Posting for

Wednesday, July 15, 1998

by: Bert Rush

brush@firstam.com

POLICY AMOUNT/COVERAGE/CO-INSURANCE

Paul Trefz (Valley Forge, PA) writes:

Dear Mr. Rush and the Land Sakes Savants --

Scenario: Mr. Blandings acquires a vacant lot in 1992 for $50,000.00 and obtains an Owner's title policy in that amount. In 1998 Mr. Blandings borrows $200,000.00 to build his dream house; in the course of that financing transaction he obtains (in a simultaneous-issue state for no additional premium or in a non-simultaneous-issue state pays requisite premium) in the same amount as the new loan, that is, $200,000.00.

Query: In the event of a title claim, is Mr. Blandings insured for 200K, or for 250K? Why? Would the answer be different if each policy was issued by a different title insurance company?

Reply to Paul: I say Blandings is insured for a total of $250,000. The reason is that in the example there is no event which would terminate the coverage of the first policy, and there is nothing in the policy which would limit the right of an insured to obtain additional insurance coverage for the same property.

This has only come up in one claim that I can remember. Couple of years ago we had a real nasty one here in Orange County--involving a supposed cloud on title created by a potential adverse claim asserted by California's State Lands Commission ("public trust" and boundary issues, as I recall). Anyway, at first we thought the insured had only one policy for about $2 million--but then the thing really heated up and the insured produces yet another owner's policy for about $4 million. I don't recall anyone involved with the claim at the time suggesting that the insured should be limited to the policy amount of only one of his policies.

Another thing: It makes perfect sense for the owner in your hypo to get additional insurance when he improves his property--greatly increasing his investment and the property value. In fact, we ought to recommend he do so. It's better for him and revenue for us.

I don't think it makes any difference if the two (or more) policies are issued by different underwriters--don't see a reason why it should. Now, you may ask, in the event of a claim with an exposure within the policy amount of the first policy--who pays? I think the insured may go to whichever insurer he chooses and expect full service--let the two (or more) companies work out between themselves whether this is co-insurance, such that more than one insurer should contribute to defense and/or indemnity. My gut feeling is that, if such an issue were litigated, a court would find this to be a co-insurance situation--the companies paying equally within their respective policy amounts.

Isn't this the Blandings who took one look at his contractor's estimate and said, "Tell you what, just build me the bathroom." (?)

Questions, comment, argument? Just press the "reply" button and weigh in.

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Some interesting replies following Wednesday's posting--Robbie Dimon (Atlanta) writes:

I agree there is coverage for $250,000. There is no basis for arguing that the first policy coverage is terminated - the insured still owns the property. If we intend to limit the coverage, a statement should be placed in the second policy that it replaces the first policy. In that case, should full premium be charged for the second $250,000 policy? Credit given for $50,000 existing coverage? What if there is a significant time lapse between first and second policy?

Also, the insured should be made aware that in the event of a claim, the loss would be limited to the value of the property at the time the defect is discovered. Which brings up another issue I've wondered about - If an insured wants $1 million in coverage and we are aware that property is only worth $100,000 - do we issue the million in coverage? Disclose to insured that loss under policy is limited to value of property at time of loss and have insured sign statement for file?

Reply to Robbie: I'd be suspicious of someone obviously over-insuring his title--you wonder if there's a fraud or forgery lurking in the shadows. On the other hand, the owner may be doing something that makes sense if he or she expects to improve the property soon, or if some improvement is scheduled for neighboring land which is likely to greatly enhance the value of insured property. So it might be a good idea to ask questions--see where they're coming from--give it the smell test. And the disclosure you suggest might also be helpful--altho I think we'd be able to enforce the measure of damages provided by the policy whether or not it's been discussed with the customer outside the normal course of closing. Problem is, sometimes, the insured finds an appraiser who shares the insured's enthusiastic sense of value--then we get stuck in the elevator going up.

Lillie Eyrich (New Orleans) writes:

In Louisiana, the way our rate filing is structured, the original owner's policy should be surrendered and a new owner's policy issued for $250,000. The insured pays only for the increase in the owner's coverage, receiving a full credit for the premium he paid for the original $50,000 owner's policy. He also receives a reissue rate on the $200,000.00 loan policy.

Alan Rubin (Uniondale, NY) writes:

In New York State, an owner who insured vacant land for $50,000 and who then built a house for $100,00 would (if he wanted additional policy coverage) be required to take additional insurance in the amount of the fair market value of the property. The TIRSA Rate Manual (New York State) provides [with a few exceptions], in Section 5, that an owner's policy "shall not be issued for less than the greater of contract price. . . or fair market value of the premises. . "

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Following up on last Wednesday's posting, Keith Pearson (Glendale/L.A.) writes:

I agree with your analysis that the total policy coverage would be $250,000. I'll make a analogy to support my opinion. Suppose I took out a life insurance policy on myself with my wife as beneficiary for $1,000,000.00 and she took out another life insurance policy on my life for $500,000.00 (granted this is not meant as a expression of my worth as a human being, or title attorney) and I died during the period of the two policies and all premiums were paid on both policies. In that instance it seems clear that the two policies would have to pay off for the total amount of $1,500,000.00. Assuming in the present case the property was worth the total amount of the two policies ($250,000.00) and the premiums were paid, I do not see any difference, unless there was a provision in the later policy saying it superseded the prior policy or replaced it in some manner (i.e. given as a means to increase coverage). I think this is one area where the law on other lines of insurance applies to title insurance.