Virtually every day title company underwriters see situations where problems could be prevented from turning into claims if a bit more diligence were exercised. Statewide Title will begin highlighting true stories from an underwriting or claims perspective in order to illustrate how easily the problem or claim might have been avoided as a part of its continuing education series and claims prevention. No actual names will be used. The first illustration this month involves a very common conveyance of property into a trust and some of the issues that derive from what is otherwise an ordinary transfer by deed.
Husband and Wife purchase their home in 2000 and take title as tenants by the entireties. Their closing attorney obtains an owner’s policy of title insurance insuring their purchase. In 2004, they consult an estate attorney and begin a series of consultations for estate planning. The attorney advises them they would benefit from certain tax advantages if they would transfer title to their home into a living trust. Subsequently, Husband and Wife make a deed for their home and transfer title to the trustee of the HW Living Trust by Quitclaim Deed. In 2005 a title defect surfaces and Husband and Wife are advised by the attorney who closed their purchase to file a claim on their policy of title insurance. The claim is submitted, processed and denied by the title company because the named insured on the title policy, Husband and Wife, no longer own the property. The trust is the current owner of the property according to the Quitclaim Deed filed in the public records.
Is there anything that Husband and Wife could have done to have prevented this problem and continued coverage under their title insurance policy? Under the terms of the 1992 standard ALTA title policy, coverage only extends to the insured named under Schedule A. Item 2 of the Conditions and Stipulations provides “The coverage of this policy shall continue in force as of Date of Policy in favor of an insured so long as the insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money mortgage given by the purchaser from the insured, or only so long as the insured shall have liability by reason of covenants of warranty made by the insured in any transfer or conveyance of the estate or interest”. In other words, the owner has to continue to own an interest in the property and not convey it outright in order to keep coverage under their policy.
Another point that should be noted here is that title into the trust was transferred by a Quitclaim Deed, which seems to be the preferred instrument of choice, when transferring title into trusts. Had the instrument been a General or Special Warranty Deed then coverage under the title insurance policy might have been invoked by having the trust sue the grantors on the warranties in the deed, thus invoking coverage for Husband and Wife against the title defect.
The attorney preparing the Quitclaim Deed should have called the title company that issued the policy and asked whether the client’s coverage would be affected by transferring title into the trust. Some title companies will continue coverage based on the fact that the trust is merely the “alter ego” of the named parties. However, most companies will not continue coverage on that basis, but will endorse the policy to change the named insured to the trust on the “alter ego” theory.
Continuation of coverage for transfers into trusts is not a problem under the current ALTA Expanded Coverage Policy as that policy specifically provides that title coverage continues when title to the insured property is transferred into a trust for the benefit of the named insureds. The new standard ALTA policies that are due out later this year will provide the same coverage as well. Those new polices provide “ The term ‘Insured’ also includes (a) successors to the title of the insured by operation of law as distinguished from purchase, including heirs, devisees, survivors, personal representatives or next of kin; …. A grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the title … (4) if the grantee is a trustee or beneficiary of a trust created be written instrument established by the Insured named in Schedule A for estate planning purposes”. Clearly conveyances into family trusts used for estate planning purposes will no longer cause coverage problems under the new policies. In the meantime and until those policies become available it is suggested that either the Enhanced Coverage Policies be used or endorsement obtained changing the named insured under Schedule A to the name of the trust along with a deed that at least contains some warranties, such as a Special Warranty Deed.
So often, real property issues are co-mingled with other areas of the law, such as trust and estate planning. When title insurance is involved it is a good practice to always call your title company and run the fact situation by their attorney underwriters.