Whenever someone other than the owner has possession of property, the title company needs to determine under what authority the possessor occupies the property. Possessory rights can come from many sources: leases, easements, error in boundary lines, or even trespass. Sometimes, the possessor may be doing so with intent to claim ownership. Other times, the possessor simply may have rights of occupancy superior to those of a buyer from or lender to the owner.
Texas Insurance Regulation P-3 establishes the procedures for dealing with parties in possession.
P-3. Exception to "Rights of Parties in Possession" - In an Owner or Mortgagee Policy, the Company shall have the right to make a general exception as to the Rights of Parties in Possession, as that term is hereinafter defined, on the condition that Insured executes a written instrument stating that Insured waives inspection of the property and that Insured is satisfied to accept the policy subject to such general exception. In all such cases, the Company must retain and preserve said written instrument. If such inspection is made by the Company, it may charge its reasonable and actual cost therefor. As used herein and in Owner and Mortgagee Policies, the term "Rights of Parties in Possession" shall mean one or more persons who are themselves actually physically occupying the property or a portion thereof under a claim of right adverse to the record owner of the property as shown in Schedule A of the policy. In no event shall the term "Rights of Parties in Possession" include any right, claim or interest which is evidenced by a document recorded in the county where all or part of the property is located.
A brief analysis of P-3 will provide a reminder of variations in handling this matter.
In order to take an exception for rights of parties in possession, the insured must execute a written statement that the insured has waived an inspection of the property and will accept the exception in its policy. Most frequently, this statement is in the form of a sworn affidavit that states that there are no parties in possession of the property other than those stated in the affidavit.
When the insured refuses to execute such a document but still insists that the policy not contain the parties in possession affidavit, P-3 allows the title company to make an on-site inspection and charge the owner for its costs of inspection. The extent, duration and cost of the inspection is usually determined by the size, location and distance of the property from the title agent’s office. The price is not part of the title insurance premium.
Please remember that the general exception for parties in possession does not take the place of a specific exception for written and recorded instruments.
Neither the language of the promulgated Commitment for title insurance, the Owner’s Policy or Title Insurance (T-1 or T-1R), nor does the Loan Policy (T-2 or T-2R) contain a “parties in possession” exception. Oft time, title insurance agents automatically include such exception intending to deal with its inclusion under the terms of P-3. It is an acceptable practice to do so but we would recommend that after the exception, a parenthetical phrase be added that reads substantially as follows:
Parties in Possession (will not appear in the policy to be issued in connection with this commitment) unless a satisfactory written affidavit from the owner is received stating that there are no parties in possession or upon a satisfactory inspection of the property at the insured’s expense.
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