public safety--which is very rare. How often does a misplaced foundation result in a building being demolished? (Now if you were a real Claims Chronicles junkie you'd recall the "Tell It to the Marines" story from Laguna Hills--where they did demolish an office/storage facility built on land subject to restrictions in connection with operation of the El Toro Marine Corps Air Station. Another safety issue--supposedly. In that case we had issued an owner's policy, we bought the land, and sufftered a total loss [after removal of the restrictions and resale of the property] of maybe $600,000.) But I digress--thanks for the reply.