Am I Still Covered Under the Title Insurance Policy?

When transferring property for corporate restructuring or estate planning purposes, an important issue to consider is whether the successor owner will be covered by the grantee’s title insurance policy.  Because title insurance policies insure only the title of the “Insured” identified in the policy, the successor in interest of the named insured may not be covered following the transfer.

In older ALTA title insurance policies, the definition of “Insured” included the person or entity specifically identified in the policy as the insured, as well as any subsequent owners who took title to the subject property by operation of law.  Because those policies did not clarify what the term “by operation of law” meant, it was unclear whether certain subsequent owners, such as a parent or subsidiary of the original insured, fell within the definition of “Insured”.  In order to avoid any risk that a subsequent owner following a transfer between related parties was not covered by the grantor’s title policy, parties often obtained an “additional insured” endorsement which provided the subsequent owner coverage under the original policy.

Fortunately, the ALTA 2006 policy form eliminates much of the doubt regarding continuing coverage under a title insurance policy by expanding the definition of “Insured” to include a list of subsequent who will benefit from the policy following a transfer by the original named insured.  The new definition of “Insured” now 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;

(B)  successors to an Insured by dissolution, merger, consolidation, distribution, or reorganization;

(C)  successors to an Insured by its conversion to another kind of entity; and

(D)  a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the title

(1)   if the stock, shares, memberships, or other equity interests of the grantee are wholly-owned by the named Insured,

(2)   if the grantee wholly owns the named Insured,

(3)   if the grantee is wholly-owned by an affiliated entity of the named Insured, provided the affiliated entity and the named Insured are both wholly-owned by the same person or entity, or

(4)   if the grantee is a trustee or beneficiary of a trust created by a written instrument established by the Insured named in Schedule A for estate planning purposes.

Keep in mind that the ALTA policy still provides that, with regard to successors described in (A), (B), (C), and (D) above, the insurer reserves all rights and defenses as to any successor that the insurer would have had against any predecessor insured.

The new definition of “Insured” does not necessarily expand the list of subsequent owners who will be covered under the existing title policy.  Rather, it clarifies which subsequent owners are deemed to take title to the subject property by operation of law.  Accordingly, one should carefully review the existing title insurance policy to determine whether it will continue in effect for the benefit of a particular subsequent owner, or whether an additional insured endorsement or new title policy is required.