Title and Vesting - Part 2 - Chapters 21-23

Question 1

Explain the function of a preliminary title report in real estate transactions

Answer 1

A preliminary title report (prelim) is a report furnished by a title insurance company in connection with an application for a policy of title insurance which discloses the current vesting and encumbrances reflected on the public record. A title insurer has no duty to accurately report all title defects and encumbrances on the prelim.

Encumbrances set out in a preliminary title report include:

• General and special taxes
• assessments and bonds
• covenants, conditions and restrictions (CCRs)
• easements
• rights-of-way
• lien’s
• interest of others.

Question 2

Distinguish between a preliminary title report and an abstract of title for reliance on their content

Answer 2

A prelim is not a representation of the conditions of title or a title insurance policy and may not be relied on by anyone. A prelim is no more than an offer to issue a title insurance policy based on the contents of the prelim and any modifications made by the title company before the policy is issued.

The prelim and a last-minute date down search of title conditions are used by escrow and the title insurer to reveal any title problems to be eliminated before closing and, as instructed, obtain title insurance for the document when recorded.

Conversely, an abstract of title is an accurate, factual representation of title to the property being acquired, encumbered or leased. Thus, an abstract of title may be relied on by those who order them as an absolute representation of the conditions of title.

Question 3

preliminary title report (prelim)

Answer 3

A PRELIMINARY TITLE REPORT (prelim) is a report constituting a revocable offer by a title insurer to issue a policy of title insurance, used by a buyer and escrow for an initial review of the vesting and encumbrances recorded and affecting title to a property.

Question 4

encumbrance

Answer 4

An ENCUMBRANCE is a claim or lien on title to a parcel of real estate, such as property taxes, assessment bonds, trust Deeds, easements and Covenants, conditions and restrictions. A title insurer has no duty to accurately report encumbrances affecting title on the prelim, shown as exceptions for the proposed policy of title insurance.

Question 5

date-down search

Answer 5

A DATE-DOWN SEARCH is a further search of the public records performed by a title insurer after preparing a preliminary title report and immediately prior to issuance of a policy of title insurance. The prelim and a last-minute date down search of title conditions are used by escrow and the title insurer to reveal any title problems to be eliminated before closing and, as instructed, obtain title insurance for the documents when recorded. The title insurers date down search of the prelim prior to closing may turn up title defects or encumbrances not included in the prelim. These occur by error on the part of the insurer or buy a recording after the preparation of the prelim. In any case, the title company withdraws its offer under the prelim and the title company then issues a new prelim, offering to issue a policy on different terms.

Question 6

abstract of title

Answer 6

An ABSTRACT OF TITLE is an accurate, factual representation issued by a title company as a guarantee to the named person, not an insurance policy, listing all recorded conveyances and encumbrances affecting title to the described real estate. An abstract of title is an accurate, factual representation of title to the property being acquired, encumbered or leased. Thus, an abstract of title may be relied on by those who order them as an absolute representation of the conditions of title. An abstract of title is a statement of facts collected from the public records and is intended by the insurance company to be relied upon as fact.

Question 7

Explain how a policy of title insurance indemnifies a person who acquires an interest in real estate against a monetary loss caused by an undisclosed encumbrances on title.

Answer 7

A title insurance policy is the contract issued by a title insurance company agreeing to reimburse or hold harmless and insured person who acquires an interest in real estate against a monetary loss caused by an encumbrance on title that:

• is not listed in the title insurance policy as an exception to coverage and
• the insured policyholder was unaware of when the policy was issued.

Question 8

Differentiate between the various types of title insurance policies, endorsements and binders available.

Answer 8

Depending on the type of transaction, a buyer’s agent advises their client to include in the purchase agreement title coverage in the form of either:

• a CLTA standard policy
• a ALTA-O owners extended coverage policy
• a ALTA-R residential policy - CIDs or apartments
• a ALTA-H homeowner’s policy
• a Title insurance binder

Note customarily, the seller pays the premium for title insurance policy.

Question 9

Comprehend the six operative sections of a title insurance policy.

Answer 9

Title insurance is purchased to assure real estate buyers, tenants and lenders the interest in title they acquire is what they bargained for. A policy of title insurance is broken down into six operative sections including:

1. RISKS OF LOSS COVERED, called INSURING CLAUSES, which are based on a completely unencumbered title at the time of transfer
2. RISKS OF LOSS NOT COVERED, aka EXCLUSIONS, which are comprised of encumbrances arising after the transfer or known to or brought about by the insured which are a boilerplate set of title conditions.
3. IDENTIFICATION - SCHEDULE A - of the insured, the property, the vesting, the dollar amount of the coverage, the premium paid and the recording, called schedule a.
4. RECORDED INTERESTS - SCHEDULE B - aka EXCEPTIONS - which are itemized for all types of coverage in schedule B, and include any encumbrances affecting title and any observable on-site activities which are listed as risks agreed to and assumed by the insured and not covered by the policy.
5. PROCEDURES, aka CONDITIONS, for claims made by the named insured and for settlement by the insurance company on the occurrence of a money loss due to any encumbrance on title which is not an exclusion or exception to the coverage granted by the insuring Clauses.
6. ANY ENDORSEMENTS for additional coverage or removal of exclusions or pre-printed exceptions from the policy.

Question 10

Understand the dollar limitations placed on coverage provided under title policy exclusions.

Answer 10

The buyer’s choice of a title policy is initially stated in the purchase agreement, including whether the buyer or seller pays the title insurance premium. The CLTA standard policy insures against all encumbrances affecting title which may be discovered by a search of public records prior to issuance of the policy.

A variety of endorsements may be added to title insurance policies to provide coverage for title conditions and use or economic conditions not covered by the basic policies.

The conditions section of a title insurance policy limits the amount the title company is required to pay to settle a claim made by an insured.

Question 11

Implement the insurers process for settling a claim.

Answer 11

To begin the claims process on becoming aware of an encumbrance covered as a loss by the policy of title insurance:

• the insured promptly give the title insurance company written notice of claim
• the title company then has 15 days to acknowledge or provide forms or begin an investigation
• the insured then needs to provide the title company with a proof of loss statement within 90 days after incurring the loss
• then the title insurance Company has 40 days to accept or reject the claim
• on accepting a claim the title company may pay policy limits, or pay the loss, or negotiate a settlement, or bring or defend legal action, or purchase the mortgage from the lender.

Question 12

title insurance

Answer 12

TITLE INSURANCE is a form of Indemnity insurance issued by a title insurance company which hold harmless the name insureds against monetary loss caused by an encumbrance not listed in schedule B of the policy and not known by the insured when the policy was issued. Thus, a policy of title insurance is a form of Indemnity Insurance, not a guarantee of title conditions. Title insurance policies are issued on one of several forms used by the entire title insurance industry in California. The policies are issued to:

• buyers of Real Estate
• tenants acquiring long-term leases and
• lenders originating mortgages secured by real estate.

Question 13

binder

Answer 13

A BINDER is a written commitment of a title insurer to issue a title insurance policy in the future, usually acquired by a buyer intending to resell the described property. A buyer acquiring property they intend to resell within two years after their purchase, usually an equity purchase (EP) investor or other flipper, provides for the seller to pay for a title insurance binder on closing. A binder, also called a commitment to issue, is a written commitment of a title insurer to issue a title insurance policy in the future, usually acquired by a buyer intending to resell the described property. The cost of a binder is 10 to 15% more expensive than a CLTA or ALTA policy.

Question 14

encumbrance

Answer 14

An ENCUMBRANCE is a claim or lien on title to a parcel of real estate, such as property taxes, assessment bonds, trust Deeds, easements and Covenants, conditions and restrictions. Almost all losses due to the reduction in the value of real estate below the policy limits arise out of an encumbrance.
Any right or interest in real estate held by someone other than the owner is considered an encumbrance when it diminishes the value of the real estate. Note- physical conditions on the property are not encumbrances since they do not affect title. Physical conditions are existing uses visible on the property by observation like canals, highways, irrigation ditches and levees.

Question 15

abstract of title

Answer 15

An ABSTRACT OF TITLE is a representation issued by a title company as a guarantee to the named person, not an insurance policy, listing all recorded conveyances and encumbrances affecting title to the described real estate.

Question 16

preliminary title report (prelim)

Answer 16

A PRELIMINARY TITLE REPORT is a report constituting a revocable offer by a title insurer to issue a policy of title insurance, used by a buyer and escrow for initial review of the vesting and encumbrances recorded and affecting title to a property.

Question 17

exclusion

Answer 17

EXCLUSIONS are risks of loss not covered under a policy of title insurance, comprised of encumbrances arising after the transfer or known to or brought about by the insured. exclusions are included in section 2, the risks of loss not covered section, in a title insurance policy.

Question 18

exception

Answer 18

EXCEPTIONS are any encumbrances affecting title and any observable on-site activities which are listed as risks assumed by the insured and not covered by a policy of title insurance under Schedule B. Exceptions are included in section four, the recorded interest section, in a title insurance policy.

Question 19

Schedule A - identification

Answer 19

SCHEDULE A in a title insurance policy is the identification of the property interest insured, the legal description of the insured property, the date and the time covered began, the premium paid for the policy and the total dollar amount to be paid for all claims settled.

Question 20

Schedule B - exceptions

Answer 20

SCHEDULE B in a title insurance policy are exceptions from coverage, both standard and itemized. in addition to a title insurance policies standard exclusions, a policies general coverage under its “no encumbrance” insuring clause is further limited by the policy schedule B exceptions. The exception section contains an itemized list of recorded and unrecorded encumbrances which are known to the title company and affect the insured title.

Question 21

joint protection (JP) policy

Answer 21

JOINT PROTECTION (JP) POLICY is a title insurance policy which enables one or more individuals or entities to be named as insured, usually the buyer and the new mortgage holder. Thus, in addition to the owner standard CLTA title coverage, the JP policy provides coverage for a trust deed held by a lender or carry-back seller.

Question 22

proof-of-loss statement

Answer 22

A PROOF OF LOSS STATEMENT is a statement submitted to the title insurance company by the insured referencing the encumbrance discovered after they were issued the policy, the amount of the loss and the basis for calculating the loss.

Question 23

Understand what constitutes a taking of real estate by adverse possession

Answer 23

Adverse possession is the private taking of another’s land and the payment of taxes, knowing it belongs to someone else and without permission from the true owner.

Question 24

Differentiate adverse possession from trespassing, easements and encroachments

Answer 24

Easements are based on the concurrent use by a non-owner of another’s property. By contrast, adverse possession has one of its elements as the exclusive use of another’s property. Adverse possession is not connected with an individual’s possession of another’s property under the doctrine of Title by agreed boundaries.

Most easily confused with adverse possession is prescriptive easement. Like adverse possession, a prescriptive easement over another’s property is an uncompensated private taking of a right to use without the owner’s consent. However, a prescriptive easement only involves the non-exclusive (concurrent) and limited right to use another’s real estate without any obligation to pay property taxes. On the contrary, adverse possession is concerned with acquiring the ownership of real estate with its right to exclusive possession an obligation to pay taxes.

Encroachments are disputes between owners of adjoining properties which result not from a simple misplaced fence or boundary line, but from the location of improvements by one property owner which improperly cross over the common boundary line and intrude on to a neighbor’s property.

Question 25

List the requirements for perfecting a claim of adverse possession

Answer 25

The criteria for perfecting ownership by an adverse possession claims are:

• a color of title or claim of right to title
• actual, notorious an open possession
• Hostile, adverse and exclusive use
• continuous and uninterrupted possession for 5 years
• payment of current and delinquent real estate taxes and assessments

Question 26

Identify whether adverse possession is taken by color of title or claim of right

Answer 26

Under color of title, the adverse possessor presents written documentation demonstrating they have a good faith belief they are the true owner of the property.

A person whose adverse possession is based on a claim of right is merely a trespasser or Intruder who has taken possession of a property without any belief they are the true owner. Evidence of five years of continuous adverse and hostile possession and use by the adverse possessor and the payment of property taxes is required to prove ownership under a claim of right.

When the adverse possession claim is made under a claim of right, the adverse possessor needs to demonstrate their actual possession of the property by one of the following:

• surrounding the property with a substantial, protective enclosure
• cultivating the property or
• improving the property.

A possessors exclusive use of a property is required to perfect any adverse possession claim, whether based on color of title or claim of right. When another person concurrently or intermittently uses the property without consent from the adverse possessor, the possessors claim is defeated.

Question 27

adverse possession

Answer 27

ADVERSE POSSESSION is a method of acquiring title to real estate owned by another by openly maintaining exclusive possession of the property for a period of 5 years and paying all property taxes. Adverse possession is the only means by which the law will take 100% of an individual’s legal or equitable ownership interest in a parcel of real estate and give it to another individual without compensation. Adverse Possession is based on a social and economic rationale suggesting real estate is not to lie idle.

Question 28

color of title

Answer 28

COLOR OF TITLE is title that has the appearance of validity but has a fatal defect and is ineffective. In this case individuals have an adverse possession claim to the property based on the color of title since they had a good faith belief the deed they received was valid.

Question 29

claim of right

Answer 29

A CLAIM OF RIGHT is a claim of ownership made without any documentation, except possession and payment of taxes. Adverse possession by claim of right attacks the title held by the recorded owner and takes possession of the property with the intent to interfere with that title. A person whose adverse possession is based on a claim of right is merely a trespasser or Intruder who has taken possession of a property without any belief they are the owner.

Question 30

actual notice

Answer 30

ACTUAL NOTICE is the expression or implied knowledge of conditions which exists on a property. Actual notice means the owner is personally aware of the occupancy or the adverse possessor’s claim against the owner’s land.

Question 31

constructive notice

Answer 31

CONSTRUCTIVE NOTICE is a legal fiction charging persons who owned or acquired interest in real estate with knowledge of recorded documents affecting title and conditions observable on the property. Constructive notice is when, upon viewing the property, a reasonable person understands the adverse possessor appears to hold some interest in the property due to their occupancy.