New Restrictions On Creditors' Rights Exclusions In Title Insurance Policies


Previously published in Holme Roberts & Owen LLP Real Estate Bankruptcy Alert, February 12, 2010.

Anyone who obtains title insurance, whether as an owner or a lender, should be aware of a recent abrupt and significant change in title insurance practices across the country. Title companies have recently stated that they will no longer delete creditors' rights exclusions from, or add affirmative creditors' rights coverage as an endorsement to, any of their issued title policies. In fact, the American Land Title Association (ALTA) voted to withdraw the ALTA Endorsements 21 and 21/06 as official forms, effective March 8, 2010, and the California Land Title Association ("CLTA") voted on February 4, 2010, to decertify the CLTA 131 and 131-06, its counterparts to the ALTA 21 and 21/06.

Title insurance policies provide coverage for loss or damage incurred by the insured that result in a complete or partial failure of the insured's title to real property or, in the case of a lender, the invalidity or unenforceability of a mortgage lien on real property. Title policies also contain various exclusions from coverage; one of those exclusions is referred to as the "creditors' rights exclusion." This exclusion removes from coverage loss or damage arising by reason of any claim, which arises out of the transaction creating the interest of the insured lender or owner under the policy, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws, that are based on (1) fraudulent transfers or conveyances under state law or the Bankruptcy Code; (2) preferential transfers under the Bankruptcy Code; and (3) equitable subordination under Bankruptcy Courts' general equitable powers.

Concerns regarding creditors' rights arose in the early 1990s as a result of the use of "outof- the-box" financing techniques and later loan workout techniques that arose when the real estate market softened. Many title companies took the position that the earlier policies, particularly the 1970 policies that were silent on the issue of creditors' rights, did not cover creditors' rights risks arising in the insured transaction. Title companies decided to clarify the issue and added an exclusion to the 1990 title insurance policies for losses resulting from preferential and fraudulent transfers. In 1992, after protests from the lending industry, the title industry modified the exclusion to except from the creditors' rights exclusion challenges...

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