Think you know what’s covered by the title insurance policy? Think again! Tune in to Melissa’s discussion with The Fund's George Perez, Senior Manager of Claims, Risk Analysis and Member Compliance, on claims coverage issues that often surprise Fund Members.
Melissa Jay Murphy 00:10
Hi, and welcome to The Fund's Title Now Webinar. I'm Melissa Murphy with The Fund and I have the pleasure of hosting these webinars from time to time as topics of interest come up, and boy, there have been a lot of those lately. Now, a reminder, these webinars are not meant to be particularly instructional, but more informative. And so for that reason we don't have PowerPoints for you to look at and PowerPoints for us to send you a link to so that you can review. I really just want these to be more of a conversation that I have with one or two of my guests. And another reminder that we push the audio out to our podcast, which is conveniently also called Title Now, super easy to get the podcast to subscribe to it and you go on whatever platform you use to subscribe to your podcasts and sign up, we would love to have you. But this is a great way for you to listen to the information again, if you would like to, but also to share it with colleagues because it's super easy for them to sign up for the podcast. So our conversation today is about claims, claims made under title insurance policies. And not just your run of the mill claims, like unpaid taxes or unpaid mortgages but claims situations that Fund Members often find surprising. And by surprising, I mean they didn't understand or realize that the outcome was the way the policy works. So my guest today is George Perez, my colleague here at The Fund and George is The Fund's Senior Manager of Claims, Risk Analysis and Member Compliance. So what better person to talk with us about claims and surprising claims situations than George. So George, welcome.
George Perez 02:20
Good morning. Thank you.
Melissa Jay Murphy 02:33
So we're going to talk about four situations today that apparently come up often enough that we wanted to talk about them. So first policy limits are paid under a policy. What does that mean? How are coverages between an owner's policy and a lender's policy when they were simultaneously issued? How are those handled when there's a claim. Third, what is the company's duty to defend as spelled out under a policy? And then last, something that we encounter a great deal out in the practice code lanes. How are they handled in the claims context? So let's start with policy limits. So when policy limits are paid, what is the general starting point when policy limits are paid?
George Perez 03:29
Melissa, I think the usual starting point is there's a misnomer out there that the underwriter has an obligation to cure an otherwise legitimate defect. If you read the policy closely, the policy only has two obligations, there's an obligation to defend or an obligation to identify, and many times both. But there is no obligation to cure. There's an option to cure under paragraph seven, condition seven, and many times that's misconstrued, has become some kind of duty, on our part.
Melissa Jay Murphy 04:26
Yes, an option to do something does not necessarily translate into a duty to do that, I get that. So what are some examples of situations in which we have made the decision to pay policy limits? And then people are surprised by what we don't do after that?
George Perez 04:52
Sure, I'll give you a couple of examples. So let's say somebody submits the claim Dear Fund, I bought some property, I have this policy and I recently found out that there's a lack of a legal right of access. We do our due diligence on the claims side and we come to that same conclusion. Or there might be an instance where there's a failure of title not necessarily tied to fraud, but let's just say a significant break in the chain. Or some other thing that contributes to a to a break. Yes, those are covered matters. And somebody like myself can sit and say, well, I'm at a crossroads what do I do? Do I undertake some action to address the problem or do I tender policy limits and from time to time, we'll make that decision tender policy limits and basically, that's all we do. It's effectively, we pay and we're done.
Melissa Jay Murphy 06:09
Well, that's an interesting way to put it, we pay and we're done. I like it, but it sounds a little harsh. So let's give a little bit more color to the reason why we might make that decision. The first example that you gave was lack of access. And certainly when you are considering the cost associated with fixing that covered matter, getting access to a particular piece of property, which if I'm remembering my law school classes correctly, you could have a prescriptive easement. We could have a statutory way of necessity. And it's if you're weighing the cost of undertaking that effort versus the face amount of the policy. It sounds like making the decision to pay policy limits must come up when you're dealing with fairly low transactional amounts. Is that your experience?
George Perez 07:19
Absolutely. I think that a good 99 plus percent of the time when we're making this decision to basically pay the policy limits is usually on smaller policy amounts where we're making a conclusion that there is going to be extraordinary amount of cost to cure and when you weigh that cost to cure versus our policy exposure, it makes more sense to basically tender the policy amount.
Melissa Jay Murphy 08:00
I would suspect that often upsets the insured and or the member that perhaps issued the policy. Hence we are including it in this webinar today because that is a surprise to them that we have the option to pay policy limits if the cost to cure is greatly in excess of that. You did mention fraudulent deeds. Unfortunately, we've had quite a few of those lately, where we have an insured that unfortunately fell victim along with The Fund Member to a fraudulent scheme. And it is proven up that in fact, the deed vesting title in our insured was fraudulent and how are those policy limits generally handled?
George Perez 09:05
Well, obviously those policies can be any, you know, very nominal amounts, even significant amounts, but it is the crime du jour for 2022 and 2023 when it comes to real property. You know, we put a lot of energy and effort into determining whether the allegations of a fraudulent deed are accurate, and unfortunately, most of the time our conclusions are deeds that way in other words, yes, this is a positive forgery of a complete failure of title. And we end up tendering policy limits. I think what usually happens the difficulties that arise after that is many times the insureds are like, well, what are you going to do now? Right, okay, thank you very much for paying me. But what are you going to do to you know [unintelligible 10:06], to clear up the title issue for the previous owner and the way the policy is written? Once again, we have no obligation to do that we might make suggestions that you know, they should, you know, quote, return title back to the previous owner made by something as simple as claim deed or was not something that we're charged with the task of undertaking to do on behalf of our insured owners.
Melissa Jay Murphy 10:33
Well, our insured would not care so much about clearing the title, but the true owners of the property because of some involvement with the Fund Member, who knows, might have the expectation that because we insured a fraudulent deed that we then have the obligation to the true owner to clear up the title but what I'm hearing you say is no, that's not the case. And another situation in which the insured may be upset that we have the option to just pay policy limits is when they got a really good deal on that lot and were duped into buying the property in a big hurry for a really good price. But all we're going to do is give them their money back. Right?
George Perez 11:30
Yeah, it's almost always a really good deal. Yeah.
Melissa Jay Murphy 11:36
Which often ends up with an insured that upset and often a Fund Member that surprised. So let's move on to the next area of interesting situations and that's owners and lenders policies that have been simultaneously issued in connection with the same transaction. So what types of issues come up there?
George Perez 12:04
Oh, okay. So, you know, obviously, we're all familiar with the old simultaneous issue of owner and loan policies. Usually where this comes up is where we have a, most common is where we have a complete failure title. For instance, I, we're just talking about forged deeds that you can have complete failure of title obviously with forged deeds, for a host of other reasons, but when we have, if there's no way to fix anything, and now where it's a matter of paying damages, we're kind of at an odd crossroads. I'll use the example you have $100,000 owners policy and an $80,000 simultaneous loan policy. And it's now time to pay damages. There have been times where the insured would say okay, my understanding is you're going to pay $80,000 to the lender and the $100,000 to the owner. The answer to that is, is no. Mainly because there's a condition 11, right. I mean, it's way down there, condition 11, and very, not read very often, which stands for the premise that is when we have these simultaneous issued policies, well, we pay the lender first and to the extent that we pay the lender first, the policy says that that payment is deemed, right, fancy legal word for let's make believe [unintelligible 13:45] it's deemed a payment to the owner. So what does that mean in real life? That means that, you know, we pay $80,000 to the lender, that $80,000 is shaved off the $100,000 that we pay to the owner. So ultimately, you're only getting $20,000.
Melissa Jay Murphy 14:05
Their obligation to the lender has been satisfied, and the loan has been paid off. Right?
George Perez 14:13
Correct.
Melissa Jay Murphy 14:14
Right. So I guess there is some equity to that. There is some sense behind that situation. But what about situations where it's not a complete failure of title, but somehow an easement got missed, and is not listed as an exception in either the lenders policy or the owners policy. So that's not a complete failure of title. So how are those viewed and and generally dealt with?
George Perez 14:47
Right, well, that's good question. So in a hyper technical world, this, we could use the exact same process. So let's just say that we're talking about an easement and the diminution in value, we have $100,000 owner, $80,000 lender, $10,000 diminution value because of an easement. Could we, based on condition 11, pay the lender the $10,000 and we're done. Yes, absolutely we could do that. Or could we just pay the owner the $10,000. We could do that as well. The driving force in that decision is ultimately how much equity is there left in this property, even subject to the defect. So in this case, we had a $100,000 property was diminished by $10,000 because of the easement, it's still worth $90,000 which means its way more than enough equity to cover that $80,000 loan amount. So in that case we can make the decision to pay the owner as opposed to paying the lender.
Melissa Jay Murphy 16:10
So we have the choice. We have the ability to make that decision, yes?
George Perez 16:15
Correct. Absolutely.
Melissa Jay Murphy 16:17
And is the language addressing that issue and that option on behalf of the underwriter in both the lenders policy and the owners policy? It is. It is, okay. It is, yes. Okay. I find that to be pretty interesting, but not as interesting as a complete failure of title where you pay the lender and then the owner just has whatever the remaining amount of coverage is for any future additional defects that might crop up. Let's not go there. So the third area we want to chat about is the duty to defend. So when is the duty to defend an insured triggered under the policy, or when is it, maybe it's better to deal with this, is when is the duty to defend not applicable at all?
George Perez 17:23
Well, you heard me say at the beginning of the conversation that there's only two obligations really under a policy a duty to defend and a duty to indemnify. The duty to defend arises under condition 5A. Now if one were to read the condition 5A closely it basically stands, it basically has language that says that will defend [unintelligible 17:47] shall provide a defense of an insured in litigation in which any third party asserts a claim, here it comes, covered by this policy that is [unintelligible 17:58 ] so the pivotal language there is covered by the policy. So just because there's a lawsuit doesn't necessarily mean that there's a duty to defend, there has to be something that is covered.
Melissa Jay Murphy 18:13
Right, I mean, so a silly but obvious example, is if i'm the insured and my neighbors sues me for nuisance because I'm doing something on my property that annoys the heck out of them. That is not a covered matter. So you would have no duty to defend me. But what are the types of things where my actual ownership or title to my property is threatened or challenged, but you don't have the duty to defend? What are the typical situations that come up where people are surprised that you have no duty to defend?
George Perez 18:57
I would say that, based on my years of experience, the single most common surprise that I've seen is when our insured transaction itself is being challenged as a fraudulent transfer.
Melissa Jay Murphy 19:12
Ah.
George Perez 19:14
And in other words, there's a creditor who is, you know, taking action against the property and basically saying that our grantor did something to stick it to the creditor and was basically trying to [unintelligible 19:37] assets or what have you. And the creditor is using the Fraudulent Transfers Act to basically attempt to lack of a better word, unwind our insured transaction and, you know, so that way the court would still look at it as still being in the name of the grantor slash debtor for collection purposes.
Melissa Jay Murphy 20:07
So that is not a covered matter under the policy and therefore we have no duty to defend the insured in that situation.
George Perez 20:19
That's correct. There's an exclusion so you know, there's a section, a laundry list of exclusions and both owners and the loan policy and under the owners policy exclusion 4A talks about that there is, excludes, let's see, will not pay [unintelligible 20:39] expenses by reason of or operation of bankruptcies [unintelligible 20:43] insolvency or similar creditors right laws, that the transaction vesting title insurance Schedule A in other words our insured transaction is a fraudulent conveyance, a fraudulent transfer. So that one is, makes everybody's, make steam come out of people's ears and heads spin.
Melissa Jay Murphy 21:07
See everybody listening, claims is a lot more interesting than you may have thought it's really quite dramatic. So this last area that we want to talk about are code lanes and there's all this confusion about and maybe I should have have called this category code violations not even gone so far as to call them lanes so what kinds of situations do you deal with in the claims context that have to do with alleged violations of municipal or county codes?
George Perez 21:48
Well, the usual way it comes up is we have an insured as doing what I call some at home title examination or they're doing, they're trying to do something with the property and trying to get a permit to improve or whatever have you and something comes up and that something that comes up is an alleged code lien waiver in some county or municipality where violation of you know insert whatever coordinates that you can think of. And the claim comes in hey, dear Fund, I've been doing, I was doing this, I discovered this lien, help me. What are you gonna do about it? And some people are demanding and say, Thou shalt do something about this and some now, claims i'm at a crossroad as to what i'm going to do.
Melissa Jay Murphy 22:40
So what is the, what's the analysis that you undertake to determine whether or not there's coverage under their policy?
George Perez 22:50
Well, for a claims guy like myself, the big, there's two things, one is, is it a real, does it meet the requirements for purposes of becoming a lien. So chapter 162 Florida Statutes lays out the minutia of what a lien is supposed to contain, but once I get beyond that, next question I have is well is it in the public records because if it's not in the public records, there's not a covered matter. Mainly because if you look at [unintelligible 23:41], which is the [unintelligible 23:45] coverage that talks about [unintelligible 23:48] code liens, it basically has that triggering language that says it has to be in the public records in order for it to qualify as a covered matter.
Melissa Jay Murphy 23:59
So doesn't that kind of beg the question of what's the definition of public records, because a city would certainly say that their code violation records are open to the public.
George Perez 24:15
Yeah, and that's where sometimes the debate is with some of our insureds and our response is we point them to a few things. We say there is a definition for public records. I think in paragraph one, which is the, includes the condition, says a laundry list of definitions in there. And among other things, it defines public records as it says records established under state statutes for the purpose of imparting constructive notice of matters relating to real property who purchases for value and without knowledge. So what does that mean in real life? That means that it is the records maintained by the Clerk of the Court of the appropriate county. And in fact that there is a, there was a case I believe it's called [unintelligible 25:11] Realty. I think First American was involved in the 11th circuit. Federal case, where it actually, the dispute was what is a public record. Is it, does it include the local city of whatever, you know, they're code office. And they said, no, absolutely not. The policy is clear and unambiguous. That effectively means clerk records, and nothing else that yes, they are public. Those offices are indeed open to the public and their records are indeed public. But it's not public records and purposes.
Melissa Jay Murphy 25:44
Well, that's very interesting, because then distinction between official records and public records is something that comes up in our world in many different contexts. And it's interesting that it comes up in the context of claims also. So do these types of discussions that are focused on a code violation, do they come up pretty often in your world?
George Perez 26:15
Quite frequently.
Melissa Jay Murphy 26:20
So generally speaking, we've talked about these four different areas of claims generally speaking, when you encounter one of these situations, and you know that it's possible that the news you deliver to the Fund Member who's representing the insured, the Fund Member may have issued the policy I'm mean there are all different types of scenarios. But regardless, you know that the news you're going to deliver is going to be surprising. Do you take any sort of proactive measures or anticipate that surprise in the conversations that you have with insureds or Fund Members that are involved in a claim.
George Perez 27:11
Yes, you know, that I call a preemptive strike or trying to bring it in for a soft landing. Many times it's quite a jolt to get a letter from us that basically says, hey, this claim is being denied for, you know, whatever reason and we site the chapter and verse. Many times when we know it's going to be that much of a [unintelligible 27:40] we will reach out to the claimant or representative to kind of have a you know, as professional as cordial a discussion as possible, and kind of explain to them that you know that this decision is coming and that gets us I'd say, a good 80% to 90% of the time that buys us a lot of goodwill and a high level of acceptance. But of course there are though some instances where you know, the insured won't be happy.
Melissa Jay Murphy 28:13
Well, hopefully this webinar has helped bring a couple of 100 people along the knowledge spectrum of what is covered and what's not covered and how claims works and what options we have. So for that reason, I hope we've been successful today, George, so that maybe the next time a situation like this comes up and you call the insured or their representative, they'll say oh, yeah, I understand. I get it. That would be, that would mean we were successful today. So thanks, George, for your time and your expertise, because you certainly know more about claims than anyone else I know. And thanks to our listeners for tuning in, hope this has been informative. If perhaps not instructional, but at least informative about the way a lot of claims situations are typically handled. And let me remind you again, we'll push this out on the podcast so that you can listen to it or share the information with colleagues. But as always, thank you for your support of The Fund.