Underwriting Manual: Mineral Rights

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Underwriting Manual Subtopic
12.16.1

In General

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Mineral rights are also referred to as subsurface rights; that is, the rights to the natural resources lying below the earth's surface. Any transfer of land may be accomplished with or without the transfer of the subsurface rights.

Minerals are subject to the same rights of ownership, possession, and alienation as any other land. A conveyance of land without any exception or reservation of the minerals thereon carries with it the minerals as well as the surface of the land.

Ordinarily, the term "mineral" is considered to include metallic ores, jewels, hydrocarbons such as coal, asphaltum and petroleum, useful rocks such as shale, granite, limestone and marble, and other miscellaneous materials such as feldspar, fluorspar, building sand, gypsum, silica rock, borax, sulphur, alum, carbonate and nitrate of soda, and salt. However, the term ordinarily does not include commonplace materials such as clay, sand, gravel, soil, and water.

Unless otherwise provided by statute or case law, conveyances or leases of "minerals" will encompass all of the materials ordinarily included within that term, except those specifically excepted, or limited by category, stratum, or fractional share.

There are basically two types of minerals. Minerals in place are those minerals which have relatively fixed and permanent situs either on top of or within the earth and fugacious minerals are those that are migratory in the sense that their physical nature permits them to flow from here to there.

Oil and gas are part of the land until they are removed. Their owner has the absolute right to drill for them but must confine operations to their land and can claim them only so long as they remain in the property, but if they escape into other land, the owner of the land under which they had first accumulated can no longer assert any rights over them.

Any instrument granting minerals or mining rights is subject to the same principles and requirements as other conveyances of interests in land. The question whether the instrument conveys the minerals in place, or a mere right to extract them, or is a lease of the land with the right to take minerals, is a matter of judicial construction.

It needs to be noted that, by implication and unless otherwise specifically excepted in the instrument, the mineral transfer is always deemed to have granted all operational powers necessary for a mineral transferee to enjoy the mineral conveyance or lease, viz;

  • Right of access (ingress and egress) to the minerals.
  • Rights for the construction, maintenance and removal of roadways, railroads, buildings, machinery and equipment, pipelines, ditches and drains, storage reservoirs, fences, etc.
  • Right to the use of the subject property (subsurface estate) and the surface estate to mine, process, transport, and store minerals from other land.
  • Right to use the water located on the property

Underwriting Manual Subtopic
12.16.2

Mineral Grants And Reservations As Title Exceptions

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A grant or reservation of a mineral right or interest found in a chain of title must be specifically excepted from the legal description of the subject property in Schedule A of the policy, and at the same time, be shown as a special exception in Schedule B thereof. An exception in regard to severed minerals or mineral rights should never be omitted from the policy on the theory of adverse possession, unless the omission is fully authorized by statute or based on a proper judicial determination.

It is imperative that the mineral right or interest be shown in the title commitment or policy in the same manner as it is described in the instrument granting or reserving it. No attempt should be made to alter, change, modify, explain, or clarify the language of the grant or reservation. It must be shown verbatim.

Once the mineral estate is shown as an exception in the policy, it is unnecessary to trace the title any further and your exceptions should so state.


Underwriting Manual Subtopic
12.16.3

Mineral Leases And Oil And Gas Leases As Title Exceptions

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In General

A mineral lease is an agreement granting to the lessee the right to explore land and remove from it all the minerals or certain specific minerals contained therein. The lease can be for a specific term or for as long as the minerals can be extracted from the land. Rent or royalty is simply the income received from the lease of the mineral estate. These words are frequently used interchangeably; however, royalty is the more appropriate term for rent based upon quantity of coal or ore removed from a mine.

Legal Characteristics of a Mineral Lease

The most important legal characteristics of a mineral lease are the following:

  • It is the granting of the possessory right to mine for a term:

    • Lessee gets title only to the minerals actually severed and removed.
    • Lessor retains title to all the unsevered minerals during the term and the remaining unsevered minerals at the end of the term.
  • It is analogous to the leasing of land, but has substantial variations from the leasing of the surface because of the physical and functional differences that are involved.

  • It can be abandoned.

  • Consideration is usually in the form of royalties and/or rent.

  • The term of a mineral lease is frequently subject to the performance of certain conditions relative to the exploration, development, and production of the leased minerals.

  • A mineral lease frequently is characterized by a fixed primary term followed by an indefinite secondary term lasting as long as production continues.

Purposes of the Mineral Lease

Most mineral leases are comprehensive in the scope of permissible mining activities. However, leases with a limited purpose are occasionally executed. The following is a list of the mining activities most commonly enumerated in a mineral lease:

  • Exploration for minerals
  • Development of the mine
  • Production of minerals
  • Treatment and processing of minerals removed from the land
  • Transportation of minerals
  • Storage of minerals
  • Marketing of minerals
  • Reservation of minerals in place or storage on the surface for future production or marketing

Term of the Mineral Lease

The term of a mineral lease may be either a fixed term or an indefinite term, the latter made up of a short fixed period followed by an indefinite period so long as minerals are produced.

A mineral lease may contain one of the following term provisions:

  • Fixed term - specified number of months or years.
  • Indefinite term - primary and secondary terms.

Provisions calling for primary and secondary terms are quite common in mineral leases and in oil and gas leases.

Termination of the Mineral Lease

Because of the special nature of the mineral lease or the gas and oil lease, fully examine the lease instrument to ascertain the circumstances and/or conditions for its termination.

Requests to waive recorded mineral leases or gas and oil leases on the basis that production has ceased and the lessee has abandoned the lease may present an extrahazardous risk for the Company. In order to waive the allegedly terminated lease, full consideration must be given as to the possible utilization of any of the following procedures:

  • Affidavit of nonproduction.
  • Release duly executed by the lessee.
  • Judicial determination of the termination.

Never rely on an affidavit of nonproduction during the primary term.


Underwriting Manual Subtopic
12.16.4

Minerals Reservations In Patents

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In those states wherein title devolves from the federal or state government and the title examination of a chain of title commences with a patent issued by the federal or state government, special care should be exercised to determine whether the patent or grant contains any provision reserving to the grantor a specified mineral or all the minerals from the land being conveyed. If such a reservation is present, an appropriate exception relative to the mineral reservation must be shown in Schedule B of the title commitment and policy.


Underwriting Manual Subtopic
12.16.5

Mineral Endorsements: Affirmative Insurance

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A mineral endorsement is an endorsement used for the purpose of insuring over the effect of a mining interest that is being excepted in the title policy.

Basically, a mineral endorsement insures the owner or the lender of the surface estate against loss or damage arising as a consequence of the mining operation in the mineral estate. These endorsements may vary in their formats and extension of coverage.

Consider the following factors prior to the issuance of affirmative insurance:

  • Federal and state law provisions (if any).
  • How long ago did the reservation or grant of the minerals occur?
  • How broad or specific is the language of the reservation or grant of the minerals?
  • Can the buildings and improvements be disturbed as a result of the mining operations?
  • Can the owner of the minerals develop exclusively within the property in question?
  • Can the owner of the minerals develop anywhere on the property in question?
  • Is the property urban, rural, downtown, commercial, residential?
  • Has there ever been any development on the property in question?
  • Has there ever been any development on the adjoining areas?
  • Is there any probability of the existence of minerals in the property in question?
  • How valuable are the granted or reserved minerals?

The basis for the selection and use of any of the different existing forms of a mineral endorsement is dependent on (1) the extent of the afforded coverage and (2) the geographical location of its utilization.

The specific approval of the National Legal Department must be obtained prior to the issuance of any affirmative coverage involving minerals.


Underwriting Manual Subtopic
12.16.6

Insuring Against Loss Arising From Mine Subsidence

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The Company does not permit insuring against loss or damage arising from mine subsidence.


Underwriting Manual Subtopic
12.16.7

Insurance Of A Mineral Estate Interest

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The insurance of a mineral estate interest separate and apart from the ownership of the land itself is an extrahazardous risk.

Any request for this type of insurance must be submitted immediately to the National Legal Department for consideration and reply.


Underwriting Manual Subtopic
12.16.8

Form Of Affidavit Of Nondevelopment And Nonpayment Of Rental Executed By Owner

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STATE OF _________ }

County of ______________ }

_____________________ being first duly sworn, deposes and says:

That __________________ is the present owner of the

of Section _____ , Township _______ , Range ______ in _______, County ___________, which land is described in an oil and gas mining lease executed on ___________ day of ____________________ by _______________________ as lessors, and _____________ as lessee, recorded in Book _________, Page _________, in the office of the (Register) (Recorder) of Deeds of said county.

That since the day of said lease the property covered by said lease has not been pooled, there has been no well drilled upon said land, nor any oil or gas produced therefrom, and that none of the rentals accruing under and by virtue of the terms of said lease have been paid or tendered to affiant or said lessors, or to any bank for their credit, by the lessee, or his agents or assigns, since _____________________ and further that the lessee and his assigns had actual notice that rentals were payable to affiant under said lease. Affiant states that he has not at any time executed any extension of said original lease, and that the same has expired.

Affiant further states that by reason of the noncompliance with the terms of said lease by lessee and his assigns, affiant hereby declares said lease forfeited, and will not, by acceptance of rentals, or in any other manner, recognize the same as a valid or existing lease.

__________________________

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