Published in Attorney at Law Magazine, Greater Salt Lake City Edition Vol. 2 No.5
Real property owners routinely use quitclaim or special warranty deeds to transfer properties. The forms do not contain the usual covenants or warranties. However, the use of such deeds may leave the grantor without any title insurance coverage to protect against past defects. Owners should carefully consider how transferring their properties may affect their title insurance coverage.
An intervivos transfer of real property may be made by warranty deed, special warranty deed, or quitclaim deed. In a warranty deed, the grantor covenants that the property is free from all liens dating before and after he acquired the property. The grantor of a special warranty deed limits the covenant against liens to only the time after he acquired the property. Unlike warranty deeds and special warranty deeds, quitclaim deeds do not contain any covenants or warranties.
Consider the following scenario: Bill purchases a property from Albert. He obtains an owner’s title insurance policy that insures that the property is free of prior liens. Bill then conveys the property to an LLC which he and several partners use to improve homes and resell them. Unbeknownst to Bill, Albert has previously granted a mortgage to Cathy. After Albert sells to Bill, but does not pay off Cathy’s lien, Cathy commences foreclosure proceedings.
Upon notice of Cathy’s foreclosure proceedings, Bill and his LLC make a claim on the title insurance policy. The policy contains a “Continuation of Coverage” provision stating, “the coverage shall continue in force in favor of an insured, but only so long as the insured shall have liability by reason of covenants of warranties in any transfer of the title.” Thus, the only way the policy provides any coverage and protection from Cathy’s foreclosure is if Bill retained liability when he transferred his property to his LLC.
If Bill transferred the property via quitclaim deed, he has no liability to his LLC because a quitclaim deed does not contain any covenants or warranties. A quitclaim deed is the surest way to ensure that Bill’s title insurance coverage is terminated.
A special warranty deed provides warranties against defects which arose because of Bill’s ownership of the property. Since Bill had nothing to do with Albert’s mortgage to Cathy, he has made no warranties to the LLC about the mortgage. Thus, insurance coverage has terminated.
But a warranty deed covenants and warrants to the LLC that there are no prior liens against the property, before or after Bill held title. When Cathy commences foreclosure, the LLC has a claim against Bill for breach of warranty, and Bill can file a claim on his insurance policy for indemnification.
If one intends to transfer property without obtaining a new policy of title insurance, one should carefully consider the type of deed to use, the risks attendant to the covenants and warranties in the actual deed used, and the language in any available title insurance policy. Best practice? Consult with an experienced title attorney.