14.12 Owner's Policies of Title Insurance

14.12.1

In General

  (NOTE: This section of Virtual Underwriter will be revised upon adoption of revised forms in 2012.) Texas uses two owner policy forms. The T-1 Owner Policy is primarily used for commercial transactions. The Texas Residential Owner Policy T-1R is used for residential transactions. See P-1(u). The coverages in each form are substantially the same; the residential policy is written in a similar language.
 
  The Texas Owner Policy form consists essentially of five parts which are:
 
  ·   The basic contractual undertakings of the Company: what the Company insures.
 
  ·   The “Exclusions from Coverage”: specific exclusions from coverage.
 
  ·   The “Conditions and Stipulations”: information relative to the Company’s insurance obligations, definition of terms, and the notice and defense provisions pertaining to claims arising under the policy.
 
  ·   Schedule “A”: the specifics of the particular policy that is being issued.
 
  The specifics include:
 
  ¨   Guaranty File Number
 
  ¨   Policy Number
 
  ¨   Date of Policy
 
  ¨   Amount of Insurance
 
  ¨   Name of Insured
 
  ¨   Estate or Interest Being Insured
 
  ¨   Vesting of Title
 
  ¨   Description of Land
 
  ·   Schedule “B”: the specific matters that affect the land being insured.

It includes two basic sub-parts:
 
  ¨   Certain preprinted “general exceptions” which are included in every Owner Policy.
 
  ¨   “Special exceptions” relative to the particular parcel or property being insured.

14.12.2

Coverage Afforded Through the Insurance Provisi

The following are the standard Insuring Provisions of an Owner Policy:

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B AND THE CONDITIONS AND STIPULATIONS, STEWART TITLE GUARANTY COMPANY, a Texas corporation, herein called the Company, insures, as of Date of Policy shown in Schedule A, against loss or damage, not exceeding the Amount of Insurance stated in Schedule A, sustained or incurred by the insured by reason of:

·  Title to the estate or interest described in Schedule A being vested other than as stated therein;

·  Any defect in or lien or encumbrance on the title;

·  Any statutory or constitutional mechanic’s, contractor’s, or materialman’s lien for labor or material having its inception on or before Date of Policy;

·  Lack of a right of access to and from the land;

·  Lack of good and indefeasible title.

The Company also will pay the costs, attorneys’ fees and expenses incurred in defense of the title, as insured, but only to the extent provided in the Conditions and Stipulations.

14.12.3

Exclusions from Coverage

The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damage, costs, attorneys’ fees or expenses which arise by reason of:

·  a) Any law, ordinance or governmental regulation (including but not limited to building and zoning laws, ordinances, or regulations) restricting, regulating, prohibiting or relating to (i) the occupancy, use, or enjoyment of the land; (ii) the character, dimensions or location of any improvement now or hereafter erected on the land; (iii) a separation in ownership or a change in the dimensions or area of the land or any parcel of which the land is or was a part; or (iv) environmental protection, or the effect of any violation of these laws, ordinances or governmental regulations, except to the extent that a notice of the enforcement thereof or a notice of a defect, line or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy.

b) Any governmental police power not excluded by (a) above, except to the extent that a notice of the exercise thereof or a notice of a defect, lien or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy.

·  Rights of eminent domain unless notice of the exercise thereof has been recorded in the public records at Date of Policy, but not excluding from coverage any taking that has occurred prior to Date of Policy which would be binding on the rights of a purchaser for value without knowledge.

·  Defects, liens, encumbrances, adverse claims or other matters:

¨  created, suffered, assumed or agreed to by the insured claimant;

¨  not known to the Company, not recorded in the public records at Date of Policy, but known to the insured claimant and not disclosed in writing to the Company by the insured claimant prior to the date the insured claimant became an insured under this policy;

¨  resulting in no loss or damage to the insured claimant;

¨  attaching or created subsequent to Date of Policy; or

¨  resulting in loss or damage which would not have been sustained if the insured claimant had paid value for the estate or interest insured by this policy.

·  The refusal of any person to purchase, lease or lend money on the estate or interest covered hereby in the land described in Schedule A because of unmarketability of the title.

·  Any claim, which arises out of the transaction vesting in the person named in paragraph 3 of Schedule A the estate or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or other state or federal creditors’ rights laws, that is based on either (i) the transaction creating the estate or interest Insured by this Policy being deemed a fraudulent conveyance or fraudulent transfer or a voidable distribution or voidable dividend; (ii) the subordination or recharacterization of the estate or interest insured by this Policy as a result of the application of the doctrine of equitable subordination; or (iii) the transaction creating the estate or interest insured by this Policy being deemed a preferential transfer except where the preferential transfer results from the failure of the Company or its issuing agent to timely file for record the instrument of transfer to the insured after delivery or the failure of such recordation to impart notice to a purchaser for value or a judgment or lien creditor.

14.12.4

Conditions and Stipulations

See TX Owners Policy T-1 in the Texas Forms Section.

14.12.5

Schedule A Analysis

·  Guaranty File Number

The reference number or guaranty file number issued by the title agent is inserted here.

·  Policy Number

Every Owner Policy must have a designated number for purposes of reference and identification. Generally, these policy numbers are preprinted on the policy jackets. The policy number either preprinted or typed must coincide with the policy number to be typed on Schedule A.

·  Date of Policy

The date of the policy (month, day, and year) of the policy must coincide with the date of recording of the last instrument to be reflected in the policy, either as an exception or creating the interest being insured.

·  Amount of Insurance

According to Rate Rule R-3, an Owner Policy must always be written for:

¨  the current sales price of the land and any existing improvements, plus, at the option of the insured, the cost of improvements immediately contemplated to be erected; or

¨  if there is no sale, the amount shall be the value of the land and any existing improvements, plus, at the option of the insured, the cost of improvements immediately contemplated to be erected.

When the policy is written to include the cost of improvements which are to be erected in the future, the applicable clauses under Procedural Rule P-8a must be inserted in Schedule B of the policy.

·  Name of Insured

The “insured” is the person or persons or the entity for whose benefit the Owner Policy is written. The insured will normally be a purchaser and its name or names must be the same as the vestee of the estate or interest of the insured.

It should be noted, however, that by definition the insured extends not only to the name insured, but also to:

“those who succeed to the interest of the named insured by operation of law as distinguished from purchase including, but not limited to, heirs, distributees, devisees, survivors, personal representative, next of kin, or corporate, partnership or fiduciary successors, and specifically, without limitation, the following:

¨  the successors in interest to a corporation resulting from merger or consolidation or the distribution of the assets of the corporation upon partial or complete liquidation;

¨  the partnership successors in interest to a general or limited partnership which dissolves but does not terminate;

¨  the successors in interest to a general or limited partnership resulting from the distribution of the assets of the general or limited partnership upon partial or complete liquidation;

¨  the successors in interest to a joint venture resulting from the distribution of the assets of the joint venture upon partial or complete liquidation;

¨  the successor or substitute trustee(s) of a trustee named in a written trust instrument; or

¨  the successors in interest to a trustee or trust resulting from the distribution of all or part of the assets of the trust to the beneficiaries thereof.”

·  Estate or Interest Being Insured

The estate or interest in the land being insured must be properly set forth, in the same manner as stated in the instrument under which title was acquired by the party to be insured (or by the party in whose name title is vested).

Item No. 2, Schedule A shows the paragraph as follows:

“2. The estate or interest in the land that is covered by this policy is:”

It is necessary to insert the estate or interest (Fee Simple, Leasehold, Easement etc.).

·  Vesting of Title

Item No. 3 of Schedule A shows the following:

“3. Title to the estate or interest in the land is insured as vested in:”

This makes necessary the insertion of the name of the party in whose name title is vested.

See Deeds of Conveyance, Section 4.16 for further discussion on vesting of title.

·  Description of the Land

Schedule A, Item No. 4. of the Owner Policy shows the following:

“4. The land referred to in this policy is described as follows:”

It is of primary importance that the sufficiency of the legal description enable a competent surveyor to locate the property on the ground.

By policy definition, “land” means “the land described or referred to in Schedule A, and improvements affixed thereto that by law constitute real property...” As is evident, the title to personal property is not included in the coverage of a title insurance policy.

The legal description of an area of land, if no exclusions appear, includes the surface, the soil and minerals underneath the surface, the air space above it, trees and growing crops, buildings and other structures permanently affixed to it, etc.. While most title policies cover all of the land, it is possible to insure some portion of the land if this is specified in the Schedule A description of the land.

See TX Owners Policy Schedule A T-1 in the Texas Forms Section.

14.12.6

Schedule B Analysis

Schedule B of the Owner Policy lists matters which are not a part of the insurance of a particular parcel of land.

In an Owner Policy, Schedule B is divided into two parts: the general and special exceptions. The general exceptions state those matters which are excluded from coverage according to the rules and regulations of the Texas Department of Insurance. The special exceptions are the exceptions relating to defects, encumbrances, liens, covenants, restrictions or other matters affecting only the particular property being insured.

Schedule B of the Owner Policy reads as follows:

“This policy does not insure against loss or damage (and the Company will not pay costs, attorney’s fees or expenses) that arise by reason of the terms and conditions of the leases and easements, if any, shown in Schedule A, and the following matters:”

·  Item No. 1 in Schedule B of the Owner Policy is the restrictive covenant exception. All restrictive covenants affecting the property shown in Schedule A No. 4 must be listed. If there are no restrictive covenants affecting the property, the exception must be deleted.

·  Item No. 2 is the survey exception. This exception can be amended to read “shortages in area” in accordance with Procedural Rule P-2 on the Owner Policy. An additional fifteen percent (15%) of the base premium for the Owner Policy must be charged if this type of coverage is given in accordance with Rate Rule R-16.

·  Item No. 3 is the homestead exception which excepts to any homestead, community property or survivorship rights in the property being insured. This exception may not be deleted.

·  Item No. 4 is the tidelands or water rights exception. There is no provision for deletion of this exception.

·  Item No. 5 is the tax exception. There is no provision for deletion of this exception.

·  Item No. 6 is the general exception to all the terms of documents which are special exceptions to the title of the property. The exceptions that follow this particular exception can be liens of record against the property, easements and rights of way, maintenance assessments, mineral interests etc.. If there are no special exceptions to be listed on Schedule B, Item No. 6 of the Owner Policy should be deleted in its entirety.

·  All special exceptions listed in Schedule B of the Owner Policy must be made in accordance with Procedural Rule P-5. Procedural Rule P-5 states that the exception must be specific in nature.

·  In the Owner Policy, title agents should take exception to the “rights of parties in possession”. In a commercial property transaction, the exception may be reformed to read “rights of tenants in possession”. In accordance with Procedural Rule P-3, a waiver of inspection must be signed by the insured before this exception can be placed in the Owner Policy. If the insured does not this exception in their policy, the title agent can make an inspection of the subject property to assure themselves that no third party is actually occupying the property outside of the record owners. A reasonable charge may be made for this inspection.

·  When an Owner Policy is to issued prior to completion of improvements, the following language must be inserted in Schedule B pursuant to Procedural Rule P-8(a)l:

“Any and all liens arising by reason of unpaid bills, or claims for work performed or materials furnished in connection with improvements place, or to be placed, upon the subject land. However, the Company does insure the Insured against loss, if any, sustained by the Insured under this Policy if such liens have been filed with the County Clerk of _____________, County, Texas, prior to the date hereof”, and

“Liability hereunder at the date hereof is limited to $_______. Liability shall increase as contemplated improvements are made, so that any loss payable hereunder shall be limited to said sum plus the amount actually expended by the Insured in improvements at the time the loss occurs. Any expenditures made for improvements, subsequent to the date of this policy, will be deemed made as of the date of this policy. In no event shall the liability of the Company hereunder exceed the face amount of this policy. Nothing contained in this paragraph shall be construed as limiting any exception or any printed provision of this policy.”

In the event the premium for the Owner Policy is paid in installments pursuant to Rate Rule R-2(b) or (c), the following shall be added to the “Liability” paragraph:

“Notwithstanding the foregoing, liability hereunder shall only increase as down-date endorsements are issued pursuant to expenditures made for improvements and as the corresponding fractional premium for the policy and the full premium for the down-date endorsement are paid.”

Upon completion of the improvements, an owner’s acceptance affidavit and an all bills paid affidavit from the builder/contractor should be required before eliminating the completion of improvements and liability paragraphs. If any unpaid bills for labor or materials are suspected, a thorough investigation of all circumstances should be made before a deletion is made. If this situation occurs, appropriate underwriting personnel should be contacted immediately.

See TX Owners Policy Schedule B T-1 in the Texas Forms Section.

14.12.7

Endorsements to the Owner Policy

·  Leasehold Endorsement

See Leasehold Insurance, Section 11.04.

·  Increased Value Endorsement (T-34)

This endorsement can be issued when the value of the property has increased since the original Owner Policy was issued. Sufficient evidence must be secured to support the requested increase in value. Title agents should be careful not to confuse the increased value endorsement with a situation wherein the insured is seeking to place improvements on the property. The applicable rate is found in Rate Rule R-3(c).

See TX Increased Value Endorsement for Owner Policy T-34 and the TX Increased Value Endorsement for Residential Owner Policy T-34 in the Texas Forms Section.

·  Owner Policy Paid in Installments (Owner Policies of 5 Million or More)

When an Owner Policy is issued in accordance with Procedural Rule P-8(a) and the coverage increases as provided in Rate Rule R-2, the Company may extend the effective date of the Owner Policy and state the amount then existing under the Owner Policy by issuing the endorsement provided for in Form T-3, Instruction VIII.

·  [Reserved for Home Owner Endorsement]

·  Please note: Procedural Rule P-17 allows for electronically reproduced endorsements which do not need facsimile signatures of Stewart Title Guaranty or numbering. GF files and HUD-1 closing statements must reflect issuance of endorsements in the case of audits of the agent.

14.12.8

Countersignature

An authorized signatory should countersign the policy in the appropriate space on the jacket and on each page of Schedule B. In addition, the issuing agent’s full name, address, and telephone number should appear on the jacket.

14.12.9

Apportionment of Amount of Insurance When Two o

The Texas Owner Policy form contains in the Conditions and Stipulations a clause providing for apportionment of insurance between two or more parcels covered by the same policy. For most situations, this formula is adequate. However, there are other situations, in which it may be desirable from the standpoint of the Company, or the insured, or both, for a definite dollar amount to be allocated.

In those cases in which an Owner Policy is issued covering several parcels of land and a definite dollar amount of liability is to be allocated to each parcel the amount of insurance should be allocated to each parcel by inserting the following note at the end of Schedule B of the policy:

NOTE: The face amount of this policy is allocated to the various parcels, the title to which is insured, as hereinafter set forth, and in the event a loss is established affecting one or more, but not all of such parcels, such loss shall be computed and settled on the basis of the insurance on such parcel or parcels as follows:

Parcel I the amount of $_________.

Parcel II the amount of $________.

14.12.10

Insuring Other than the Record Owner

Under certain circumstances it is permissible to issue an Owner Policy naming as the insured one other than the owner of the estate or interest described in the policy.

This type of insurance presupposes:

·  The existence of a non-record owner, who has a determinable and insurable interest in the land and who is susceptible to suffer loss or damage if a cause of action arises against the Company under the policy.

Examples of circumstances where a non-owner named insured may suffer such loss or damage are:

¨  One purchasing under a contract for deed in reliance upon the vendor’s representation as to the quantity and quality of the vendor’s ownership.

¨  One purchasing the stock of an existing corporation in the reliance upon the seller’s representation as to the quantity and quality of the corporation’s ownership.

·  The insertion of the following statement in Schedule B of the policy:

“The rights of the insured under this policy shall also be subject to the defenses, if any, which the Company might have against the party shown vested with the estate or interest in the land described in Schedule A as if said party were the insured under this policy.”

14.12.11

Duplicate of an Original Owner Policy

When requested to issue, in conjunction with the issuance of an Owner Policy, a duplicate thereof, the following note must be shown after the last exception as the duplicate policy.

NOTE: This policy is a true copy of Stewart Title Guaranty Company Owner Policy No. ___________, and this copy is issued by the Company and accepted by the Insured herein upon the agreement and understanding that no further or additional liability is assumed or incurred by the Company, by reason of the issuance of this copy of said policy.

14.12.12

Duplicate of a Lost Owner Policy

When requested to issue a duplicate owner policy in lieu of an owner policy which has been lost or destroyed, the following is required:

·  The duplicate policy must be given a new number.

·  The following note must be shown after the last exception on the duplicate policy:

NOTE: This duplicate owner policy replaces Stewart Title Guaranty Company Policy No. _________ which has been lost or destroyed. It is understood that this duplicate evidences the liability of this Company under its original policy and that such liability is not increased or diminished by reason of the issuance of this duplicate policy.