This Month’s article is presented by:
Chad Reynolds, Attorney at Law
Shouldn’t Every Seller purchase an Owner’s Title Policy for their Buyer?
As title examiners we have all probably run across title defects similar to the following situation:
During their marriage, Bob and Sue Jones acquire several tracts of immovable property. Their four children, Angie, Billy, Celeste, and David, acquire the various tracts through their parents’ respective successions. After Angie’s death and the completion of her succession (recognizing her three children, Ellie, Frank and George as her sole heirs), Billy, Celeste, David, Ellie, Frank and George sell Tract A to Holly. Holly defaults on her loan, and Bank Indigo buys the property at sheriff’s sale. Bank Indigo then sells Tract A to Bank Jackson, who quitclaims Tract A to Bank Kingfish, who in turn sells Tract A sells to Bank Louvre, who finally quitclaims Tract A to Bank Mouse. Thereafter, Bank Mouse sells the Tract A to Nelson for $5,000. At closing, Nelson declined to purchase an owner’s title insurance policy. After investing close to $100,000 to build a home on Tract A, Nelson enters into a purchase agreement to sell Tract A to Olivia for $130,000. As it turns out, however, Tract A was left out of Angie’s succession, and thus never transferred to her heirs, Ellie, Frank and George, who in turn could not transfer to Holly their undivided 25% interest in the property. And, despite numerous transfers of Tract A since the sale to Holly, Nelson still only owns a 75% interest in the land on which he has built a home and invested almost $100,000.
This is a title defect, and a nasty one at that. To fix this defect, Nelson will have to re-open and amend the judgment of possession in Angie’s succession, at his own expense. Nelson faces the additional issue that he may not be able to find a willing heir to ask the Court to amend the judgment of petition, and he further runs the risk of the Court declining to permit Nelson to amend the judgment of possession on his own. Nelson knew that a title examination was performed when he purchased Tract A. And Nelson, like many persons, probably thought that the sheriff’s sale wiped clean any title defects that may have existed from the previous owners. Buyers like Nelson have to make a financial decision whether to spend the money on a policy for perceived remote risks when they barely have the down payment to purchase the home in the first place.
Which bring us to the question: Why are buyers left holding the bag to insure that someone else has delivered merchantable title? After all, it is the seller’s obligation to warrant merchantable title in the Act of Cash Sale. Of course, a seller five links down the chain could not possibly foresee an undisclosed heir, and there are sellers who have undoubtedly forged cash sales in bad faith before selling to an innocent third party. The additional, yet unknown, benefit to sellers, buyers, and title agents alike is the ability to take advantage of the Underwriter Cancellation Statute, which allows for underwriter indemnity between underwriters. This allows properties that may have otherwise been out of commerce for ten to thirty years to be put back into commerce with a new owner’s policy protecting each subsequent buyer. Indeed, this statute has proven particularly useful in the post-2008 slump that resulted in the closure of many title companies across Louisiana, and in instances where Acts of Cash Sales were completed by out-of-state notaries with likely little understanding of Louisiana law.
Louisiana is not alone in this custom. After a brief (and perhaps unreliable) internet search of customs, it looks like the states are equally divided as to who pays for an owner’s policy at closing. The only remaining question is why did the custom develop, and what can we do to change it?
| States in which Owner’s Title Insurance Policy is either required to be or customarily purchased by the Seller | States in which Owner’s Title Insurance Policy is either required to be or customarily purchased by the Buyer | States in which the purchase of Owner’s Title Insurance Policy varies or is negotiable | ||
| Alabama | Mississippi | Southern California | New York | Iowa (negotiable) |
| Alaska | Montana | Connecticut | N. Carolina | Georgia (negotiable) |
| Arizona | Nevada | Delaware | N. Dakota | Hawaii (varies) |
| Northern California | New Mexico | District of Columbia | Oklahoma | Iowa (negotiable) |
| Colorado | Oregon | Kentucky | Pennsylvania | Kansas (varies) |
| Florida | Texas | Maine | Rhode Island | Minnesota (negotiable) |
| Idaho | Utah | Maryland | S. Carolina | Missouri (varies) |
| Illinois | Washington | Massachusetts | Vermont | Nebraska (divided equally) |
| Indiana | Wisconsin | New Hampshire | Virginia | Ohio (negotiable, but usually divided equally) |
| Michigan | Wyoming | New
Jersey |
West Virginia | S. Dakota (divided equally) |
| Tennessee (negotiable) | ||||
Wouldn’t it make more sense to have every Seller in the State of Louisiana purchase an Owner’s Title Insurance Policy to insure the Seller’s warranty of title? The net effect of that policy change would mean every citizen homeowner in the State of Louisiana would be afforded the protections of an Owner’s Title Insurance Policy. As members of LAILTA, shouldn’t we set the wheels in motion for legislative action?
Chad F. Reynolds, Board Member of LAILTA and owner of Legacy Title, L.L.C.
& Ashley Bynum, Attorney-at-Law, Legacy Title, L.L.C.