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Defective title insurance
Defective title indemnity policies are widely used in the property industry to plug holes in defective titles and to cover unwelcome restrictive covenants.
Lenders use conveyancing indemnity policies for residential and commercial remortgages. Following due diligence, a title insurer will assume that the title is free from defects, that covenants have been observed, that searches are clear and that all previously registered charges will be redeemed on or before completion. Full title insurance (FTI) will protect the lender's security by covering any unknown defect, breach or problem discovered after completion. Usually, an FTI policy will cover fraud. It may also guarantee that a lender's charge will not rank behind any other.
However, great care is required because sometimes, despite the considerable premiums charged, these policies may not be worth the paper they are written on.
Points to check
If a new policy is being taken out check its terms very carefully:
does it contain strict provisions or warranties that could enable the insurer to avoid liability for even minor breaches?
does the definition of 'insured' include successors in title, lenders and/or tenants?
is the policy written only for a limited period?
what is the 'excess' payable in respect of any claim? The benefit of insurance may be very limited if the insured has to pick up a significant proportion of costs as its 'excess'
does the policy set out in detail each of the restrictive covenants or other matters to be covered? If the policy is required for a number of defects or covenants it must be clear on the face of the policy schedule that all of those risks are covered
Existing policies
When acting for a purchaser or a mortgagee in relation to a property that already has an indemnity policy, the solicitor acting for the buyer or mortgagee should:
obtain specific confirmation from the seller or borrower's solicitor that all provisions of the policy have been complied with
search for anything in the title papers that indicates any change in the risk profile since the policy was obtained, and check whether the insurer has been informed. A common warning sign is correspondence from an adjacent landowner alleging breach of a restrictive covenant that does not have a corresponding letter passing that information on to the insurers
check that the policy will benefit the purchaser or mortgagee, and look for any assignment or notice provisions that must be complied with
It is also worth checking that the insurer is still in business. If it isn't, then a priority task is to find out whether the policy has been taken on by another insurer.
Duty of full disclosure to the insurer
Insurance policies are contracts of 'utmost good faith'. There is an obligation to disclose to the insurer all facts material to the insured risk that is known, or deemed to be known, by the insured but neither known nor deemed to be known by the insurer.
If full disclosure is not made, even if concealment is unintentional, the insurer could elect to void the insurance contract before or after a loss has occurred.
A fact is 'material' if it 'would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk'. A fact could be material even if the risk would not have been declined or the premium increased as a result of disclosure. The test is what a prudent insurer would think to be material. The insured's opinion is irrelevant.
Disclosure to potential buyers
Policies usually restrict disclosure of their existence to 'bona fide purchasers', their mortgagees and professional advisers. Even in those cases the underwriters' written consent may be required before disclosure is allowed. If disclosure conditions are not observed, the insurer may void the policy.
A particular difficulty arises at auction. The seller cannot establish, with certainty, whether or not a request for a property pack comes from a bona fide purchaser. The request could come from someone seeking to take advantage of the fact that the title is defective. Consequently, an underwriter may be reluctant give consent due to the claims that might arise.
A difficulty for the seller is that enquiry 5.1 of the commercial property standard enquiries 1 specifically asks whether anyone has obtained, or been refused, insurance cover in respect of any defect in title of the property, including any restrictive covenant or a lost title deed. Enquiry 5.2 requests copies of all policy documents, including the proposal form, and confirmation that all conditions to such policies have been complied with.
When preparing a property pack for auction, a copy of the title indemnity policy should be obtained and carefully read in order to identify whether it can be disclosed. If in doubt it is important to obtain written instructions from the underwriter to determine whether it agrees to the disclosure of the policy.
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