Why are Exclusions and Exceptions to Title Insurance so important?
The standard title insurance form used in whole or part by industry participants is the 2006 Owner’s Policy of Title Insurance produced by the American Land Title Association. The standard ALTA insurance form starts with the following language:
“American Land Title Association
Owner’s Policy Adopted 6-17-06
SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B (bold italics added) AND THE CONDITIONS, _(Blank)_______ TITLE INSURANCE COMPANY, a ______ corporation (the “Company”) insures . . .”
Given that title insurance policies specifically calls out EXCLUSIONS and EXCEPTIONS to insurance coverage in the very beginning of the policy, it would seem prudent for the purchaser of real property to ask, what exactly are these exclusions and exceptions? How important are they? Do I understand the risks involved with buying this piece of real estate? This article attempts to answer these questions.
Title Insurance Exclusions
Title insurance Exclusions are risks lying outside the scope of insurance coverage unrelated to the specificities of the parcel. Exclusions are defined as matters unrelated to matters of title. Exclusions are called out in a title insurance policy as a matter of clarification. Exclusions are not strictly speaking matters of title, but matters related to use of the parcel, use being a different matter than title to the property. Exclusions are marked “Exclusions from Coverage” and follow the “Covered Risks” section of the 2006 ALTA Owner’s Policy.
Broadly, Exclusions fall into two categories:
- Government regulations affecting the use of the parcel, including but not limited to zoning, building code, environmental, subdivision, and existing improvements;
- “Rights” by eminent domain.
Title Insurance Exceptions
Title insurance exceptions are risks that lie outside the scope of insurance coverage, risks related to the parcel. Exceptions are found in “Schedule B” of the 2006 ALTA Owner’s Policy following “Schedule A.” Exceptions are of two types: 1) Standard and 2) Special.
Standard Exceptions are defined as matters unrelated to matters of title. Standard Exceptions are called out in a title insurance policy as a matter of clarification. Standard exceptions are not strictly speaking matters of title, but matters related to use of the parcel, use being a different matter than title to the property. The industry has found it useful to make clear what otherwise can be a confusing and contested area.
Broadly, Standard Exceptions may include:
- Parties in possession;
- Accurate survey or inspection;
- Adverse possession or prescriptive easements;
- Easements not shown by public record;
- Construction liens;
The difference between Standard and Extended title insurance coverage is most often the difference between a policy that does not cover Standard Exceptions and that which does cover them.
Special Exceptions are found in Schedule B of the 2006 ALTA Owner’s Policy, most times in Section II, and often are referred to colloquially as Section B II exceptions. The Special Exceptions section lists public-record documents representing uninsured risks to title. The Special Exceptions represent the greatest risks when buying or selling property because they can be so diverse, unexpected, contrary to expectations, and ultimately expensive when not accounted for. For more information, see our article, Title Insurance Special Exceptions.