Posting for

Wednesday, December 13, 2000

by: David Dickson

ddickson@firstam.com

and: Midwest Counsel

SURVEY REQUIREMENTS (AND OWNERS)/ESCROW AND CLOSING/TITLE UNDERWRITING

David Dickson (Memphis) writes (originally to in-house counsel in the Midwest Region):

The recent Regional Counsel meeting brought an issue to my mind that has been discussed, off and on, here regarding our policy regarding requiring surveys on loan policies, a policy I have embraced. What duty does the closing/escrow officer have to the buyer/borrower regarding "disclosure" of the fact no survey has been obtained? Rather than elaborate my ideas and the questions that have been put to me from time to time I would welcome throwing the matter out for discussion.

Billy Rosenberg (Nashville) writes:

At the risk of appearing repetitious, since I imagine you all know how I feel about this issue, here are my two cents:

I think that the buyer of property should receive/obtain some sort of "survey" before closing on the purchase. I know I wouldn't want to purchase real estate without a survey, and I never would recommend otherwise. Where the purchase money lender requires a survey or mortgage loan inspection, this should suffice. If the lender does not require a survey of any sort, however, then the buyer should obtain (even if it's at his/her own expense) at least a mortgage loan inspection or the equivalent.

Our agents act on our behalf for the purpose of issuing title insurance. We have the argument that the agent's failure to discuss the ramifications of having/not having a survey are beyond the scope of the agency. That may not carry the day, however. Furthermore, where the agent is an attorney (or where we are closing the transaction, and have one of us touching the file), there may be an ethical (read "actionable malpractice") duty to the "unrepresented party" to advise clearly about the lack of a survey and what that means.

It continues to be my recommendation to all closing agents that the buyer be urged to purchase a survey/mortgage loan inspection if one is not already required by the lender or the seller is not providing one.

In the case of an ordinary refinance, I am not concerned. If a loan is for construction purposes, however, the buyer/borrower should be encouraged to purchase a three-tier survey; one prior to commencement of construction, again after the foundation footings are in place, and last when the construction is complete.

John Kohl, a surveyor in Nashville who is very active in the Tenn. surveyors' association, thinks that title companies and their agents should have a duty to explain to borrowers that the lender is getting survey coverage and the borrower is not. (John also thinks that there should be a law prohibiting the issuance of survey coverage without a survey, and that the TLTA should join with the surveyors to get it enacted.)

Gerard Knorr (Troy/Detroit) writes:

I am of the view that we and our agents should not hold ourselves out as experts in the area of the need for surveys to either lenders or purchasers. We are not experts and therefore we can not intelligently discuss surveys beyond the fact that we may require that the customer commission a survey of a particular type (usually an ALTA/ACSM survey) for our use when required to remove survey exceptions or to provide requested affirmative coverage. There are many different types of surveys which are certified to may different standards. Can we assume to know all the information of importance to a particular customer which might be disclosed by a survey certified to that particular matter. I, for one, think that a mortgage report or what is sometime generously referred to as a mortgage survey is of little if any value. There is only a weak if any certification of the correctness of the information disclosed on the report. If someone advised me to rely on a mortgage report that had an error guess who I would add as a defendant in the litigation alone with the surveyor? To advise a customer to rely on a mortgage survey may result our being required to pay for loses arising because the mortgage survey did not disclose or misdisclosed information that was of primary importance to the customer. This primary importance will no doubt arise after the customer discovers the easement or encroachment that was not disclosed on the mortgage survey.

I can't see a class action being successful where a claim is made that the title company or the closing agent somehow as a duty to recommend surveys. The problem for the closing attorney may arise if the attorney is also representing the party beyond the closing. That is really and attorney/client problem.

Rhonda Bundy (Memphis) writes:

When I was in private practice and acting like a lawyer, we made a big deal that all purchasers should get a survey (really a mortgage inspection report). But, I am convinced the survey issue caused more problems than it eliminated real risk. First, we lost some agent business because we were too particular. Then, often times, the survey received at closing has some minor problem, then Seller digs up their survey which was clean. Then, how do you explain to the normal home buyer which is right? And, no matter what, how to you really explain that the owner's title insurance policy excepts to matters disclosed by survey in hand and matters disclosed by an accurate survey (whatever that is).

As a closing operation and not a law office, I am under the impression that our role is to follow the contract. If the contract says survey waived, no further responsibility. If the contract says subject to review of survey, we order survey. No legal advice one way or another.

On residential purchases, now, with the EAGLE policy, I would think the purchaser would be getting much better coverage if we did not even consider looking at a survey. For 10% extra, they get full survey coverage without a survey. If we look at a survey and see problems, then they get policy with exceptions.

If First American is willing to take the risk, I would think that no one outside First American could or should complain.

David Dickson (Memphis) writes:

I guess my question is when do we require surveys? It is my understanding that we do not require surveys in most loan transactions. I think the exceptions are where we have reason to believe there may be survey problems. We have not been particularly successful in communicating this to our lender customers-many of whom would still require surveys even if we gave them the coverage. That gets us into the don't ask don't tell area. We are giving you the coverage, don't get a survey.

That takes us to owners coverage. Of course in Tennessee we have used the 1987-92 format owner's policy here since they were introduced in insuring residential transactions. We do not use the "plain language" form nor do we give CLTA 126 series Homeowners' endorsement, which essentially gives a residential owner CLTA 100/ALTA 9 type coverage. I understand both of these are given in many areas of the country outside California. This gets into the question raised by Rhonda. Do surveys cause more non problems than real problems they solve?

A big problem here is the marketability problems on the backside. There are highly respected closing operations here in Memphis that will require a variance on a de minimus setback violation. I have seen deals killed on "setback violations. "They cant assure you . .. ." The most galling aspect of this attitude is, some of the same people will come to us for affirmative insurance when it is their ox in the ditch. Rhonda and I are about to frame a policy to deal with that problem-if all you bring us is your dogs, don't bother. We are working on how to get the word out. Some have gotten a taste of our views and use us when (Brand X and XX) turns them down. We are about to stop that. Send us a good share of your files and you will reap the benefits when you have a tough one.

Comment by Bert Rush: Sounds like a RESPA violation--offering something of value for referral of business. Just KIDDING.

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Following Wednesday's posting, Don Schenker (Madison, WI) writes:

Whether we are wearing our owner's title insurance policy issuing hat or our closing agent hat, we rarely require surveys or counsel the parties to get a survey. The only time we require them is when the existing description is so poorly drafted that it leaves in doubt what is being conveyed and what is being insured.

I once was presented with a poorly drafted, but adequate description of a commercial property. Both seller and buyer were represented by counsel. Neither the seller or buyer were requiring a survey. We said we needed one. Our past experience had been that this type of description rarely did not produce encroachments, overlaps or other adverse matters that a survey would disclose. Lo and behold no encroachments, overlaps or other adverse matters were disclosed by the survey. The buyer and seller wanted us to pay for the survey! Sort of like going to the doctor and being told that you having nothing wrong with you and saying, "well that was a waste of money". We paid for half the cost of survey and vowed to never again require a survey except when we needed it for our protection.

Most title insurance policies in Wisconsin are issued by lay abstractors and most residential sellers and buyers are not represented by attorneys. I would agree with Billy Rosenberg that a wise buyer should get a survey, but I am very reluctant to give any counsel in that respect to our insureds.

Mark Workman (Cleveland) writes:

Actionable Malpractice for failure to advise a Buyer to obtain a survey?!? What happened to the closer being a "disinterested third party?" It seems hard to fathom that we may become liable for remaining exactly what we are being paid to be, disinterested. Once we start advising one party to the transaction as to how to proceed, I fear we may loose our neutral status and could be found to be representing one party. Further, in Ohio, a mortgage location survey is not certified to a buyer, rather it is certified to a lender and the title company. Moreover, the language contained therein virtually disclaims liability on behalf of the surveyor. It would appear to me that to advise a buyer one way or the other on this matter may raise more issues than it resolves. Were I asked by a buyer if I personally would get a survey, I would answer in the affirmative, but I would never do so unsolicited.

Keith Pearson (Santa Ana) writes:

The discussion on surveys is a great one which I was able to participate in fully with David, Billy and Rhonda when I was in Tennessee a few months ago. I am still of the opinion that we do not need to require surveys to issue a loan policy because of the different measure of damages on surveys. I am also of the opinion that we do not need to require surveys (absent some property specific knowledge) on residential home sales and loan transactions based on our experience in California.

Having said that, I would not prohibit (not that we could) or discourage someone from getting a survey in a transaction if they felt that they needed it. Billy raised a concern that an attorney might have about malpractice if they do not advise their clients to get a survey. I do not think that I would be concerned about that if there is disclosure and choice to forego the survey by the client, and title insurance to take care of the problems that a survey might show. As Rhonda pointed out survey problems (excluding coverage above $5000 for boundary walls and fences) are covered by the EAGLE Policy. Additionally, the automatic increase in coverage of the EAGLE Policy gives greater protection as the property becomes more valuable.

There is also an unspoken assumption that obtaining a survey will turn up all of the problems it should. Surveyors like all human beings make mistakes. To recover against them, suit would have to be brought. Additionally, suit against a surveyor may be barred by a state statute of limitations. In contrast, the title insurance policy continues on covering the buyer for the period of time that they own the house whether it be 5 years or 50 years.

The waiving of the survey requirement is meant to be a sales tool to allow us to in effect cut the cost of the transaction to the client without cutting our title insurance fees. By saying First American will not require a survey, we are not prohibiting someone else from getting a survey for their own reasons (although we may be robbing them of a scapegoat).

All in all, an interesting subject upon which reasonable people can disagree.

Oscar Beasley writes:

I believe that I heard all this maybe as long as 45+years ago before FA days. I know that it begs the question a bit but the problem seems to turn a bit on representation. It's all well and good to do what he have and are doing, that is put in a survey exception. I don't know what the insured thinks they are getting. Actually probably 99% don't know and the brokers don't generally or can't explain it or want the deal closed and don't worry about the problems. If we put in a survey exception we generally would not have problem. In essence we wash our hands. If we do get a survey then our action is to read it in to the Policy and the insured is no farther ahead. So we are back to representation. What is our position as to the insured and what obligations do we have there. Is it just to show the public records?? If our agent is an attorney agent and the representation is that of client and attorney I think the whole ball game changes and at least the atty-agt has a problem. Under agency law since the agent is also our agent what does this do to for or us?

In the early years in the islands we just used the survey exception. There were a lot of party wall problems and apparently the brokers had some problems so a law was passed that said if there is an encroachment of no more than 6 inches it was to be considered de minimus and of no consequence. Does this relieve us of liability if we don't show it??? Who knows. I might add that the commercial requirement is half that of the residential. We have on occasion endorsed against loss, but generally it is just shown.

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Following last Wednesday's posting, Dennis Gonski (outside counsel/Fairfield, NJ) sent a letter with an unpublished court of appeals decision, that can be viewed by clicking on the URL below.

Rich Angelo (Iselin, NJ) writes:

The discussions have been interesting, but as Oscar stated, it seems like I heard the same thing long ago. Representation is the key. Only attorneys can practice law. It always falls on their head if they are conducting the closing or representing the buyer.

At a seminar for the Pa. Bar Institute last week in which I participated, one of the other speakers said it could be malpractice if they didn't advise their clients to obtain the EAGLE policy, or get a waiver. So the EAGLE policy is already being recognized as protecting the attorneys from their own clients. Don't we advise the insureds that they can obtain enhanced coverages by purchasing the EAGLE policy? So why do we worry about additional or separate advice regarding issues (like survey coverage) that are covered by the EAGLE? We need to focus on insurance and not 'representation'.

Alan Rubin (Manhattan) writes:

I do not believe that where we issue a fee policy we should (or have any right to) require the purchase of a survey. However, if I were the attorney representing a purchaser, I would not only strongly recommend that a new survey be purchased where the last existing survey is 5 years or older, but I would put such recommendation in writing and require the client to sign off should he or she elect not to purchase a new survey.

In addition--similar to the case of the Market Value Rider--I do not think it would be a bad idea for us to have the insured purchaser made aware of the survey issue and accept or reject it in writing.

Whether or not the failure to recommend a new survey amounts to actionable malpractice against the purchaser's attorney is a separate issue. However, I have seen claims where an insured purchaser, who was willing to pay a substantial amount for residential property, obtained only a "survey inspection" to "update" a 20-year old survey rather than spend $500 for a new survey and, as a result, the insured suffered a loss that would likely have been avoided with a new survey.

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Following up on last Wednesday's posting, Ben Knittel (Houston) writes:

In Texas, the Board of Insurance promulgates the forms of commitments, policies, and everything else we issue. One of the official forms we are obligated to use is the Texas Title Insurance Information handout, which is sent out with each commitment. Along with some basic information about the nature of title insurance and scope of coverage, the Information handout informs the customer about the availability of additional survey coverage. Very often when we deny coverage for a boundary dispute or encroachment, the insured complains that nobody ever told him that he could purchase additional survey coverage--and we then refer him to the contents of the Information handout that he received.

Perhaps a standard form handout that informs the proposed insured of available options would offer some protection against a claim that we should have advised the insured to get additional coverage, without putting us in the position of giving legal advice.

A copy of the Information handout may be viewed by clicking on the URL below.

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Following up on our posting for 12/13/00, and Ben Knittel's reply, Rich Angelo (Iselin, NJ) writes:

The Texas form is pretty good. But I believe we would have to file the form in all states which require title forms to be filed, and it might not be approved. Without the approval, and maybe in spite of it, the courts will interpret the form in ways that we never intended. So are we better for "advising" them of additional coverages? Or should we explain that we have the "Eagle Policy" which offers additional protections beyond the standard policy? I think that kind of an advisory does not need to be filed as a form because it is an offer of "title" insurance coverage in bulk form, as opposed to specific forms of coverage, such as survey or whatever. Whenever we purport to advise prospective insureds of their "rights", it ultimately is turned against us.