An Owner’s Title Insurance Policy Protects You: But Did You Invalidate the Policy by Transferring Title to an LLC or Revocable Trust?

            As a full-service law firm handling real estate, estate planning, and land use matters, we see this factual circumstance often: a buyer of real estate purchased the property in their individual capacity before creating an estate plan. Once talking with an estate planning attorney, the buyer/owner wants to transfer the property to a new entity such as their newly formed revocable trust. While this may be appropriate for a variety of reasons, the owner must consider how transfers after owning a property may affect their title insurance policy. If the transferee receiving title is not an additional insured under the policy or the transfer is not contemplated by the policy terms, it may invalidate beneficial insurance coverage for the homeowner.

            This is similar to what happened in Kwok v. Transnation Title Ins. Co., 170 Cal.App.4th 1562 (2009). The California Second District Court of Appeal held that a transfer through a grant deed—the method to convey property from a grantor to a grantee—was an act not covered under the title insurance policy. Thus, the owner of the property (an LLC) terminated their insurance coverage by transferring the property to revocable trusts held by the LLC’s members.

            A title insurance policy is offered to buyers by title companies during the escrow period. If the buyer obtains financing from a bank or other lender, there are usually two insurance policies: a lender’s policy and an owner’s policy. As the name suggests, the lender’s policy protects the lender if a claim against title of the property occurs after closing. Not too surprisingly, the buyer pays for the lender’s policy as one of the many requirements a buyer must satisfy to receive the loan. The owner’s policy is usually optional—but it’s important for an owner. Why? Let’s assume that after the property is purchased—which may be the largest purchase of a buyer’s life—a person or entity suddenly appears and claims an interest in a property. This person files a lawsuit seeking to receive sale proceeds or to rescind the sale between the buyer and seller. If the buyer purchased an owner’s title policy, the insurance company issuing the policy would defend and otherwise protect the buyer from this lawsuit. Without purchasing title insurance, the buyer is left to defend itself at its own expense. Besides this hypothetical, title insurance may cover disputes concerning undiscovered liens, easements, or other boundary disputes depending on the policy.

            Many title policies contain the same or similar language as this:

            The coverage of this policy shall continue in force as of the Date of Policy in favor of an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by the purchase from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the title.

            If the insured owner never transfers title of the property until selling it, this discussion is irrelevant. But what if the buyer purchased insurance in its own name and, before the title claim is contested by a third party, quitclaims the property? Here, the buyer must be careful to not lose the benefit of the title policy insurance by voluntarily transferring the property. It all depends on the language of the policy itself and the deed conveying the transfer, but many policies are boilerplate so the type of policy can identify the potential to lose your rights.

            As an example, as of this writing, the CLTA Standard Coverage Policy 1190 does not cover voluntary transfers to revocable trusts. Nor does the ALTA Residential Title Insurance Policy 1979 and 1987 or the ALTA Owner’s Policy 1970, 1987, 1992 and 1990. If you purchase one of these policies—or any other policy that precludes the transfer of the property to another entity or a revocable trust—the buyer must procure an additional endorsement before purchasing the title insurance policy. It is not very difficult or expensive, but if you do not ask for it, you will not receive it.

            Conversely, if the owner quitclaims his or her interest to an LLC that is wholly owned by the owner then the title policy usually continues to be valid after the transfer. If the owner transfers his or her ownership interest to a trust and he or she is not the settlor of that trust, a policy endorsement would have to name the trust (and the trustees) as an additional insured. The same result may occur if the owner transfers title to a corporation where the stock or membership interests (if a limited liability company) are also not wholly owned by the owner. These hypothetical examples demonstrate that finding the correct result requires a case-by-case analysis of several factual circumstances.

What should I do if my insurance policy does not cover transfers to revocable trusts?

• Expand your coverage! Have coverage for trustees and successor trustees, as one example. Or obtain a new ALTA/CLTA policy altogether.
• Obtain an endorsement! They are rarely expensive and can alleviate the potential to invalidate your title insurance policy.

            Homeowner hazard and fire insurance policies must follow the same analysis—i.e., confirm that the proper parties are protected. In that context, the endorsement most used by insurers for a residence held in a trust is HO 05 43. Although not the subject of this article, when transferring or conveyance ownership interests of 50% or more, a related and important aspect to not overlook is property tax reassessment that occurs from a change in ownership under California Revenue & Taxation Code § 60, 61, and 62. Given the recent rise in property values, transferring property in a manner that does not qualify for an exclusion to reassessment could be a costly mistake.

            Title insurance can protect a new homeowner from claims that arise or are pursued after closing of the sale. Owners should carefully review the policy terms before transferring property, as even determining whether to use a quitclaim or a warranty deed may make a material difference. Similarly, if an owner knows it will transfer title shortly after acquiring title to a property, any potential issues may be resolved by requesting an endorsement to the title insurance policy. Do not be a homeowner that unwisely transfers title to their property, discovers a defect in title, and receives a denial of coverage letter from the insurance company because transferring title inadvertently invalidated coverage.

            Contact an experienced real estate attorney with questions about transferring or conveying ownership, property tax reassessment issues, or liability concerns.

            Author Ethan Birnberg is a business attorney licensed in California, Nevada, Colorado, and Wyoming and recent voted the “Best Attorney” in Truckee and North Lake Tahoe. He regularly assists clients with real estate issues, land use, landlord/tenant matters, HOA disputes, and all types of asset sales, acquisitions. He holds dual certifications as a business bankruptcy and consumer bankruptcy specialist from the American Board of Certification, and has extensive insolvency experience helping entities seeking to restructure under chapter 11 of the U.S. Bankruptcy Code, borrowers and lenders seeking out-of-court workouts, representing chapter 7 trustees, and advising directors, officers, and executive management regarding fiduciary duties and corporate governance issues. You can reach him at birnberg@portersimon.com.

            Porter Simon Law is a full-service law firm with attorneys licensed in California, Nevada, Colorado, and Wyoming. Its personal injury practice is called Porter Simon Sierra Injury Lawyers. Its lawyers have decades of experience representing clients in and around Truckee, Tahoe Donner, Tahoe City, Carnelian Bay, Dollar Point, Kings Beach, Tahoe Vista, Hobart Mills, South Lake Tahoe, Meyers, Homewood, Incline Village, Crystal Bay, Portola, Graeagle, Calpine, Downieville, Whitehawk, Loyalton, Sierraville, Nevada County, Placer County, Placerville, Granite Bay, Rocklin, Sierra County, El Dorado County, San Joaquin County, Madera County, Mono County, Mammoth Lakes, June Lake, Bridgepoint, Washoe County, Douglas County, Elko County, Reno, Carson City, Gardnerville, Roseville, Sacramento, Auburn, Chico, Oroville, Healdsburg, Santa Rosa, Elk Grove, Markleeville, Gardnerville, Carson City, Fairfield, Fresno, Folsom, Redding, Walnut Creek, Santa Clara, Stockton, Sonora, Manteca, Merced, Nevada City, Grass Valley, Newcastle, Turlock, Tracy, and Yuba City.