Posting for

Wednesday, October 7, 1998

by: Ronald Wood

Asst. V.P.--Underwriting Counsel

New Orleans, LA

and: Bert Rush

brush@firstam.com

GAP COVERAGE/TITLE UNDERWRITING/THE VALUE OF TITLE INSURANCE

(Ken Jannen [Fort Lauderdale] has passed along a copy of a fax he received October 2 from Ron Wood, an underwriter in our New Orleans office. The fax letter describes circum-stances with which more than a few of you are all too familiar. Text of the letter follows.)

Peter (Keenan) has asked me to write to you regarding a problem in Orleans Parish in connection with the "gap" that we are experiencing for this parish. A new administration recently took over the mortgage office and has increasingly fallen behind in the indexing of the records. At any particular time, the records are between six and eight weeks behind. The problem seems to be worsening and it has become a concern to real estate attorneys and title companies.

The title company has increasingly been requested to do insured closings on large transactions and the amount of time and expense involved has become prohibitive. It may take an abstractor three days to run the records for the "gap." This is caused by the necessity of having to locate each document wherever it may be located in the clerk's office since there is no daily index kept of the documents as they are recorded. The abstractors must search through bundles of documents on the clerks' desks to account for each document that has been recorded. The abstract company has been charging $75 an hour for this service and, if it takes three days, that would mean a cost of $1,800. Besides the cost, the process takes the abstractors away from their regular work and ties them up for an extended period of time. As a result, we have been increasingly relying on "gap" indemnities for certain insured closings. However, even on other routine closings there is an ever increasing "gap" period that we are insuring whenever title insurance is being issued.

Because of the concerns over this problem, the Real Property Committee of the New Orleans Bar Association has created a sub-committee to investigate the situation in order to determine what can be done about it. In the meantime, we would like to know if there is anything we need to require our agents to do when it comes to insuring this type of "gap." Is there a cut-off of a certain amount of liability on the policy to be issued before we must require that the "gap" be closed? In what instances may we rely on indemnities alone and not require that a date-down be done? As a practical matter, we cannot require our agents to do date-downs on routine closings and we must be willing to take the risk on the "gap." However, as the "gap" increases, then we may reach a point where we feel uncomfortable with taking the risk. What do you feel is a reasonable risk to take?

This problem may exist in other parts of the country and you may be aware of some measures that have been taken in order to resolve the problem. We would greatly appreciate your input.

Reply to Ron: This problem has indeed been experienced elsewhere--and at times it has constituted a major risk which we have simply been forced to accept as a covered matter.

First, let's remember there are at least two gaps to speak of--the first is prior to closing when intervening matters may be floating around the clerk's office, not indexed and virtually unlocateable. The second is after closing, when documents evidencing our insured transaction are on their way to being recorded and/or being indexed so as to be "perfected" and impart constructive notice.

The risk of an intervening matter gaining priority in both of these gaps has traditionally been undertaken by title insurers--although some title folk may argue this point and may try to limit their exposure in the post-closing gap by making their policy date the date of closing, instead of the date of recording. My opinion is we ought to accept the risk for both gaps--and proudly point to this as another example of the value of title insurance.

But now I'll get off my pedestal and try to address your very insightful questions. First you ask if there is anything we should be requiring our agents to do. I think it'd be appropriate to ask for an indemnity from the grantor(s) in every transaction, indemnifying us against any mortgage, lien, easement or any other interest which may gain priority over the insured interest by virtue of intervening recording and/or indexing--assuming our insured docs are duly submitted for recording by a date certain (perhaps). I take it you are already doing this--at least for certain transactions. I also take it that it's been the practice in your region to obtain grantor affidavits for many years--which I think is the "next best thing" to the indemnity. If you take an affidavit, tho, make sure it's worded to include intervening matters which may gain priority even though not yet recorded and/or indexed.

I would also ask the agents to be extremely diligent about submitting docs for recording as soon as possible after closing--stress that we're already giving up too much time in the pre-closing gap.

Second, you ask if there's a cut-off for liability we're willing to accept (in terms of policy amount) before requiring that the gap be closed. I don't think so--but you're right in thinking that in high liability cases it might behoove us to ask an abstractor to give us the $1,800 treatment. For competitive reasons, though, I'm afraid you'll retreat from that requirement--but I think it's reasonable for you so retreat. (Other Savants--what say you?)

Third, in what instances may you rely on indemnities alone? All instances, unless you've got a known-insolvent grantor and a high-liability transaction--then you know you're at heightened risk with the gap...in such a case call senior underwriters and get a consensus.

Fourth, you ask as the gap increases what is a reasonable risk to take? We've seen gaps of more than three months in Long Island, NY, and more than two months in Philadelphia--and the claims experience was not all that bad. On Long Island I think the county recorders have since automated their operations--shortening the gap, and in Philadelphia the local land title group caused a lawsuit to be filed against the county recorder--the results of which I'm not current on. Anyhow, point is it's a risk we've found to be insurable even in areas where properties have substantial value and gap periods may run to several months.

So we basically go with it until we learn a better way.

Hope this helps--and I hope other Savants will not hesitate to argue.....just press the "reply" button.

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Following Wednesday's posting Frank Melchior (Iselin, NJ) writes:

Gap problems are not news in the NE. The NJ Land Title Insurance Association has on two occasions sued regarding this problem. The first time we sued a specific county recording official and the county board (to include the possibility of inadequate funding); we got a court order mandating that the clerk correct the deficiency and had the court maintain jurisdiction to avail ourselves of the contempt power to obtain performance. For political reasons, after more than one year of performance, we agreed to dismiss the suit.

We currently have a suit pending against all county clerks in the state to obtain similar relief.

The New York title association, several years ago, sued the Nassau County Clerk. There were big political repercussions as they were sitting on millions of dollars of uncashed (and in many instances stale) checks for transfer tax. . . in addition to the problem of the recording lag. Finally, if memory serves me correctly, there is a currently pending case in Philadelphia where the records are approximately one year (!) behind.

Sad to say, the problem seems to be never ending. I suppose the ultimate answer is, on the appropriate occasion, to sue the recording official for the damage caused by the failure to meet his/her statutory duty and thus, finally, get their attention.

And Mindy Haas (NYC) writes:

On many closings sellers execute gap indemnities, especially where there are multiple sites. I have sent this form to many offices and will continue to do so as requested. Love the interchange of ideas!!!

Note: For those who don't know, Mindy is a commercial underwriter in New York City--with lots of experience with such issues as gap coverage. You may want to e-mail and ask for a copy of their indemnity form. Mindy's e-mail address is MHaas@faticony.com.

Meanwhile, Jim Dondero (Grand Rapids, MI) writes:

Again, all it takes is one high-liability claim to create a monstrous loss. And, the more that our increasingly liberal practices in this regard become commonly known, the greater our exposure to such claims resulting from the fraudulent acts of unscrupulous real estate "professionals" (in which case, a gap indemnity would prove worthless). I personally believe that we need to become LESS, not more, tolerant of the situation.

Reply to Jim: Yeah, I'm not really preaching tolerance here. I'd like to see all these county recorders who don't like their jobs just go out and get new ones.

Here in Orange County, CA, First American was very supportive of one candidate for County Recorder last election. We hosted a reception for him here on-site and invited lots of the local movers and shakers. Our candidate won, and now we have a great county recorder's office. Title folk and their state associations should be more active in the election of county recorders (and those who control their purse strings).

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Following up on Wednesday's posting, Frank Melchior adds:

I forgot to mention that the obvious answer (unfortunately only in NJ and then still subject to the risks of the excessive gap caused by ridiculous recording backlogs) is to file a Notice of Settlement which substantially reduces the risk of the gap. We may wish to lobby other states to adopt similar legislation.

For the uninitiated: a Notice of Settlement is a NJ statutory device which "freezes" [similar to the effect of a lis pendens] a title for a 45 day period from filing provided that the closing which is the subject of the Notice is consummated and goes to record (including indexing) within the 45 day period.

Maybe -- with the backlogs as prevalent as they are -- this is a good time to lobby for such a law in other jurisdictions.

Reply to Frank: Glad you thought to add this--I'd forgotten about the New Jersey "Notice of Settlement" statute. As I recall there's a special index or list for Notice of Settlement filings in the recorder's office--so they get "posted" right away and are reasonably "searchable." This practice at least goes a long way to discourage the frauds and flakes Jim Dondero wrote about--who will exploit weaknesses in the system.

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Here's more info from Frank Melchior about New Jersey's statutory Notice of Settlement procedure:

Your memory is fine. Notices of Settlement are "filed" not recorded. As a result they are indexed but NOT posted in books as deeds, mortgages, etc. and are thus promptly findable (new word!) in most counties. Even if not, as after the fact evidence they can be found and have narrowed the gap.

Incidentally, from an underwriting standpoint, we do not rely on them to avoid dealing with problems arising post filing of the notice but prior to the settlement and insist that the closers deal with the intervening interest. If such an interest arises after the "bring down" search or between closing and the indexing of the recorded documents we then avail ourselves of the statutory defense.