Written by Paula M. Zwiren, JD, MBA, CTP
One of the most popular questions we're asked is: "How do we clear this exception?" The answer depends on the type of issue the exception presents and if it is from the current owner or from behind the ownership date of the current owner.
A key tool for clearing prior owner items is the Inter-Underwriter Indemnification Agreement. It is a tool that's use is triggered by providing a copy of the Owner's Title Policy without exception to the title exception one is seeking to clear. While it is most simple to clear using the Agreement as a tool, when it is not available there are still many other options to be explored.
Requirements of the Title Policy to qualify for the Inter-Underwriter Indemnification Agreement:
- The policy must provide coverage to the current seller.
- It must be an owner's policy. It may only be a loan policy if the lender acquired title.
- The policy must not have lapsed— for example, if the policy insures John Smith and Mary Smith relating to a 1991 deed and John and Mary later conveyed the property for $1.00 to their daughter for estate planning purposes, the policy has lapsed.
- The policy amount must be equal to or higher than the amount of the title exception.
- The exception sought to be cleared must not also be an exception on the seller's title policy.
Items Not Covered Under the Inter-Underwriter Indemnification Agreement:
- Tidelands Claims
- Outstanding Ownership Interests
- Items over the amount of the policy or $1,000,000.00, whichever is lesser
- Liens with open Lis Pendens or successfully concluded proceedings
- Matters against the current owner.
Clearing Title Exceptions/Omitting based on the Policy and Agreement sometimes require notice be provided by the insurer relying on the policy to the policy issuing company contemporaneously. Circumstances with the Condition Precedent to Relying on the Inter-Underwriter Indemnification Agreement:
Line of Credit Mortgages
Judgments, federal tax liens or other liens that do not expire in a fixed period of time
- Tax Sale Certificates
Items Covered by the Inter-Underwriter Indemnification Agreement:
- Mortgages
- Judgments
- Federal Estate Tax Liens, New Jersey Estate and Inheritance Tax Liens
- Tax sale Certificates
- Marital rights arising in favor of the spouses of record-title holders
- Alleged or actual defects or irregularities in judicial proceedings (i.e. certain exceptions or requirements relating to Chancery Abstracts)
- Lack of proper legal description if the land can still be identified from the documents
Clearing title can be somewhat nuanced from time to time. We are always here to discuss your thoughts and proposals relating to any title commitment exceptions or requirements.
EXAMPLES:
Example 1
New title commitment shows an exception for a prior owner mortgage open of record for $150,000.00 from 2001. Seller bought the property in 2005 and has an owner's title policy for $400,000.00 which is free and clear of the open mortgage. Seller's title policy is provided to the insurer that issued the new commitment to the buyer.
Analysis: The insurer on the new title commitment may automatically omit the $150,000.00 mortgage in reliance on the Agreement.
Example 2
New title commitment shows an exception for a 2014 Tax Sale Certificate for $35,000.00 with a related Lis Pendens. Seller bought the property in 2015 and has an owner's title policy for $120,000.00 free and clear of the open Tax Sale Certificate.
Analysis: The insurer on the new title commitment may not rely on the Agreement to omit because there is an open Lis Pendens. They should instead ask the insurer on the existing owner's title policy for an indemnification letter. The questions presented for the prior insurer to analyze the situation will likely include, but not be limited to: does the current tax search show an open lien and did the seller get notice of the tax issue before or after closing. They will likely request the office that issued the subject policy to provide copy of its file, settlement statement and ledger. Regardless of the questions, the existing insurer will need to address the exception in a way that allows the parties to move forward.
Example 3
New title commitment shows an exception for the outstanding interest of Mary Smith by virtue of a life estate she received in 1995 deed to her daughter Barbara Smith. Barbara Smith later sold the property to the current seller in 2004. The current seller has a title policy free and clear of any exception relating to the interest of Mary Smith. The death records for Mary Smith cannot be located in the Counts Surrogate's records.
Analysis: The insurer on the new title commitment cannot rely on the Agreement and must request an indemnification form the insurer who issued the existing owner's title policy to the seller. The indemnification will likely be issued in ordinary course. The insurer on the existing owner's title policy will likely also ask the issuing office to confirm there is proof of death of Mary Smith in its file.
Example 4
New title commitment shows an exception for irregularities of a recent foreclosure which are listed in the Chancery Abstract. The new title commitment is for $400,000.00 of insurance. The mortgage that was the subject matter of the foreclosure was for $200,000.00. The seller took title as a 3rd party bidder at the Sheriff's sale relating to the foreclosure and purchased a title policy for $300,000.00, which is free and clear of these exceptions.
Analysis: The insurer on the new title commitment cannot omit the exception relating to the irregularities of recent foreclosure by relaying on the Agreement because of the seller's title policy.