Tips for Avoiding or Reducing Title Insurance Claims
Martin R. Ufford
Member, Hinkle Law Firm, LLC
I’ve had the privilege of representing title insurance companies and their insureds for the past ten years. Each claim represents a unique challenge. With the benefit of hindsight, I have reached some conclusions that may assist agents and local counsel in avoiding claims.
Triple check your legal descriptions
While this is belaboring the obvious, errors in legal descriptions on deeds and mortgages must be avoided.
If a mortgage contains an inaccurate legal description, the loan goes into default, and a mortgage foreclosure action is filed, the lender will need to add a request for the court to reform the mortgage to revise the legal description to accurately describe the property that the lender and borrower supposedly “intended” to be the collateral in the mortgage.
Unfortunately, borrowers in financial difficulty, or worse, the borrower’s bankruptcy trustee, might argue that the error in the legal description results in the lender having an unsecured loan.
If the error is not discovered until after a foreclosure judgment is entered, the lender will have additional delays and expenses due to a need to set aside the journal entry of judgment and starting over with an amended petition.
Be on the lookout for unanticipated reservations or easements in deeds
Immediately following a metes and bounds legal description in a deed conveying ten acres out of a 160 acre quarter section to party A, the deed granted to party A:
Ten years later, a title examiner failed to pick up and exclude the grant of easement when the remaining 150 acres in the quarter section were sold to party B.
Allen Lake is directly in the flight path of more than 800,000 migratory game birds that fly over it each year, making Allen Lake one of the best geese and duck hunting properties in Kansas.
Party B made a claim against the title insurance company because he did not have the exclusive right to develop and hunt on the lake he had bought.
It cost the title insurance company a lot of money to resolve this claim.
Beware of Judicial Quit Claim Deeds
At least one state has enacted a series of statutes that permit the issuance of a “judicial quit claim deed” to an organization that rehabilitates “abandoned” property, i.e., a residence for which real estate taxes are delinquent for the preceding two years and which has been unoccupied continuously for the preceding 90 days.
A non-profit corporation can file a petition with the court to approve a rehabilitation plan to fix up the property. Once the rehabilitation plan is completed, the non-profit corporation can file a motion with the court for it to obtain a judicial quit claim deed to the property.
The statutes require the non-profit corporation to properly serve the record title owner of the property with both the initial lawsuit and the motion for the issuance of the judicial quit claim deeds.
In one case, the court ordered the judicial quit claim deed to be set aside since the non-profit organization failed to make a good faith effort to locate the record title owner, and, therefore, its reliance on publication notice for the filing of the lawsuit was held to be improper.
Unfortunately for the title insurance company, the property had been conveyed to three different entities in the span of about a year before the property was sold to its insured, and the title examiner relied upon the judicial quit claim deed in the chain of title. The title company ultimately settled with the former property owner after an 11-hour mediation.
Therefore if a “judicial quit claim deed” appears in your chain of title, it is recommended that you:
- (1) get a quit claim deed from the property owners who lost their title as a result of the judicial quit claim deed;
- (2) get judgment lien waivers from any judgment creditors whose liens were arguably extinguished by the recording of the judicial quit claim deed; and
- (3) get a mortgage release from any mortgagee whose mortgage lien was extinguished by the recording of the judicial quit claim deed.
Beware of Bankruptcies
A Kansas county held a tax foreclosure sale for payment of unpaid real estate taxes and the property was sold to Party A who received a sheriff’s deed to the property.
Prior to the sale, the property owner had filed a Chapter 13 bankruptcy, which was pending at the time of the tax foreclosure sale.
Because the county did not obtain permission from the Bankruptcy Court to hold the sale (this is called a “motion for relief from the automatic stay”), the sale to Party A was ruled to be null and void, and the county had to refund the amount paid to Party A.
Most states have title standards that address what documentation is required prior to obtaining a deed from a trustee in bankruptcy or a Chapter 11, 12 or 13 debtor while the case is pending or after a discharge has been granted.
Bankruptcy is a red flag that should always alert a title examiner to proceed with caution. Contact your Underwriter to discuss.
About the Author:
Martin R. Ufford has defended claims against both title insurance companies and their insureds in state and federal courts. He is admitted to practice before the Kansas Supreme Court, United States District Court for the District of Kansas, the Tenth Circuit Court of Appeals in Denver, Colorado, and the United States Supreme Court.
Martin R. Ufford
Hinkle Law Firm LLC
1617 N. Waterfront Parkway, Suite 400
Wichita, Kansas 67206