WHEN THE LEFT HAND IS NOT THE SAME AS THE RIGHT
By: David L. Allen
It is commonplace for an owner of real estate to convey their
property from one entity that they own or control to another that
they also own or control. There are many reasons for such
transfers, including, most commonly, the desire to hold a
particular property in a "single purpose entity" in order to
satisfy a lender's requirement, or to attempt to shield the asset
from potential creditors of the transferring entity. While
owners who engage in such transactions may give consideration to
the effect that the transfer will have on an existing loan, or
possible tax implications, it is likely that little, if any,
thought is given to the potential impact of such a transfer on the
title insurance coverage of the transferring entity.
It is common for the title insurance policy obtained by an owner
of real estate to include language that the coverage afforded by
such policy remains in effect only "so long as the insured retains
an estate or interest in the property," or only "so long as the
insured shall have liability by reason of covenants of warranty
made by the insured in any transfer of the property."
Whenever the insured owner transfers its property, even if from one
entity that it owns to another, it runs the risk of its title
insurer asserting that it "no longer owns an estate or interest in
the property," and thus, the coverage afforded by the policy no
longer is in effect. While the owner may argue that such a
transfer is merely a transfer from the owner's proverbial "left
hand" to its "right hand," various courts (there is no case
directly on point in Arizona, yet) have rejected such an argument,
and have held that regardless of the close relationship between the
transferring entity and the entity to which the property was
transferred, the coverage afforded by the policy no longer
applies.
Absent an ongoing ownership interest in the property, another
way for the transferring entity to assert that it still has
coverage under its title insurance policy is to assert that it
still has "liability" to the entity to which the property was
transferred. While it is commonplace for transfers of this
nature to be made by quitclaim deeds or special warranty deeds, if
the transfer is made by a general warranty deed, which includes a
warranty against title defects of the nature covered by the
insurance policy, then the transferring entity will likely be able
to successfully argue that it still has coverage for any
subsequently discovered title defects based upon its ongoing
liability under the warranties contained within the general
warranty deed.
The title insurance obtained by a purchaser of real estate often
offers the only recourse available to an innocent owner who
discovers a title defect some time after acquiring its
property. In order to avoid the unintentional loss of such
valuable insurance coverage in the context of an "internal"
transfer of property, before completing the transfer, the insured
owner should contact its title insurance company, and inquire as to
whether the proposed transfer will terminate the coverage. If
the answer is "yes," then the insured owner should ask the
insurance company to sell it an endorsement or amendment to the
policy adding the transferee entity as a named insured, so as to
avoid any possible dispute regarding the availability of coverage
in the event of a future claim. If the answer is "no," then
the insured owner should obtain the title company's affirmation in
writing.
About the Author: David Allen, a partner in the Phoenix law
firm of Jaburg & Wilk, has been representing clients in
both transactional and litigation real estate and
business related matters over thirty years. He is
licensed as an attorney in both Arizona and California,
and is also a licensed Arizona real estate broker. He can be
reached at 602.248.1082 or at dla@jaburgwilk.com.
This article is not intended to provide legal advice and
only relates to Arizona law. It does not consider the scope
of laws in states other than Arizona. Always consult an
attorney for legal advice for your particular situation.
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