THE NEW ALTA POLICY FORMS

by Robert S. Bozarth^*

• Choosing an ALTA Policy Form

Which form of title policy is the best?  Until recently, it was a difficult question.   Even limiting our inquiry to the basic loan and owner’s policy forms adopted by American Land Title Insurance Association, title insurance customers have been deciding among the 1970 form, the 1970 form revised in 1984, and the 1992 form.  Few, if any, have ordered the 1987 and 1990 versions, recently. 

The oldest title insurance forms still in active use are the 1970 ALTA Owner's and Loan Policies.  Some still order the 1970 policies, perhaps hoping to obtain some form of environmental loss protection since it is the only surviving policy form predating the environmental protection lien exclusion added in the 1984 revision of the policies.  That may be futile; all of the litigation failed that sought to impose environmental liability on a title insurer for the possibility of pollution on the land as a defect in title.

In 1984 ALTA changed Exclusions 1 and 2 of the policy to add the environmental exclusion, as well as an exclusion for past subdivision issues.  The 1984 policies also tempered Exclusions 1 and 2 by implying that coverage was not lost if a notice of a violation of an excluded matter was recorded in the “public records” as defined in the policy.  Many consumers have concluded that the 1984 amendments to the Exclusions are less restrictive on balance.

The 1984 revision was just a stopgap that anticipated the full revision of the 1987 ALTA policies.  The language was simplified somewhat in 1987, but most sections of the policy related provision by provision to the 1970 policy.  The environmental protection and subdivision exclusions carried over from the 1984 revision, and an arbitration provision was added to the Conditions and Stipulations.  The owner’s policy added a coinsurance provision.  Those preferring the earlier policies usually named the environmental exclusion, the coinsurance or arbitrations section, or a general suspicion of the new policy as the reason for ordering the old, but familiar, policy forms instead.  The 1987 Loan Policy also included Section 9(b) of the Conditions and Stipulations that excited the “last dollar” concerns that payments on the loan diminished the policy’s “amount of insurance.”

In 1990 ALTA added the creditor’s rights exclusion to the 1987 policy.  Ironically, the exclusion was added because many lenders objected to a creditor’s rights exception in Schedule B for leveraged buyout transactions.  The exception showed that the parties were aware of creditors’ rights exposure at the outset of the transaction.  An exclusion printed in the policy would be much more subtle and would not give competing creditors fodder for their challenges to the insured mortgage. 

Unfortunately, the 1990 exclusion was far too comprehensive, limiting coverage as to matters that title insurers had willingly covered in the past.  The objections to other features of the new policy paled in comparison to concerns about the new strict creditors’ rights exclusion. 

Just from reviewing cases, one would not understand why the creditors’ rights issue has become such problem.  There is only one reported decision, and it exonerated the title insurer from liability under a policy that had no creditor’s rights exclusion or exception.  However, the loss from a creditors’ rights claim on a large commercial transaction could be catastrophic. Title insurance policy premiums are poor compensation for assuming such a risk.

As soon as it became apparent that the 1990 creditors’ rights exclusion was unacceptable on the market, ALTA adopted the variant that had been filed in New York.  The new 1992 exclusion applied only to the transaction creating the interest insured in the policy, and then only as to fraudulent conveyances, equitable subordination, and preferences, with two carve outs for the preference exclusion.  It was a defensible exclusion, but creditors’ rights exclusions had already been tainted by the 1990 version, so many still objected to it.

However, the coverage of the basic policy forms did not really change much at all from 1970 to 1992.  Indeed, in three out of five of these revisions, the changes made affected only one or two exclusions, and nothing else in the policy.   That made the choice among these forms difficult.  Which nuance was best?

Each policy is composed of pages of provisions to read and compare.  Who has the time to make a considered choice?  The ALTA Forms Committee recognized the problem facing title insurance consumers and decided to devise a new set of forms that clearly makes all preceding forms obsolete.

Beginning in October, 2002, the ALTA Forms Committee embarked on a review and revision of the 1992 policy forms.  It considered several novel approaches, like a suite of residential and a suite of commercial policy forms, but it decided to keep the basic policy forms that apply in either context.  That doesn’t mean that it will discard the recent residential policy forms.  Expect to see them updated to the new format soon, so residential owners and lenders will have a choice of the basic policy or the expanded coverage residential policy forms.

The new policy forms were adopted by ALTA on June 17, 2006, and should be available in many states this autumn.  To help you decide whether to order the new policy forms on your transactions, a review of what is new in the forms and what has been dropped is now provided.

• New Provisions in the 2006 ALTA Policies
• For Both Loan and Owners Policies
• The new policies address emerging technology applications to the public records by electronic documents, electronic recordings, and “transferable records” like the mortgages in the MERS® system.  Condition Section 6 also refers to “e-mails, disks, tapes, and videos,” as well as the more traditional mediums carried over from the 1992 policies.
• The insuring provisions, now defined as “Covered Risks,” have been expanded by adding six new Covered Risks in each policy.  Four involve matters that might have been implied as part of the coverage in the 1992 ALTA policy Exclusions.  Two more Covered Risks are made for limited creditors’ rights coverage and for “gap” coverage for the period between the Date of Policy and the time the insured documents are recorded.
• Even the increase in the number of Covered Risks understates the scale of the increase in coverage.  For example, Covered Risk 2 still insures “Any defect in or lien or encumbrance on the title,” but that is now followed by three new subsections.
•  Covered Risk 2(a) adds a laundry list of defects in seven categories that are expressly covered by the new policies. 
• Covered Risk 2(b) insures against the lien of real estate taxes or assessments due or payable, but unpaid at Date of Policy. 
• Covered Risk 2(c) expressly insures against matters of survey, including encroachments of improvements on the insured land onto adjacent land, and encroachments of improvements on adjacent land onto the insured land.  This encroachment coverage is one of the more important features of the ALTA 9 Restrictions, Encroachments, Mineral Endorsement, now incorporated into the basic policy, but it was not obviously covered in the prior policies.
• New Covered Risks 5, 6, 7, and 8 now give express coverage for matters involving:
• a violation or enforcement of laws, ordinances, permits, or regulations;
• a violation or enforcement of the police power; or
• an exercise of eminent domain or any taking by a governmental body that is binding on the rights of a purchaser for value and without knowledge;
• if notice of the violation, exercise, or enforcement is recorded in the Public Records.
• These coverages were implied in the Exclusions of the 1984, 1987, and 1992 policy forms, but now the intended coverage is clearly stated. 
• In all prior title insurance policy forms, the coverage is limited to matters occurring or attaching before the Date of Policy specified in Schedule A.  In the 2006 policies, several Covered Risks add coverage for events occurring after the Date of Policy:
• Covered Risks 11 (Loan Policy only) insures the priority of the Insured Mortgage over construction advances for work contracted or commenced before the Date of Policy, or financed by proceeds of the loan.  Of course, in many states, this Covered Risk must be limited by an exception to conform to the mechanic’s lien law of the state where the project is located. 
• Covered Risks 13 (Loan) and 9 (Owners) grants some limited creditor’s rights protection:
• Subsection (a) insures against impairment of the mortgage (Loan) or loss of title (Owners) as a result of a finding that any transaction preceding the transaction creating the insured interest was either a fraudulent conveyance or a preferential transfer under federal bankruptcy, state insolvency, or similar creditors’ rights laws.  This coverage does not apply to the transaction creating the interest insured in the policy.
• Subsection (b) Insures against loss if the transaction insured in the policy constitutes a preferential transfer because it was either not recorded timely or its recording failed to impart notice of its existence to purchasers for value.   This coverage does apply to the transaction creating the interest insured in the policy.
• Why is there no subsection (c) for coverage against the imposition of equitable subordination?  After all, the 1992 Loan Policy included equitable subordination in its creditors’ rights exclusion.  Two reasons explain this change.  First, bankruptcy courts apply equitable subordination only when lenders have badly misbehaved.  Insurance companies do not insure against the deliberate acts of their policyholders.   Second, equitable subordination has also been removed from the creditors’ rights exclusions in the 2006 policies.
• Covered Risks 14 (Loan) and 10 (Owners) are a new approach to eliminate a “gap” in the coverage of a title policy between the Date of Policy and the date the insured instruments are recorded in the Public Records.  None of the prior versions of the basic policies included any kind of gap coverage.  Past efforts to cover this gap in residential policies have led to confusion.  The effective date of title insurance is counter-intuitive.  In all other lines of insurance, the effective date begins the coverage period.  In title insurance, it defines the end of the period.  If the insured instruments are recorded after the closing, the insured is better protected by an effective date as of the recording than by an effective date as of the closing.  ALTA tried to address the “gap” issue in the ALTA Short Form Residential Loan Policy by defining the Date of Policy as “Date of Policy:         a.m./p.m. or the date of recording of the insured mortgage, whichever is later.”  Although this provision covered the gap, some attorneys expressed misgivings because they feared that a court might decide that the policy coverage would not begin if the mortgage or deed of trust was not recorded at all.  Although this is a remote risk, and one that should be easily cured, the Forms Committee decided to try this new approach to resolve all of the gap issues.
• The undesignated provision at the end of the Covered Risks that establishes the title insurer’s duty to defend its policyholder has been expanded to encompass “in defense of any matter insured against by this Policy,” instead of “in defense of the title or the lien of the insured mortgage” in the earlier forms.  It recognizes that title insurers now cover transactional issues in addition to title and lien issues.
• The Exclusions from Coverage have been diminished, in large part by removing that implication of coverage to the Covered Risks, but also by recasting and using new definitions to reduce the size of the Exclusions.
• The 1992 policy Exclusion 1(a)(iii) has been revised from “a separation in ownership or a change in the dimensions or area of the land or any parcel of which the land is or was a part”  to “the subdivision of land” in the new 2006 exclusion, and in Covered Risk 5, as well.  It should be much clearer to policyholders.
• The 2006 policies add a new Exclusion for “[a]ny lien on the Title for real estate taxes or assessments imposed by governmental authority and created or attaching between Date of Policy and  the date of recording of the Insured Mortgage” as the only exception to the new gap coverage.  Taxes are prorated as of the Date of Policy in a closing, so they do not create a gap issue.
• The definitions in Section 1 of the Conditions include new terms and expand some of the familiar terms.  The significant changes include:
• The definition of “Insured” has been expanded to include a successor by dissolution, merger, consolidation, distribution, reorganization, or conversion to another type of entity, or certain grantees by deed if they are affiliated with the Insured.  In the 1992 policies, the parties would have sought a “permitted transfers,” “successor insured,”or “Fairway” endorsement for this coverage, but these should be unnecessary with the 2006 policies.
• The term “Unmarketable Title” replaces “unmarketability of title,” and the definition now fits the term.  It has also been expanded to apply to refusals to lease or lend, as well as refusals to purchase.
• The policies also include new definitions for “Amount of Insurance,” “Date of Policy,” “Insured Mortgage,” and “Title” to shorten and simplify the provisions.  The definition of Amount of Insurance was also designed to reassure policyholders that the “last dollar” issue created by Section 9(b) of the Conditions and Stipulations of the 1987, 1990, and 1992 policies has been eliminated.
• The new policy has relaxed the requirements for making claims against the policy. 
• Under Section 4 of the Conditions, an insured must make a proof of loss only after the title insurer asks for one.  The title insurer may ask for a proof of loss only if it is unable to determine the amount of the loss without it.  The new policies drop the penalties for failing to timely submit a proof of claim that caused policyholders some concern in prior policies. 
• In the 1992 policy, the cooperation obligations of the insured were scattered in Section 4 on Defense and Prosecution of Actions and in Section 5 on Proof of Loss.  The 2006 policy consolidates the cooperation provisions into a new Section 6 so the Insured is not asked to comb through the policy to discover all of its duties to cooperate.
• The Payment of Loss provisions of the new policy drop the requirement to produce the policy for an endorsement when a claim is settled.
• Section 8 of the new policy includes a number of helpful changes. 
• Section 8(a) sets the maximum liability of the title insurer for a loss.  The use of defined terms makes this provision much shorter and easier to understand than it was in earlier policies. 
• The new policy adds a new provision in Section 8(b) that
• adds 10% to the Amount of Insurance, and
• gives the Insured the option to value the loss at the date the claim was made or the date the claim is paid if the title insurer pursues litigation and is unable to establish the title or the lien of the mortgage as they were insured by the policy. 
• New Section 8(b) gives the Insured some leverage to influence the title insurer’s decisions whether to litigate with a third party or to settle with its Insured.
• The arbitration provision in Sections 13 (Loan) and 14 (Owners) has been reworded.  The American Arbitration Association was disappointed with the activity in the title insurance sector so it dropped title insurance.  The ALTA became the sponsor for the rules instead, but it simply adopted the existing AAA rules.  The provision also expands its scope to policies with an Amount of Insurance less than $2,000,000 instead of the $1,000,000 set in 1987.  Of course, a $1,000,000 property in 1987 would be worth at least $2,000,000 now, on average.  The increase was made to reflect rising values of residential real estate.  The arbitration provision allows unilateral triggering of arbitration by either the insured or the insurer, but that aspect does not apply to policies issued with an Amount of Insurance greater than $2,000,000.
• Section 14(d) (Loan) and 15(d) add incorporation provisions for endorsements.  If an endorsement is issued without the incorporation provisions, the new policy covers the issue itself.  It makes it clear that where an endorsement conflicts with the policy, the endorsement controls.
• Section 16 adds provisions specifying the choice of law as the law where the land is located.  This provision has been made necessary by the emerging international reach of title insurance.
• New Provisions in Loan Policies Only
• Covered Risk 9 insures the validity and enforceability of the lien of the Insured Mortgage and adds the list of defects first seen in Covered Risk 2(a) that applies to defects in title.  The list emphasizes that the coverage for defects in liens is coextensive with the coverage for defects in title.
• Covered Risk 11includes not only coverage against lack of priority for advances over mechanics’ liens in limited circumstances, as carried forward from the 1992 and prior policies, but adds the coverage in Section 11(b) of the ALTA 1 Street Assessment  Endorsement.
• Condition 1(d) introduces a definition of “indebtedness,” drawn in part from Condition and Stipulation section 2(c) of the 1992 policy, but adding construction loan advances to complement Covered Risk 11, prepayment premiums, exit fees and penalties, and amounts disbursed after the Date of Policy. 
• Do not be deceived by “the amounts disbursed after the Date of Policy.”  It does not add insurance of the validity, enforceability, or priority of future advances. 
• It does allow the insured lender to include future advances in its calculation of a loss for the first time if the claim does not involve questions of the validity, enforceability, or priority of advances. 
• It expands the coverage.  A 1992 Loan Policy does not insure the validity, enforceability, or priority of future advances, or include them in the computation of loss even if they were not at issue in a claim, unless the policy was modified by an ALTA 14, 14.1, or similar endorsement.
• The new schedules have some minor changes.
• Schedule A has new blanks for the loan number and address of the property securing the lien of the Insured Mortgage.  It also has optional check boxes for certain loan endorsements such as the condominium, PUD, variable rate, environmental protection, restrictions, encroachments, minerals, leasehold loan and future advance endorsements.
• Schedule B makes the old Parts I and II optional.  Now schedule B may be issued as a two-part schedule, as in the past, or with a one-part schedule as with the Owner’s Policy.
• New Provisions in Owner’s Policies Only
• The definition of the term “Insured” in Section 1(d) adds: “The term ‘Insured’ also includes . . . a grantee of an Insured under a deed delivered without payment of actual valuable consideration  conveying the Title . . . 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.”  It gives estate planners freedom to create living trusts without losing the title insurance coverage.
• Provisions Dropped by the 2006 ALTA Policies
• Provisions Dropped from the 1992 Loan Policy
• Old Exclusion 6 of the 1992 and earlier policies, relating to mechanics’ liens, did not carry over to the 2006 policies.  That does not mean that title insurers are always assuming full liability for mechanics’ liens; it just means that they must take an exception in Schedule B if the insurer intends to limit mechanics' lien coverage because of state-specific or transaction-specific issues.  Old Exclusion 6 was rarely enough in most cases, so the policies included an exception to augment it anyway.  With this change, a lender’s review can be focused on Schedule B only, without any concern about how the exclusion and exception interact with each other.
• As observed on page 14, equitable subordination was dropped from the creditors’ rights exclusion.  The ALTA Forms Committee decided that the exclusion for acts of the insured, Exclusion 3(a), was sufficient.
• New Section 9 differs from old Section 8 chiefly in its dropping subsection (d).  The Forms Committee decided that subsection (d) limited recovery of principal indebtedness by policyholders to the amount disbursed at Date of Policy, plus any protective advances or construction advances expressly not affected by subsection (d).  If the loss does not involve a dispute over the validity, enforceability, or priority of advances, there is no reason why the policyholder should not recover those amounts as well, within the limits of Section 8.
• CAVEAT:  By deleting Section 8(d), the Forms Committee did not intend to insure the validity, enforceability, or priority of future advances in this policy.  Each state has its own requirements for securing advances with a mortgage, so a title insurance underwriter must review the mortgage instruments to determine if they meet those requirements.  Accordingly, you should order an ALTA 14 or 14.1 (whichever is appropriate to the jurisdiction) if you want the policy to insure the validity, enforceability, and priority of advances. 
• If you assume that the addition of new Section 1(d)(ii) (that adds future advances to the definition of “Indebtedness”) and the dropping of old Section 8(d) equate to future advance coverage, and fail to order an ALTA 14 or 14.1, you may not have the insurance you need for those advances.
• One of the principal complaints about the 1987 through 1992 Loan Policies centered on old Section 9(b).  In 1987, the Forms Committee added section 9(b) to reassure policyholders that in those cases where the principal indebtedness had been paid down, the limit on the title insurer’s liability expressed in old Section 7(a)(ii) could be increased by accruing interest and advances made to protect the lien of the insured mortgage.  Unfortunately, the first part of Section 9(b) referred to the “amount of insurance” instead of the title insurer’s “extent of liability,” and that touched off the concerns about the policy’s coverage of the “last dollar” owed on the loan.  Lenders then began seeking “last dollar” endorsements to patch the perceived hole in the coverage.  By dropping old Section 9(b), the Committee removed the need for a "last dollar" endorsement even where the loan amount exceeds the Amount of Insurance (where the loan is also collateralized by personal property or additional real property covered in a separate title insurance policy, or is partially unsecured due to the creditworthiness of the borrower). 
• The Small Business Administration objected to Section 10, the “Liability Noncumulative” provisions, of the 1992 and earlier loan policies because it threatened the recovery of a second lienholder unless the second lienholder could show that the fair market value of the land exceeded the lien of the first lienholder.  Title companies began eliminating the provision in those states where they were not prohibited from doing so.  This policy eliminates the provision altogether.  It should please the SBA and any other second lienholder.  However, the provision has been continued in the Owner’s Policy because title insurers do not accept the obligation to pay double the value of a loss.
• Provisions Dropped from the 1992 Owner’s Policy
• The coinsurance provision, introduced in 1987 as Section 7(b) of the Conditions and Stipulations, has been dropped from the new policy.  It was a serious impediment to the acceptability of the 1987-1992 owner’s policies.  In its place, the new Owner’s Policy adds the provision in Section 8(b) that adds 10% to the Amount of Insurance, and gives the Insured the option to value the loss at the date the claim was made or the date the claim is paid if the title insurer pursues litigation and is unable to establish the title or the lien of the mortgage as they were insured by the policy.  New Section 8(b) gives the Insured some leverage to influence the title insurer’s decisions whether to litigate with a third party or to settle with its Insured.
• The Apportionment provision has been dropped from the new Owner’s Policy.  Apportionment forced the Insured to place values as of the Date of Policy on two or more nonadjacent properties if a claim arose.  The apportioned values would act as separate Amounts of Insurance for each parcel.  The Insured would not be able to shift coverage from properties unaffected by a defect to a property affected by a defect in case the affected property had increased in value.  Now there is no provision that would prevent shifting coverage from one property to the next.  This feature, termed “aggregation,” has always been available to lenders in the Loan Policy.

back to top