Posting for

Wednesday, November 4, 1998

by: Bert Rush

brush@firstam.com

TITLE UNDERWRITING/COMMERCIAL PROPERTIES/SURVEY REQUIREMENTS

In our posting for 10/1 we discussed new underwriting initiatives recently announced by Cliff Morgan and Paul Hammann, including offering to issue loan policies (even extended coverage and EAGLE) on commercial properties without requiring a survey.

Raising questions which I'm sure have occurred to more than a few of you, Phillip Poitevin (Jackson, MS) writes:

But again, as mentioned in our previous posting, you should check with local lenders before actively marketing this initiative to make sure they are comfortable with it.

All indications are that commercial business is slowing down--which makes this an important time for us to pursue every reasonable underwriting initiative we can think of to hold on to market share. Initiatives such as this may also improve our ability to avoid taking other unreasonable risks, such as by hasty removal of the creditors' rights exclusion in response to a last minute request.

Questions, comment, argument? Just press the "reply" button and send your thoughts....

**********

Following last Wednesday's posting, Paul Trefz (PA) writes:

Here in PA we commonly insure lenders on commercial property without requiring a new survey, with very good (that is to say minimal) claims experience as a result. We have little hesitation issuing ALTA 9 (Comprehensive), Contiguity, and Separate Tax Lot. However, as to Access, in lieu of a survey we should have an inspection by our agent to confirm the "physically open" issue (which, by the by, may or may not be disclosed by a survey not certified as being ALTA/ACSM).

And Oscar Beasley (Santa Ana) writes:

PHILLIP'S ANSWER, OR QUESTION AS THE CASE MAY BE IS NOT ANY DIFFERENT THAN WE HAVE BE ASKED FOR YEARS. WE ARE SUGGESTING THAT LENDERS BE INSURED WITHOUT THE NEED FOR OR USE OF SURVEYS. OUR REASONING FOR DOING THIS IS BASED ON THE PERCENTAGE OF THE LOAN, SO THAT IF THERE IS A LESS THAN 100% LOAN THERE IS ROOM IN THE VALUE FOR THE CLAIM. AS LONG AS WE CAN SUSTAIN THE FACT THAT A LOSS CAN NOT EXIST IF THE FORECLOSURE WILL PAY OFF THE LOAN WE HAVE NO LIABILITY. A SECOND REASON IS THAT WE SELDOM HAVE CLAIMS IN THE SURVEY AREA THAT CREATE A LOSS.

HOWEVER HAVING SAID ALL THIS WE MUST UNDERSTAND THAT A SURVEY CAN AND DOES ON OCCASION REPORT TO THE PURCHASER PROBLEMS THAT TITLE INSURANCE DOES NOT EFFECT. A MAJOR ISSUE FOR ME IS "DO WE INSURE THE DESCRIPTION IF WE GIVE AN EXTENDED COVERAGE POLICY? IF THE ANSWER IS YES WHICH IT PROBABLY IS, DOES THAT MEAN WE INSURE THE DESCRIPTION WHEN WE GIVE EXTENDED COVERAGE AND DON'T HAVE A SURVEY??

AN INTERESTING STATUTE HAS BEEN PASSED BY THE LEGISLATURE IN HAWAII THROUGH THE INSTIGATION OF THE REALTORS. IT IS MEANT TO CONCERN ENCROACHMENTS AND THE STATUTE DECLARES THAT AN ENCROACHMENT OF LESS THAN 6 INCHES IS CONSIDERED DIMINUTIVE AND CAN BE IGNORED. SO WE DON'T SHOW THEM BUT MAY HAVE TO INSURE AGAINST LOSS. SO, WHAT DOES THIS MEAN IF THE ENCROACHMENT IS 7 INCHES. NOW WHAT DO WE DO? THE REALTORS PASSED THIS STATUTE SO THEY COULD SUPPOSEDLY ESCAPE LIABILITY FOR FAILURE TO DISCLOSE. WE ARE IN THE POSITION NOW THAT WE PROBABLY CAN NOT INSURE WITHOUT A SURVEY. THERE ARE MANY PARTY WALLS WHICH MAY OR MAY NOT ENCROACH 6 INCHES. THIS HAS CERTAINLY CHANGED THE METHOD OF OPERATION.

**********

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

I don't want to carp . . . especially about Oscar's sagacious (as usual) comments . . . but aren't party walls reciprocal easements as opposed to encroachments?

Reply: I'd venture a guess that a party wall isn't a reciprocal easement when one neighbor learns for the first time that the original boundary of his or her property is on the other side of the wall by several feet (or yards), and

Meanwhile, Ben Knittel (Houston) writes:

In case anyone gets involved in a multistate transaction involving Texas property, be advised that the Texas Department of Insurance has had the wisdom to protect us from ourselves. In Texas, we are not allowed to amend the survey exception unless we have a current survey (on residential refinance transactions we are allowed to use an old survey if we have an affidavit saying that there have been no changes to the boundaries or improvements since the time of the old survey).

Even with a surveyor involved, people can totally screw things up. We currently have a claim where the building was staked and built entirely off of the insured lot, and the surveyor gave us a survey showing no problems - he had simply relied on the stakes set by another surveyor, and didn't bother to locate any control monuments to double-check the stakes (such as running some measurements from block corners, which would have quickly revealed the error.) In this case, even with a significant equity cushion, we will probably have to pay a loss under our loan policy unless we are able to talk the neighbor into swapping lots with our insureds. I don't think we should assume that there is no risk involved in abandoning the requirement of surveys for loan policies.

In my experience, survey claims have always arisen with regularity. Even if the value of the land involved in the dispute is minimal, owners get very exercised about these matters, and they want their title companies to defend them to the death. If other title companies follow suit and stop requiring surveys, our claims experience may end up going down, since it is usually a new survey that reveals the discrepancy. I have always been amazed at how often surveyors disagree about the results of the application of their "science." The truth is that land surveying necessarily involves many judgment calls, and surveyors will still arrive at different results even if they are all using laser instruments that can measure down to hundredths of an inch.

It is also true that people will continue to build sheds and decks and carports and swimming pools with little regard to the location of lot lines, easements and setback requirements - most of these matters would not result in a loss under a loan policy. On the other hand, if we agree to give owners survey coverage without surveys, we should count on having to pay some claims.

Reply: Well, of course, we do offer owners survey coverage without a survey--and have done so for years in such places as California--with claims experience so manageable it encourages us to expand these coverages with the EAGLE and second-generation EAGLE owner's policy forms. Even now--as we speak--having offered the EAGLE policy in California for 18 months, our claims experience has been perfectly manageable (and you CA claims counsel feel free to share any horror stories to the contrary of what I'm saying). In fact, the only pure EAGLE claims I know of to date have involved building permit violations.... So, yes, there are risks--but the rewards for the consumer and the title industry alike are expected to outweigh the risks.

**********

Following up on our posting for Wednesday, 11/4/98--and subsequent ruminations between Oscar Beasley, Frank Melchior and myself about the many facets of party walls--Sandra Thwaites (Ontario, Canada) writes:

Further to your invitation to "make up your own" potential claim relating to party wall issues, I thought I would share a claim that we received last month relating to an encroaching toilet and bathtub. This spring we insured (with the Canadian version of the first generation Eagle policy) a purchaser of a modest row house in Hamilton, Ontario. Shortly after our insured moved in, her neighbor advised her that her bathtub and toilet encroached onto his property, and would she kindly remove them.

The previous owners of the property had renovated the bathroom some years earlier, and took the liberty of breaking through the party wall separating their property from their neighbors to make the bathroom two feet wider. The neighbor first realized there was a problem when there was a significant leak.

We considered (briefly) either negotiating an encroachment agreement with the neighbor (which seemed unlikely given that he was asking that it be removed and had already suffered damages when it leaked), or arguing that our client was entitled to keep the encroachment because the evidence was that the neighbor had known about the encroachment for 5 years and done nothing about it.

We decided, given the modest nature of the home, to pay for renovations to the bathroom to move it back onto our insured's property, pay a small amount for dimunition of market value (the square footage of the house will now be slightly smaller), and pay for a hotel room for the week it will take to do the repairs.