Silver Law Offices Inc. E-Alert

For many years lenders, and buyers, could opt to have title insurers bear a very specific risk. The risk of losses arising from a third party creditor of the borrower or buyer claiming that the insured loan or sale transaction was a fraudulent transfer or a preference under Federal bankruptcy or state laws. From 1990 until 2004 this was accomplished by paying the title insurer to issue an endorsement "deleting the creditors' rights exclusion" (which may or may not have actually provided affirmative insurance) and starting April 2004 by purchasing an affirmative insurance endorsement known as the "Creditors' Rights Endorsement" which was written on the American Land Title Association's ("ALTA") Form 21 (except in NY, TX, Florida and NM where it was unavailable per state law). Lenders wanted this coverage as they were concerned about not being covered for these insolvency related issues in connection with potential future foreclosures, deeds in lieu of foreclosure, modifications and other loan workouts. Title insurers, on the other hand, were concerned about possible claims based on alleged fraudulent conveyances and preferential transfers by the borrower, and the risk of equitable subordination of all or a portion of the lender's claim against the borrower in the event of a subsequent bankruptcy filing by or against the borrower.

Obviously, these concerns were well founded as title companies have lately been experiencing many claims and losses based on this endorsement. As a result, on February 8, 2010 the ALTA Board of Governors voted to withdraw and de-certify the use of the ALTA 21 endorsement form to avoid new exposure and losses. The same day, Stewart, First American and all Fidelity group title insurers announced they would stop issuing the endorsement. I received an email from First American stating that it "will no longer delete the creditors' rights exclusion, issue the ALTA 21-06 or similar endorsements, or modify in any other way the basic policy form to provide affirmative coverage for creditors' rights issues." Even well before these announcements many insurers had declined to issue the endorsement, at least not unconditionally, or would only do so for very high premiums.

This coverage product was enjoyed by title companies as long as it was a great source of profit but they never should have been allowed to sell it to begin with because it involves a business risk which was never a "title matter." It's a risk associated with the financial viability of the borrower or seller and, although title insurance company underwriters were internally generically told to do some due diligence before issuance, they were never in a position to be able to do so, especially given the high volume of transactions from 2004 through 2007. Lenders will have to do without it now but many won't care as they now finally again realize that the burden to assess the financial strength of the borrower is solely theirs. Back to basics!