Title insurance insures against risks incurred to title when you buy land. However, when you read through a title insurance policy, you’ll find that certain risks are not covered. These uncovered risks to title are colloquially called “special exceptions.”
The American Land Title Association (ALTA) is the national trade association for the title insurance industry. Founded in 1907, the Association has developed a set of forms, the ALTA title insurance forms, used voluntarily by title insurers across the nation. The following is an excerpt from the 2006 ALTA specimen policy:
“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,”
Note that insurance is provided subject to Exclusions and Exceptions. The exceptions referred to here are what are known in the industry as “special exceptions” and are the subject of this article.
What is a “Special Exception” to Title Insurance?
Schedule B Part II of the 2006 American Land Title Association Owner’s Policy form is the section of the insurance policy that lists public-record documents usually found at the County Recorder’s Office pertaining to the parcel. In the title insurance industry, Special Exceptions are best thought of as exclusions specific to the parcel being insured. The Special Exceptions are matters affecting a specific parcel for which the policy does not provide coverage. Because public-record documents represent a potentially uninsurable risk to title, it’s critical that buyers and sellers understand the effect of public-record documents on their title interest.
Examples of Special Exceptions
Special Exceptions are many and varied but may include:
- Boat slip use agreements
- Claims of lien
- Deed restrictions
- Plats (Records of Survey)
- Tax liens
- Road agreements
- Septic agreements
- Water agreements
What is a public-record document?
Public-record documents are instruments recorded at the Recorder’s Office of the County in which the parcel is located. Examples of recorded documents include easements, tax liens, and other documents affecting the use, financing, or insurability of the parcel. Once a document has been recorded, the public is legally “on notice” regarding the document, meaning that the law presumes knowledge of its existence and its contents. Therefore, lack of knowledge of a public-record document is no excuse for not knowing its effect as a Special Exception to title insurance coverage.
Nature of the public-record document history of a given parcel
It is prudent to characterize the public-record documents history of any given parcel as unique. It may be more helpful to state this rule in the negative: it is imprudent to assume the public-record document history of any given parcel is not unique. In other words, a buyer is best advised to look very carefully at the public-record documents for any given parcel, regardless of its attributes, and to make no assumptions about the adequacy of the public-record documents. Caveat emptor (“buyer beware”) is the rule when it comes to real estate transactions. Better safe than sorry.
Value of a legal opinion of Special Exception risks
When buyer and seller are aware of all excepted risks, the market-clearing sales price will properly assess those risks. If the parties to a transaction are not aware of the excepted risks, the market-clearing price may overstate the value of the land by underestimating the risk.
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 J. Bushnell Nielsen, Title and Escrow Claims Guide 3rd Ed., p. 12-59 (2015).