Posting for

Monday, October 12, 1998

by: Bert Rush

brush@firstam.com

MARKETABILITY COVERAGE/THE VALUE OF TITLE INSURANCE/CLOUD ON TITLE

One of the great benefits of title insurance, and perhaps the least understood, is coverage against unmarketability of the title.

Look at it this way: If you have fire insurance you will have a covered claim only when you have a fire. You have life insurance you're covered only if you die. But with title insurance you're covered against a potential title defect--even where there's no adverse claim and no current problem.

Consider the recent decision in Nelson v. Anderson, 286 Ill.App.3d 706, 676 N.E.2d 735 (1997).

In April 1993 Jon and Anne Nelson contracted to sell their home to Walter and Shelly Anderson. The contract required buyers to pay $1,500 earnest money, with the contract balance payable upon delivery of title free and clear of encumbrances except those mentioned in the contract. Sellers were to obtain a preliminary (title) report which buyers would have 10 days to object to. If buyers objected to any matter disclosed by the report then sellers would have 90 days to satisfy the objection(s).

Chicago Title issued a preliminary report disclosing that the home was located less than 10 feet from the property's north boundary line, in violation of a setback covenant contained in the applicable subdivision plat.

In fact, it turned out the house was only 4.7 feet from the northern boundary.

Buyers objected and sellers obtained written assurance from the title company that for an additional fee it would, as the Court said, "insure over the building line exception." The Court's decision is unclear as to how this "insuring over" was to be done--and whether "forced removal" language may have been involved. Let's assume Chicago Title offered to insure over by simply deleting the exception for the setback violation.

In any case, buyers found the title unacceptable and proceeded to buy another house. Sellers sold the property to someone else for a lesser price.

The buyers filed suit to collect the earnest money, and sellers sued for damages. The cases were consolidated for trial.

The trial court ruled in favor of buyers and the sellers appealed.

The Court of Appeal affirmed, holding that the title was sufficiently clouded by the violation in question as to be unmarketable. In so holding the Court said that a reasonable person could fear both the threat of future litigation and an unfavorable effect on market value of the property. The Court noted that the nature of the covenant involved would allow any other homeowner in the subdivision to sue to enforce the restriction, and said "(t)he law has long recognized that a buyer cannot be compelled to buy a lawsuit."

Comment: I've heard it said no title is perfect--there will likely be potential issues and unanswered questions after a careful exam of the chain of title to almost any property. Heck--in years past we had a local "expert" who made the rounds as a speaker for service clubs and whoever else would listen, claiming that all property boundaries in south Orange County were mislocated by three feet.

But the question of whether or not a perceived "cloud" renders a given title unmarketable has no clear "plumb line" test. As the Court says in the Nelson case, it's a question of law for a court to decide.

Which means it's also something the average homeowner doesn't want to fool with. Can't blame `em. My guess is a court will usually tend to side with a buyer who has bailed out in these marketability suits.

Marketability questions can give rise to claims which are among the most challenging for our claims handlers --because if a prospective buyer isn't persuaded to accept our indemnity and offer to continue to insure over the matter, then where are we? If we hire outside counsel to quiet title we may stir up opposition--and it may take months or years to resolve non-issues in court, during which the frustrated insured owner/seller will feel they are in limbo.

And, even if the prospective buyer accepts our indemnity --what about the next time the issue might come up? Should we try to put the matter to rest now--or let sleeping dogs lie?

When you stop and consider the many ways a question of marketability might arise--an old unreleased mortgage, a missing signature in the chain of title, a transfer from a decedent without a probate or a right of survivorship, a "wild" deed or mortgage, an apparent violation of restrictions or covenants, an encroachment or question of boundary location, a questionable signature in the chain of title, a deed recorded long after the grantor was dead, a vesting in reliance on an off-record or illegible power of attorney, tax or judgment liens against a name matching a grantor's, ambiguous docs in the chain of title...not to mention the case we've seen where both vestees underwent sex change operations so that Harold became a Shirley and Janet became a Robert...enough!

These possibilities and more illustrate the value of marketability coverage provided by title insurance.

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

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Following Monday's posting Frank Melchior (Iselin, NJ) writes:

Your tale reminds me of one of our unforgettable New Jersey claims. It appears that a retired gentleman, a Mr. Keebler, owned a parcel of real property in central New Jersey which was insured by First American.

Mr. Keebler was under contract to sell and move to a retirement community. His purchaser's title company determined that a small (almost insignificant) piece of the land was claimed by the State of New Jersey as having once (in ancient history) been tidally flowed, and thus belonging to the State. [Parenthetically, it is immaterial whether the state's claim was good, if challenged the state having the burden of proof as to their claim, or whether it was a case resulting from the filing of a map by the state.] Since it is substantially cheaper to pay the state's blackmail and purchase the missing piece rather than take the litigation risk and expense of bringing a quiet title action, we decided to purchase the land. I forgot the amount the state charged but it was insignificantly small.

Unfortunately, the bureaucratic process involved in purchasing the land takes time . . . lots of it. We offered to insure the buyer, who refused.

While the wheels of government ground, ever so slowly, Mr. Keebler presented his bills for interest on his mortgage, his insurance and real estate taxes on a almost monthly basis until, finally, he was (inevitably) known as "the cookie monster" in the office.

After the state's grant of title finally came through, Mr. Keebler resold the property. Unfortunately, during the interim, the real estate market suffered a serious slump resulting in a substantially reduced purchase price from the earlier contract. Needless to say, First American also paid the difference in value.

This is another example of how a minor (in terms of dollars) title claim can rapidly escalate in value because of the question of marketability.

Reply to Frank: Oh yeah--how familiar. Sometimes at the end of the claim you just wish you'd bought the PIQ right at the outset and quickly resold it at a discount--taking a smaller net loss.