The Owner’s and Loan Policies include a new defined term “Enforcement Notice” and revise the defined term “Public Records.” These are important new terms for Covered Risks 5, 6, 7, and 8 in both.

“Enforcement Notice” is defined as a “document recorded in the Public Records that describes any part of the Land and . . . is issued by a governmental agency that identifies a violation or enforcement of a law, ordinance, permit, or governmental regulation; is issued by a holder of the power of eminent domain or a governmental agency that identifies the exercise of a governmental power; or asserts a right to enforce a PACA-PSA Trust.”[xxiv] [xxv]

The revised definition of “Public Records” distinguishes between those public records that are intended to be used for limited purpose in title insurance policies and other governmental records that are not intended as such, and which are construed generally as being outside of the policy’s intended scope.[xxvi] [xxvii] The newly defined “Enforcement Notice”, together with the revised “Public Records” definition, represent a much-needed clarification as to what form of notice causes a covered loss, and where such notice must be recorded to trigger coverage unless excepted from coverage in Schedule B.

Covered Risk 10: Loan Policy

The 2021 ALTA Loan Policy Clarifies Those Components of a Loan That a Title Policy Covers

Covered Risk 10 in the new Loan Policy was overhauled to clarify the specific components of Indebtedness that benefit from priority coverage for the Insured Mortgage.[xxviii]

The 2006 Loan Policy addressed the lack of priority of the Insured Mortgage lien against other liens on the Title but, as with all of the Covered Risks, its language was subject to Exclusion 3(d) for “[d]efects, liens, encumbrances, adverse claims, or other matters . . . (d) attaching or created subsequent to Date of Policy . . . .”[xxix]  This left open the question of whether principal disbursed subsequent to Date of Policy (other than construction loan advances addressed by Covered Risk 11(a)) were actually included as part of the priority coverage under Covered Risk 10. The ALTA Forms Committee wanted lender customers to understand this question and seek an endorsement, such as the ALTA 14 (Future Advance – Priority) or ALTA 14.1 (Future Advance – Knowledge), whichever is most appropriate in light of the terms of the subject loan and applicable state law, to be confident in the scope of the priority coverage provided by Covered Risk 10.[xxx] The Forms Committee reworded the 2021 Loan Policy to resolve the uncertainty by driving lender Insureds to seek an appropriate endorsement whenever a loan that is not a construction loan contemplates future advances of principal.[xxxi]

Covered Risk 13: Loan Policy / Covered Risk 9: Owner’s Policy

The 2021 ALTA Policies Improve Coverage for Issues Related to Creditors’ Rights Against Real Property

Covered Risk 13 in the Loan Policy, and Covered Risk 9 in the Owner’s Policy, sometimes referred to as “back-chain creditors’ rights coverage,” affords protection to the Insured against the risk that a transaction prior to the one for which the Loan Policy or Owner’s Policy is being issued is challenged on the basis that it constituted a fraudulent conveyance, fraudulent transfer, or a preferential transfer, under federal bankruptcy, state insolvency, or similar state or federal creditors’ rights laws.[xxxii]

Section 550(a) of the Bankruptcy Code authorizes an alternative remedy in allowing the bankruptcy trustee to “recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property . . . .”[xxxiii] The new Covered Risk improves back-chain creditors’ rights coverage by expressly stating that protection against loss resulting from “the effect of a court order providing an alternative remedy” now applies to both subsections of this Covered Risk.[xxxiv] [xxxv]

Additionally, the back-chain creditors’ rights coverage has been updated to expressly address the risk of a challenge to a prior transaction based on it being voidable under the Uniform Voidable Transactions Act. The National Conference of Commissioners changed the Uniform Fraudulent Transfer Act to the Uniform Voidable Transactions Act (“UVTA”) in 2014[xxxvi] and numerous states have enacted the UVTA as part of applicable state creditors’ rights law.[xxxvii] The 2021 revision modernizes coverage by expressly referencing the UVTA within this Covered Risk.[xxxviii]

New Exclusions and Clarity on Certain Others from Coverage

Two new Exclusions have been added with the 2021 Owner’s and Loan Policy revisions. The remainder of the revisions to this section are intended to keep the Exclusions internally consistent with modifications made to the corresponding Covered Risks and Conditions sections of the policies.

 First is the governmental police power exclusion (Exclusion 1.b). The 2021 revision adds the words “forfeiture,” “regulatory,” and “national security” power to the list to clarify that these are intended to be excluded from coverage and are within the scope of Exclusion 1.b.[xxxix] Note, however, that a concluding sentence in Exclusion 1 of the 2021 policies makes clear that the Exclusion “does not modify or limit the coverage provided under Covered Risk 5 or 6”.[xl]  So, as was the case with Exclusion 1 of the 2006 policies, the 2021 policies do insure against loss or damage arising from the enforcement of a governmental forfeiture, police, regulatory, or national security power to the extent of the enforcement described in an “Enforcement Notice” that, as defined, is recorded in the “Public Records,” and is not excepted to in Schedule B.[xli]

Second is the ‘failure to pay value’ exclusion (Exclusion 3.e.). It has been modified to make clear that “value,” for purposes of this exclusion, means “consideration sufficient to qualify the Insured named in Schedule A as a bona fide purchaser or encumbrancer”—the word ‘encumbrancer’ being unique to the Loan Policy—to be entitled to the protection of state recording statutes.[xlii] The clarification should bring comfort to those who might have confused “value” in this Exclusion 3.e. context for “fair value,” “reasonably equivalent value,” or “fair market value”.[xliii]

Exclusion 4 of the Owner’s Policy and Exclusion 6 of the Loan Policy are the creditors’ rights exclusion. As the counterpart to Covered Risk 9 of the Owner’s Policy and Covered Risk 13 of the Loan Policy, each policy now expressly excludes from coverage, in addition to fraudulent conveyances and fraudulent transfers, loss that arises out of a voidable transfer claim under the UVTA as well as voidable preference claims to the extent the instrument of transfer vesting the Title as shown in Schedule A. In the Loan Policy context, this phrase reads “to the extent the Insured Mortgage is not a transfer made as a contemporaneous exchange for new value . . . .”[xliv] These additions modernize and add clarity to each policy.[xlv]

Exclusion 7 of the Loan Policy and Exclusion 5 of the Owner’s Policy contain a new exclusion for liability by reason of any claim arising from a PACA-PSA Trust. Note, however, that the exclusion expressly states that it does not “modify or limit the coverage provided under the new Covered Risk 8”[xlvi], which insures against loss for “an enforcement of a PACA-PSA Trust, but only to the extent of the enforcement described in an Enforcement Notice” that has been recorded in the “Public Records”.[xlvii]

Exclusion 9 of the Loan Policy and Exclusion 7 of the Owner’s Policy contain a new exclusion for loss arising from “[a]ny discrepancy in the quantity of the area, square footage, or acreage of the Land or of any improvement to the Land.”[xlviii] Although the title insurance policy has never been intended to provide coverage for these issues, this exclusion was added to eliminate the need to add a special exception to Schedule B of the policy whenever the record legal description of the Land includes references to the subject parcel’s quantity of area, square footage, or acreage and the Insured prefers that the legal description in Schedule A of the policy exactly match the record legal description. This new exclusion eliminates the confusion.[xlix]

Modernize Language Relating to the Policies’ Schedule B Exceptions from Coverage

Each policy’s ‘Schedule B – Exceptions from Coverage’ now begins with a preamble that addresses globally any exceptions to restrictive covenants shown in the policy that may contain unenforceable discriminatory provisions. The added language is intended to make clear that when the policy includes an exception for a restrictive covenant, it does not perpetuate or republish any illegal provisions found therein, but still preserves the exception to coverage for those portions of the covenant that are legal and enforceable.[l]

Likewise, the policies now contain a model exception immediately preceding the list of Schedule B exceptions that clarifies that the policy does not cover loss due to the terms and conditions of any lease or easement that is identified as an insured interest in Schedule A of the title policy.[li] Like the Preamble discussion above, this model exception eliminates the need for a specific numbered exception in Schedule B as to the terms and conditions of an easement or lease that is shown as part of the interest being insured in Schedule A of the title policy.[lii]

Eight New Defined Terms and Certain Others Revised

There are eight new Defined Terms in Condition 1. These are Affiliate, Consumer Protection Law, Discriminatory Covenant, Enforcement Notice, Government Mortgage Agency or Instrumentality, Obligor, PACA-PSA Trust, and State.[liii] Of note, Affiliate, is as an Entity “that is wholly owned by the Insured; that wholly owns the Insured; or if that Entity and the Insured are both wholly owned by the same person or entity.”[liv] State is “[t]he state or commonwealth of the United States within whose exterior boundaries the Land is located. The term “State” also includes the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and Guam.”[lv]

There are also revised Defined Terms in Condition 1. Of note, Indebtedness expressly includes “advances made for insurance premiums” [Condition 1.i.i.(g)]; “real estate taxes and assessments imposed by a governmental taxing authority” [Condition 1.i.i.(h)(1)]; and “regular, periodic assessments by a property owners’ association” [Condition 1.i.i.(h)(2)].[lvi] 

The term Insured in the Owner’s Policy, clarifies with added language that a conveyance from the named Insured to any one of the following qualifies the grantee as an Insured under the policy, including an Affiliate: “A trustee or beneficiary of a trust” [Condition 1.g.i.(e)(2)]; “a spouse who receives title [in] a dissolution of marriage” [Condition 1.g.i.(e)(3)]; “a transferee by a transfer effective on the death of an Insured as authorized by law” [Condition 1.g.i.(e)(4)]; or “another Insured named in Item 1 of Schedule A” [Condition 1.g.i.(e)(5)].[lvii]

The term “Insured” in the Loan Policy clarifies with added language that the Insured is a person, “other than an Obligor, . . . [who] owns the Indebtedness, the Title, or an estate or interest in the Land . . . but only to the extent [the person] either . . . owns the Indebtedness for its own account or as a trustee or other fiduciary or . . . owns the Title after acquiring the Indebtedness.”[lviii] The definition further clarifies that a conveyance from the named Insured to any one of the below qualifies the grantee as an Insured under the policy.[lix]

Note that both the revised Owner’s Policy and Loan policy have removed the requirement that the deed or conveyance from the Insured to an Affiliate be “delivered without payment of actual valuable consideration” to qualify the grantee Affiliate within the policy’s definition of “Insured”.[lx]

The term “Public Records” in the Owner’s Policy and Loan Policy has been modified to specifically enumerate the filing systems that are intended to be considered Public Records for the purpose of title insurance and to distinguish other governmental records that are not intended to qualify as Public Records within the scope of the title insurance contract. These mean “[t]the recording or filing system established under State statutes . . . under which a document must be recorded . . . to impart constructive notice [to a purchaser for value without knowledge] of matters relating to the Title . . . .”[lxi] Expressly, Public Records do not include “any other recording or filing system, including any pertaining to environmental remediation or protection, planning, permitting, zoning, licensing, building, health, public safety, or national security matters.”[lxii]

Condition 8 in each policy now contains a revised preamble emphasizing that the title policy is a “contract of indemnity against actual monetary loss or damage” by reason of matters insured against and “is not an abstract of the Title, report on the condition of the Title, legal opinion, opinion of the Title, or other representation of the status of the Title.”[lxiii]

An added term in Condition 8.a. ii. states that a “fair market value of the Title” [bolding added] standard will be used to calculate compensable loss or damage based upon diminution in value, as compared to the open-ended term “value of the Title”, on which the 2006 title policies relied.[lxiv] A new Condition 8.b., addressing the date as of which loss or damage will be calculated, states that “the fair market value of the Title in Condition 8.a. ii. is calculated using the date the Insured discovers the defect, lien, encumbrance, adverse claim, or other matter insured against by this policy.”[lxv] 

However, as provided by new Condition 8.c., “[i]f, at the Date of Policy, the Title to all of the Land is void by reason of a matter insured against by th[e] policy, then the Insured Claimant may . . . elect to use the Date of Policy as the date for calculating the fair market value of the Title . . . .”[lxvi] As provided by Condition 8.d.(i), if the Insurer exercises its Condition 5.b. right to cure the claimed defect but is unsuccessful, then the Amount of Insurance increases by 15% (as compared to 10% in the 2006 Owner’s Policy).[lxvii] Also, Condition 8.d.ii. provides the Insured two additional alternative dates from which to choose as the “as of” date for calculating the amount of loss or damage when the insurer has attempted and been unsuccessful in curing the claimed defect. These are: (1) the date the settlement, action, proceeding, or other act described in Condition 5.b. is concluded; or (2) the date the insurer received the Insured’s notice of claim.[lxviii]

Condition 8 of the Loan Policy includes the same “fair market value of the Title” [bolding added] standard as the revised Owner’s Policy, to add clarity to what is meant by “value of the Title” in Condition 8.a.iii., for purposes of calculating compensable loss or damage based upon diminution in value.[lxix] New Condition 8.b. addresses the date as of which loss or damage will be calculated for an Insured lender and states that the “[f]air market value of the Title in Condition 8.a.iii. is calculated using either “the date [title is acquired] as a result of a foreclosure or deed in lieu of foreclosure” or “the date the lien of the Insured Mortgage . . . is extinguished or rendered unenforceable by reason of a matter insured against by this policy.”[lxx]

As with the revised Owner’s Policy, the 2021 Loan Policy, in Condition 8.c., also provides the Insured lender with two added benefits if the insurer exercises its right to cure the claimed defect but is unsuccessful. They are that the Amount of Insurance will be increased by 15% (as compared to 10% in the 2006 Loan Policy).[lxxi] And also, that the Insured may elect, as an alternative to the dates set forth in Condition 8.b. [for calculating the fair market value of the Title in Condition 8.a.iii.], to use either the “date the settlement, action, proceeding, or other [curative] act . . . is concluded, or the date the notice of claim required by Condition 3 is received [by the Insurer] . . . .”[lxxii]  

Additionally, there are several miscellaneous conditions added. First, Condition 10 of the Loan policy has been retitled as “Reduction or Termination of Insurance”. A new Condition 10.b provides that, when the Insured acquires the Title through foreclosure or a deed in lieu of foreclosure, the Amount of Insurance is not reduced by the amount that is credited against the Indebtedness.[lxxiii]

Revised Condition 15 in the Loan Policy and Condition 16 in the Owner’s Policy provide that the “State law of the State where the Land is located, or to the extent it controls, federal law, will determine the validity of claims against the Title and the interpretation and enforcement of the terms of the policy, without regard to conflicts of law principles to determine the applicable law.”[lxxiv]

Next, Condition 17 of the Loan Policy and Condition 18 of the Owner’s Policy prohibit class action proceedings pertaining to “[a]ll claims and disputes arising out of or relating to this policy, including any service or other matter in connection with issuing this policy, any breach of a policy provision, or any other claim or dispute arising out of or relating to the transaction giving rise to this policy. . . .”[lxxv] 

Lastly, Condition 18 of the Loan Policy and Condition 19 of the Owner’s Policy includes a revised Arbitration provision as the last numbered Condition that is bracketed to signify that each title insurer has the option to include or delete it.[lxxvi] Deleting the bracketed provision from the title insurer’s typeset form obviates the need for an endorsement to accomplish the same result in transaction-specific contexts. 

Copies of redlined comparisons of the 2006 ALTA Policies against the 2021 ALTA Policies, and a clean blackline version of each, as well as comprehensive comparison charts of both policies, can be found at https://www.alta.org/policies-and-standards/policy-forms/.

Note: Nothing contained in this article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This article is intended for educational and informational purposes only.