Published in the 2014 Great Salt edition of Attorney at Law Magazine, Vol. 2. No. 4
Abstract of Title. Preliminary Title Report. Condition of Title Report. Title Policy. Title Search. Commitment. Title Report. Even for those in the industry, the imprecision of casual communication causes confusion. Many times well-meaning, intelligent, educated real estate professionals muddle these names and derive preliminary title policy and preliminary abstracts. As Utah Court of Appeals decisions over the past year illustrate, confusion has its costs. If misunderstandings are rain, billable hours are the crops harvested. The shelter of this umbrella won’t stop the rain – but, it’s better than getting soaked. You need to understand the differences in the products offered by title insurance companies.
For instance, a preliminary title report cannot be relied upon as an abstract of title. They often look the same and contain much of the same information. However, as explained by the Utah Court of Appeals in Walker v. Anderson-Oliver Title Ins. Agency, Inc., they are different products, for different purposes.
In that case, a title insurance company issued a preliminary title report which failed to include the deeds of a neighbor who claimed an easement over the property in question. The neighbor unsuccessfully sued the title company on, among others, the theory of abstractor liability. The court of appeals held the theory was inapplicable to a title company preparing a preliminary title report. An understanding of the differences between a preliminary title report and an abstract of title and the roles of title insurer and abstractor would have saved the parties significant legal fees.
As explained by the court, “the distinction between abstractors and title insurers is important because abstractors may be held liable in tort while title insurers generally are liable only under the terms of the insurance contract.” Walker v. Anderson-Oliver Title Ins. Agency, Inc., 309 P.3d 267, 270 (Utah Ct. App. 2013)(citations omitted).
An Abstract of title is “[a] condensed history of the title to land, consisting of a synopsis or summary of the material or operative portion of all the conveyances, of whatever kind or nature, which in any manner affect said land, or any estate or interest therein, together with a statement of all liens, charges, or liabilities to which the same may be subject, and of which is in any way material for purchasers to be apprised. An epitome of the record evidence of title, including maps, plats, and other aids.” Culp Const. Co. v. Buildmart Mall, 795 P.2d 650, 654 (Utah, 1990)(citing Black’s Law Dictionary 10 (5th ed.1979)).
A preliminary title report contains much of the same information, but serves a different purpose. Preliminary title reports, often times called commitments, are nothing more “than a statement of the terms and conditions upon which the insurer is willing to issue its title policy.” Culp Const. Co. v. Buildmart Mall, 795 P.2d 650, 653 (Utah, 1990). As illustrated in the Walker case, a title company issuing a preliminary title report may elect to omit information that would be included in an abstract of title. In Walker, the title company determined that the deeds did not create a valid easement on the property in question, and decided not to list them as exceptions in either the commitment or the title insurance policy. “In other words, the [title company] decided that ‘they were willing to insure title’ to the property ‘against loss or damage [for any claim] … aris[ing]’ from the [deeds].” Walker v. Anderson-Oliver Title Ins. Agency, Inc., 309 P.3d 267, 269 (Utah App.,2013).
Thus a preliminary title report is not a full history of title, and should not be relied upon as such. A preliminary title report, sometimes also called a preliminary report, states it is made solely to facilitate the issuance of a title policy and that the insurer assumes no liability for errors or omissions in the report. An abstract of title is a full history. Similarly, a condition of title report can be relied upon as an accurate statement of title, showing ownership, liens, etc.
All of these products involve title searches and are generically referred to as title reports. However, they are not interchangeable. The confusing similarity is, in part, due to the fact that a title insurer is statutorily obligated “to make a reasonable search and examination of title and has made a determination of insurability of title under sound underwriting principles.” Utah Code Ann. § 31A–20–110(1).
Ultimately, lenders need to be focused on whether they want insurance or whether they want reliable information. “One who hires a title insurance company does so for the purpose of obtaining the assurance or guarantee of obtaining a certain position in the chain of title rather than for the purpose of discovering the title status,” or the history of title. See Walker v. Anderson-Oliver Title Ins. Agency, Inc., 309 P.3d 267, 271 (Utah App., 2013).
The importance of purchasing the right product was also illustrated in another Utah Court of Appeals opinion, First Nat. Bank of Layton v. Palmer. After recording a deed of trust to secure a loan, an issue with the loan guarantor arose requiring First National to reconvey and re-record its trust deed. This was problematic because the trust deed securing First National’s loan occupied first-lien position, and the borrower had also taken out a second mortgage, secured in a junior lien position. First-lien position is important to a lender because it means in the event of a foreclosure sale, that lender will be the first to be paid the balance owed on its loan out of whatever money is obtained. Who gets paid first, many times, means who gets paid at all.
Before re-recording its deed of trust, First National obtained what the court referred to as an updated title report. The type of report was not specified. Surprisingly, the report did not show the second mortgage as a lien. But, when First National released its trust deed, the second mortgage slid into first-lien position. When the borrower defaulted on both loans, the second mortgage holder informed First National of its lien position and its intent to foreclose. First National filed a lawsuit asking the court to put its trust deed back in first-lien position due to the error in the updated title report.
Although the trial court ruled in First National’s favor reasoning that it had taken sufficient care by ordering an updated title report, the court of appeals overturned the ruling. The court of appeals held First National could not be restored to first-lien position notwithstanding the erroneous title report because it knew of the second mortgage, and should have known the title report was wrong because, “it is a long-standing practice in the real estate industry for sellers to secure any financing they extend with a recorded trust deed against the property being sold….”
As a result of the court’s ruling that First National’s trust deed would not be restored to first position, the type of updated title report First National obtained, is critical. If the updated title report First National obtained was a commitment, and was followed by a title policy First National could have pursued a claim under the policy. Generally speaking a title policy guarantees the endorsements and representations of title made in the commitment, leaving the insurer on the hook for errors discovered later. If First National didn’t obtain the right type of updated title report, the loss could be its to absorb.
- On August 5, 2014