TITLE INSURANCE

What is title insurance and why do I need it?

When you purchase real property, the title company issues a title insurance policy to you individually.  

Title insurance offers protection against claims resulting from various defects which may exist in the title to a specific parcel of real property, effective on the issue date of the policy. For example, a person might claim to have a deed or a lease giving them ownership or the right to possess your property. Another person could claim to hold an easement giving them a right of access across your land. Yet another person may claim that they have a lien on your property securing the repayment of a debt.

A title insurance policy contains provisions for the payment of the legal fees in defense of a claim against your property which is covered under your policy. It also contains provisions for indemnification against losses which result from a covered claim. By acquiring a title insurance policy you derive the knowledge that recorded matters have been searched and examined so that title insurance covering your property can be issued.

 

Am I covered if I transferred my real property to my revocable living trust? 

Here is a real-life example from a case called Kwok v. Transnation Title Insurance Company (2009) 170 CA4th 1562.  The case explains why you need to make sure that Trustees of your revocable Trust are covered under any title insurance policy you bought when you bought real estate.

In 2004, Mr. and Mrs. Kwok formed a Limited Liability Company (LLC) to purchase real property as an investment. They purchased real property in Los Angeles and at the time of purchase, a California Land Title Association Standard Coverage Policy of Title Insurance was issued. The policy insured the title and an easement over a neighboring parcel. The LLC was the named insured on the policy.

After the Kwoks purchased the property, they built a single family residence on the property. Their neighbors refused to give them access to the easement for sewer and drainage asserting that the easement was invalid. Construction was delayed due to the dispute over the easement. Property values dropped. The Kwoks decided to finish the residence and move into the house as their primary residence until the real estate market picked up. In 2005, the Kwoks signed a grant deed transferring the real property from the LLC to themselves as Trustees of their revocable living Trust. They dissolved the LLC.

The Kwoks could not resolve the easement dispute with their neighbors and filed a lawsuit to enforce their rights. They also filed a claim with the title insurance company under their policy. They wanted the title company to defend them in the easement dispute.

The title insurance company denied the Kwoks' claim stating that the transfer from the LLC to the Trust was voluntary and not by operation of law as was required by the policy. The title company stated that the Kwoks should have obtained an endorsement to cover the transfer of the real property to their revocable living Trust, a separate legal entity. The Kwoks sued the title insurance company and lost in the trial court and then appealed the decision.

The Court of Appeals agreed with the title insurance company. The Court held that the only way that the transfer of the real property could be characterized as one by operation of law is if the real property transferred to the Kwoks individually upon the dissolution of the LLC. Even if the real property transferred to them individually upon the dissolution of the LLC, it would not characterize the transfer to the Trust as by operation of law because they did not own the LLC as Trustees of their Trust.

The Kwoks settled with their neighbors but they had to pay the legal costs of suing their neighbors and the title insurance company themselves. This result was infinitely more costly to the Kwoks than obtaining an endorsement on their title insurance policy which would have covered them as Trustees of their revocable living Trust.

I merely transferred my home to myself as Trustee of a revocable living Trust. No LLC was involved. Do I need title insurance to cover the transfer?

 

As part of funding your revocable living trust, you transferred your residence and maybe your vacation home and/or a rental property to yourself as Trustee of your Trust. Now you as the Trustee of your Trust rather than you individually own the real property. There have been instances of title insurance companies denying coverage in the situation where individuals merely transferred their real property into a revocable living Trust and there was no LLC involved as happened with the Kwoks. You need to make sure that your title insurance covers you as Trustee of your Trust.  

How do I determine whether I am covered as a Trustee?   

Coverage for Trustees under the title insurance policy depends on when you purchased your real property and the type of title insurance that was issued for the purchase. For example, starting in 1998, both an American Land Title Association homeowner's policy and a California Land Title Association homeowner's policy includes language that provides for specific coverage of the successor Trustee. Just because you purchased real property after 1998 does not guarantee that your title insurance company used a policy that covers Trustees of a revocable living Trust. The Kwoks title insurance policy issued when they purchased the property in 2004 did not cover them as Trustees of their revocable living Trust.


You need to contact your title insurance company and ask them if you as the purchaser of the property who has transferred the property to yourself as Trustees of your Revocable Living Trust are covered under your original title insurance policy. If the title insurance policy does not cover the Trustees of the Trust, then you need to request an endorsement to add the Trustees as an additional insured. An endorsement should cost between $50 and $100 as a one-time charge.

How do I determine which title company provided title insurance for the purchase of my real property?

 

You can usually find the name of the title insurance company on your original deed or in the final settlement papers. Many of the title companies have merged so you may have to do some research on the internet to locate the successor title insurance company. When you speak with your title insurance company, you need to ask for an endorsement to cover Trustees if a Trustee is not included in the definition of a named "insured."