Title Insurance In Florida

I. INTRODUCTION

In a typical real estate sale transaction, the seller conveys the real property to the buyer with a deed and the buyer gives a mortgage to the lender if financing is involved. The buyer would be insured with an Owner’s Policy of title insurance and the lender would be insured with a Loan Policy of title insurance. The purpose of this Section is to explain what title insurance is, what a title insurance policy covers, and the various Florida Statutes and Insurance Rules that govern title insurance.

II. BASIC REAL PROPERTY – A REVIEW

A. Conveyance by Deed

When transferring title, the seller could convey with a warranty deed, a special warranty deed, a quitclaim deed, or another form of deed but most contracts require the conveyance be by a warranty deed. Many people, including attorneys, are confused as to who is the grantor, and who is the grantee in a deed. The best explanation that I have heard to that conundrum was from my Real Estate School Instructor before I went to law school. He said that the grantor is the “give-or”, and the grantee is the “give-ee”. The “or” is always the “give-or” and the “ee” is always the “give-ee”. Therefore, the grantor conveys title to the grantee, and the grantee receives title from the grantor. So, in a deed, the grantor is the seller and the grantee is the buyer.

B. Mortgage as Security for Loan

If the transaction involves financing, the lender will require a mortgage on the property as security for the loan. The lender lends money to the Buyer to purchase the property, and the Buyer signs a promissory note agreeing to pay back the loan. The Buyer also gives the lender a mortgage on the property as security for the promissory note i.e. the loan. A mortgage is a lien on the real property and is not itself the loan from the lender. Who is the mortgagor and who is the mortgagee in the mortgage? Remember, the “or” is always the “give-or”, and the “ee” is always the “give-ee”. Therefore, under the terms of the mortgage, the mortgagor is the “give-or” – the Buyer, who gives the mortgage to the lender as security for the loan; and the lender is the the “give-ee” – the “Mortgagee” , who receives the mortgage on the property from the mortgagor as security for the loan.

C. Mortgage is a Lien

Under F.S. 697.01, a mortgage does not convey conditional title to the lender as security for the lender’s loan but instead grants a lien against the real property as security for the loan. Therefore, if the loan goes in to default, the lender must foreclose the mortgage to obtain title to the property.

III. WHAT IS TITLE INSURANCE

A. Statutory Definition of Title Insurance

Florida Statute, Section 624.608 defines title insurance as:

“(1) Insurance of owners of real property or others having an interest in real property or contractual interest derived therefrom, or liens or encumbrances on real property, against loss by encumbrance, or defective titles, or invalidity, or adverse claim to title;”

The 4th DCA in Lawyers Title Ins. Co. Inc. v. Novastar Mortgage, Inc., 862 So.2d 793 (Fla. 4th DCA 2003), quoted F.S. 624.608 and then stated: “title insurance is protection against future loss because of past events.”

Florida Administrative Code Rule 69O-186.007 provides that F.S. 624.608:

“shall be construed to confine the scope of coverage of title insurance to real property and contractual interests derived therefrom.”

Based on F.S. 624.608 and Rule 69O-186.007, title insurance insures an owner’s title to real property or a lender’s mortgage lien on real property against loss caused by an encumbrance, defective title, adverse claims to title, or the invalidity of the mortgage lien. While F.S. 624.608 and Rule 69O-186.007 set forth the general parameters of title insurance in Florida, the terms of the title insurance policy expressly provide what is insured by the policy and what is excluded and excepted from coverage.

B. Casualty Title Insurance

1. Casualty Title Insurance Prohibited

F.S. 627.784 expressly prohibits title insurance from being casualty insurance. That Section states as follows:

“A title insurance policy or guarantee of title may not be issued without regard to the possible existence of adverse matters or defects of title.”

And F.S. 627.7845(1) provides that:

“A title insurer may not issue a title insurance commitment, endorsement, or title insurance policy until the title insurer has caused to be made a determination of insurability based upon the evaluation of a reasonable title search . . ., has examined such other information as may be necessary, and has caused to be made a determination of insurability of title . . . including endorsement coverages, in accordance with sound underwriting practices.”

F.S. 627.784 prohibits title insurance from being casualty insurance and F.S. 627.7845(1) requires a determination of insurability based upon a reasonable title search and sound underwriting practices before a title insurance commitment and subsequent policy may be issued. Therefore, a Title Agent or Title Insurer cannot issue a policy of title insurance without regard to the status or quality of title because that would be casualty insurance. A reasonable title search and examination of that title search must be performed to determine the insurability of the title before a title insurance commitment and subsequent policy may be issued. See Lawyers Title Ins. Corp. v. D.S.C. of Newark Enterprises, Inc., 544 So.2d 1070 (Fla. 4th DCA 1989).

2. Casualty Title Insurance Allowed - Gap Coverage

While casualty title insurance is prohibited under Florida law, there is one situation in which a title insurer is required by statute to insure what could be considered casualty title insurance. When a title insurance commitment is issued, it contains an effective date which is the date through which the Official Records of the County where the property is located have been searched. When a closing is completed and the insured documents [deed and/or mortgage] are “sent to” recording, there is an unsearched “gap” between the effective date of the commitment and the date that the insured documents are recorded (hereinafter “Gap”). F.S. 627.7841 requires that unsearched Gap be insured after a transaction closes and the funds are disbursed. F.S. 627.7841 provides as follows:

“If a title insurer issuing a commitment or policy of title insurance upon an estate, lien, or interest in property located in this state through its officers, employees, agents, or agencies disburses settlement or closing funds, the title insurer shall insure against the possible existence of adverse matters or defects in the title which are recorded during the period of time between the effective date of the commitment and the date of recording of the document creating the estate or interest to be insured, except as to matters of which the insured has knowledge.”

Underwriting standards and best practices require a title agent perform a title search update 24 hours before the closing to determine if any adverse matters were recorded after the effective date of the commitment. While that update search shortens the Gap, an unsearchable gap will remain between the effective date of that update and the date that the insured documents [deed and / or mortgage] are recorded. That shorter title gap is required by F.S. 627.7841 to be Insured when a title agent closes and disburses even though that shorter title gap cannot be searched as of the date of the closing. Insuring the Gap or the shorter gap could be considered casualty title insurance but title insurers are mandated by Florida law to insure the Gap.

IV. DOES TITLE INSURANCE GUARANTEE OR WARRANT TITLE

A. Contract of Indemnity

Does a title insurance policy guarantee or warrant title to real property? The answer is no. In the Conditions of the both the Owner’s and Loan Policies at Section 8, the policies provide as follows:

“This policy is a contract of indemnity against actual monetary loss or damage sustained or incurred by the Insured Claimant who has suffered a loss or damage by reason of matters insured against by this policy.”

In Lawyers Title Insurance Co. v. Synergism One Corp., 572 So.2d 517 (4th DCA 1990), the 4th DCA stated that: “A title policy indemnifies rather than guarantees the state of the insured title.”. In Kahama VI, LLC v. HJH, LLC, 2016 WL 7104175 (M.D. Fla. 2016), the Federal District Court for the Middle District of Florida quoted Lawyers Title Insurance Ins. Co. v. Synergism One Corp regarding a title policy indemnifying rather than guaranteeing title, and then stated:

“It [a title policy] provides indemnity against actual monetary losses resulting from specified causes, such as title defects, liens, or encumbrances existing on the date the insurer issues the policy – unless, of course, the cause is excepted in the title policy.”

In Village Carver Phase 1, LLC v. Fidelity Nat.Title Ins. Co., 128 So.3d 107 (Fla. 3 DCA 2013), the 3d DCA with very similar language to the Kahama court, stated:

“Title insurance policies are indemnity contracts against actual monetary loss resulting from specified causes, such as defects, liens and encumbrances existing on the date the insurance policy is issued.”

In CMEI, Inc. v. American Title Insurance Company, 447 So.2d 427 (Fla. 5 DCA 1984), Judge Cowart stated that title policies are:

“[C]ontracts of indemnity, under which the insurer agrees to indemnify the insured up to a specific amount against loss or damage resulting from liens, encumbrances or title defects and claims within its coverages”.

Wikipedia defines “Indemnity” as:

“Indemnity is a contractual obligation of one party (indemnitor) to compensate the loss occurred to the other party (indemnitee) due to the act of the indemnitor or any other party.”

Since the title policy is a Contract of Indemnity, the Insured will be indemnified i.e. compensated, for a loss due to a matter covered by the policy. While the insurer is obligated to indemnify (compensate) the insured for a loss incurred due to a covered title defect, the insurer is not obligated to cure the title defect.

B. Breach of Title Policy

Is a title policy breached when a covered title defect is discovered? While many of the title insurance cases use the phrase “breach of contract” when referring to a title defect that was not disclosed by the policy, the answer to the question is no because a title policy does not guarantee that the title has no title defects. Instead, the title policy is an agreement to indemnify the insured when a covered title defect is discovered. Therefore, a title policy cannot be breached by the mere discovery of a title defect. Lawyers Title Insurance Co. v. Synergism One Corp., 572 So.2d 517 (4th DCA 1990).

While the title policy is a Contract of Indemnity that requires the insurer to indemnity the insured for a covered title defect, the insurer has the option to cure the title by litigation or otherwise. Condition 5(b) of the policy provides:

(b) The Company shall have the right, in addition to the options contained in Section 7 of these Conditions, at its own cost, to institute and prosecute any action or proceeding or to do any other act that in its opinion may be necessary or desirable to establish the Title, as insured, or to prevent or reduce loss or damage to the Insured. The Company may take any appropriate action under the terms of this policy, whether or not it shall be liable to the Insured. The exercise of these rights shall not be an admission of liability or waiver of any provision of this policy. If the Company exercises its rights under this subsection, it must do so diligently.

When a title claim is submitted to the title insurer, the title insurer has the option under Condition 7(b)(ii) to pay or settle the claim with the insured, or under 7(b)(i) to pay or settle the title claim with the third party alleging some interest in the property. Condition 7 provides as follows:

7. OPTIONS TO PAY OR OTHERWISE SETTLE CLAIMS; TERMINATION OF LIABILITY

In case of a claim under this policy, the Company shall have the following additional options:

(a) To Pay or Tender Payment of the Amount of Insurance. To pay or tender payment of the Amount of Insurance under this policy together with any costs, attorneys’ fees, and expenses in­curred by the Insured Claimant that were authorized by the Com­pany up to the time of payment or tender of payment and that the Company is obligated to pay. Upon the exercise by the Company of this option, all liability and obligations of the Company to the Insured under this policy, other than to make the payment required in this subsection, shall termi­nate, including any liability or obligation to defend, prosecute, or continue any litigation.

(b) To Pay or Otherwise Settle With Parties Other Than the Insured or With the Insured Claimant. (i) To pay or otherwise settle with other parties for or in the name of an Insured Claimant any claim insured against under this policy. In addition, the Company will pay any costs, attorneys’ fees, and expenses incurred by the Insured Claimant that were authorized by the Company up to the time of payment and that the Company is obligated to pay; or (ii) To pay or otherwise settle with the Insured Claimant the loss or damage provided for under this policy, together with any costs, attorneys’ fees, and expenses incurred by the Insured Claimant that were authorized by the Company up to the time of payment and that the Company is obligated to pay. Upon the exercise by the Company of either of the options provided for in subsections (b)(i) or (ii), the Company’s obligations to the Insured under this policy for the claimed loss or damage, other than the payments required to be made, shall terminate, including any liability or obligation to defend, prosecute, or continue any litigation.

The payment by the insurer to indemnify the insured or to settle the title claim with a third party resolves the insurer’s obligation under the policy to the insured for that particular title claim. Additionally, under Condition 7(a) of the policy, the insurer may pay the entire policy limit to the insured and, thereby, terminate all liability and obligations of the insurer under the title policy.

In lieu of indemnifying the insured or paying a third party to settle the title claim under Condition 7, the title insurer has the option to cure the title defect by any method including litigation under Condition 9(a) of the title policy. Condition 9(a) of the Owner’s and Loan policies provides as follows:

“(a) If the Company establishes the Title, or removes the alleged defect, lien, or encumbrance, or cures the lack of a right of access to or from the Land, or cures the claim of Unmarketable Title, all as insured, in a reasonably diligent manner by any method, including litigation and the completion of any appeals, it shall have fully performed its obligations with respect to that matter and shall not be liable for any loss or damage caused to the Insured.”

Under Condition 9(a) of the policy, if the title Insurer cures the title defect in a reasonably diligently manner after a title claim is submitted for a covered title defect, the title insurer’s obligations under the policy are fulfilled. Therefore, the policy is not breached by the mere discovery of a title defect and the insurer is not liable for any loss or damage to the Insured beyond curing the title defect. See Lawyers Title Insurance Co. v. Synergism One Corp., 572 So.2d 517 (4th DCA 1990); and Cocoa Properties, Inc. v. Commonwealth Land Title Ins. Co., Id., citing Conditions 7(a) and 7(b) of the policy at issue in the case, which are now Conditions 9(a) and 9(b) in the current version of the policy.

Under Condition 9(b), if the title insurer decides to cure the title defect by litigation, the title insurer will have no liability to the insured for loss or damage caused by a covered title defect as long as the court, including all appeals, rules in favor of the insured. See Lawyers Title Insurance Co. v. Synergism One Corp., 572 So.2d 517 (4th DCA 1990), and Cocoa Properties, Inc. v. Commonwealth Land Title Ins. Co., 590 So.2d 989 (Fla. 2 DCA 1991).

Condition 9(b) of the policy provides as follows:

(b) In the event of any litigation, including litigation by the Company or with the Company’s consent, the Company shall have no liability for loss or damage until there has been a final determination by a court of competent jurisdiction, and disposition of all appeals, adverse to the Title, as insured.

Regarding litigation to cure a title defect and Condition 9(b), the 4th DCA in Lawyers Title Insurance Co. v. Synergism One Corp., 572 So.2d 517, stated:

“The policy does not guarantee that litigation will not occur, but, in fact, assumes the opposite, that many types of title defect litigation can occur. The insured’s claim must await an adverse title determination by a court. ‘The claim only lies once a court speaks, and not before, and not if the court’s judgment is favorable.’”

When a title claim is submitted to the title insurer, the title insurer can either compensate the insured for the title defect or cure the title defect. Typically, the insurer will select the option that will cost the insurer the least amount of money. If it is less expense to cure the title defect than to indemnify the insured for the title defect, the insurer will cure the title. If it is less expense to indemnify the insured than to cure the title defect, the insurer will indemnify the insured. The insurer has the option under the policy to cure the defect or compensate the insured.

V. MEASURE OF LOSS UNDER A TITLE INSURNACE POLICY

A. Determination and Extent of Liability

Condition 8 of the policy entitled “Determination And Extent of Liability” provides as follows:

8. DETERMINATION AND EXTENT OF LIABILITY

This policy is a contract of indemnity against actual monetary loss or damage sustained or incurred by the Insured Claimant who has suffered loss or damage by reason of matters insured against by this policy. (a) The extent of liability of the Company for loss or damage under this policy shall not exceed the lesser of

(i) the Amount of Insurance; or (ii) the difference between the value of the Title as insured and the value of the Title subject to the risk insured against by this policy.

Under Condition 8, the maximum liability of the insurer under the policy for a covered title defect is the lesser of the policy amount or difference between the value of the property as insured i.e. without the title defect, and the value of the property with the title defect. This second measure of damages is usually referred to as the “diminution in value”.

B. Measure of Loss – Owner’s Policy

While Condition 8 of the policy sets forth the maximum loss under the policy to the lesser of the policy amount or the diminution in value of the property due to the title defect, what constitutes loss under an Owner’s Policy is different than what constitutes loss under a Loan Policy. In CMEI, Inc. v. American Title Insurance Company, 447 So.2d 427, the 5th DCA stated that:

“[S]ubstantive differences between the insured interest of an owner and that of a mortgagee results in a significant difference in what constitutes ‘loss or damage’ under each type of title policy. Title defects and liens directly and adversely affect the property owner because the owner is entitled to the full market value of the property and that value is immediately reduced by the outstanding title defects and liens.”

Therefore, an owner suffers an immediate loss if a covered title defect reduces the market value of the insured property. For example, if a $10,000 judgment against a former owner of the property was missed in the title search, the insured owner would have an immediate loss under the title policy as long as the policy does not have an exception for the judgment and the judgment was a valid lien against the property.

C. Measure of Loss – Loan Policy

Regarding the measure of loss under a Loan Policy, the above quote in CMEI, Inc. v. American Title, 447 So.2d 427, continued:

“A mortgagee’s loss is measured by the extent to which the insured debt is not repaid because the value of [the] security property is diminished or impaired by outstanding lien encumbrances or title defects covered by the title insurance. Therefore, superior liens or title defects … may … reduce the market value of the … property … yet result in no loss or damage to the insured mortgagee because the effect of the title problems does not reduce the value of the security property below the amount of an indebtedness secured or because the indebtedness is otherwise secured or paid.”

Therefore, if the market value of the insured property with the covered title defect is greater than the debt secured by the mortgage, the lender will not have suffered a loss under its policy because the market value of the property, even with the title defect, is sufficient to make the lender whole if the lender has to foreclose and take title to the property. In CMEI, Inc. v. American Title, the Loan Policy was in the amount of $1,475,000. After the lender foreclosed and obtained title to the subject property, two recorded easements were discovered that were not listed as exceptions in the Loan Policy. However, the market value of the property when the lender foreclosed and obtained title, even with the two easements, was in excess of $1,475,000. Therefore, the lender did not suffer a loss under the Loan Policy because the market value of the property with the defects was sufficient to fully pay the debt owed the lender.

D. Exclusions from Coverage

The title polices contain Exclusions from coverage and the introduction to those Exclusions from coverage states as follows:

“The following matters are expressly excluded from the coverage of this policy, and the Company will not pay loss or damage, costs, attorneys’ fees, or expenses that arise by reason of:”

And, Exclusion 3(c) states as follows:

“3. Defects, liens, encumbrances, adverse claims, or other matters:” * * * “(c) resulting in no loss or damage to the Insured Claimant;”

There can be a claim for a covered title defect, but if the insured has not suffered a loss, the title defect will be excluded from coverage under Exclusion 3(c). In the CMEI, Inc. v. American Title case, even though there were two missed easements that encumbered the property, the lender did not suffer a loss under the policy because the value of the property with the two easements on the property was in excess of the amount owed to the insured lender under the loan secured by the property. Therefore, under Exclusion 3(c), those two missed easements were excluded from coverage under the Loan Policy but would have been covered under an owner’s policy.

VI. DATE OF TITLE INSURNACE POLICY

The effective date of a title insurance policy is the date and time that the insured documents (deed and or mortgage) are recorded in the Public Records of the County where the property is located. A title insurance policy provides coverage under the insuring clauses of the policy from the effective date of the policy back in time for covered title defects in the chain of title to the property that occurred prior to the date of the policy but are not discovered until after the date of the title policy. The 4th DCA in Lawyers Title Ins. Co. Inc. v. Novastar Mortgage, Inc., 862 So.2d 793 (Fla. 4th DCA 2003), quoted F.S. 624.608 and then stated: “title insurance is protection against future loss because of past events.”

VII. AMOUNT OF COVERAGE

A. Policy Must State Amount of Coverage

Florida Statute 627.778(1)(a) requires that the title policy state a specific amount of coverage for insurer solvency purposes. F.S. 627.778(1)(a) provides as follows:

“(1)(a) A title insurer may not issue any contract of title insurance, either as a primary insurer or as a coinsurer or reinsurer, upon an estate, lien, or interest in property located in this state unless: 1. The contract shows on its face the dollar amount of the risk assumed; and 2. The dollar amount of the risk assumed does not exceed its surplus as to policyholders, unless the excess is simultaneously reinsured in one or more authorized insurers or one or more reinsurers that meet the requirements of s. 624.610.”

B. Owner’s Policy Coverage

Regarding the amount of an owner’s policy, Florida Administrative Code Rule 69O-186.003(1)(a)2 provides that:

“In all cases the owner’s policy shall be issued for the full insurable value of the premises.”

The title insurance industry interprets “full insurable value” to be the full fair market value of the property. The public policy behind this requirement is to protect the owner’s full equity in the property.

C. Lender’s Policy Coverage

Regarding the amount of a loan policy, Florida Administrative Code Rule 69O-186.003(1)(b)2 provides that:

“2. A mortgage title insurance policy shall not be issued for an amount less than the full principal debt. A policy may, however, be issued for an amount up to 25 percent in excess of the principal debt to cover interest and foreclosure costs.”

The public policy behind this requirement is to protect the lender’s loan amount and to allow the lender to obtain 25% more in coverage to cover foreclosure costs and interest.

VIII. PROMULGATED FORMS AND RATES

A. Promulgated Forms

Under F.S. 627.777, all forms of title insurance such as commitments, policies and endorsements must be approved by the Florida Office of Insurance Regulation (“OIR”) before they may be issued. F.S. 627.777(1) provides as follows:

“(1) A title insurer may not issue or agree to issue any form of title insurance commitment, title insurance policy, other contract of title insurance, or related form until it is filed with and approved by the office. The office may not disapprove a title guarantee or policy form on the ground that it has on it a blank form for an attorney's opinion on the title.”

B. Promulgated Rates

Under F.S. 627.780(1), title insurance premium is promulgated by OIR so only the premium rates adopted by OIR may be charged. F.S. 627.780(1) provides as follows:

“(1) A person may not knowingly quote, charge, accept, collect, or receive a premium for title insurance other than the premium adopted by the commission, except as provided in s. 626.9541(1)(h)3.b.”