Posting for

Thursday, November 19, 1998

by: Paul Trefz

ptrefz@firstam.com

and: Bert Rush

brush@firstam.com

MAXIMUM ACTUAL LOSS ENDORSEMENT/SOFT COSTS/TITLE UNDERWRITING

Paul Trefz (Valley Forge, PA) writes:

My customer insists he has been issued, by First American, a so-called "Maximum Actual Loss" endorsement to the effect that, "The Company hereby agrees that for the purpose of determining the maximum liability of the Company under this Policy, the maximum actual loss of the insured shall include all funds paid by or on behalf of the insured for the development of the land and related soft costs, ..."

Can you or the LandSakes savants tell me the circumstances under which this coverage can be given, if at all?

Reply: This isn't a standard endorsement form--nor even a "black book" form--but I'm pretty sure we've issued it.

Since it's not to be found in the Underwriting Library, I asked Oscar Beasley and Richard Flory for their comments. Here's my second-hand report: This type of endorsement is typically requested by the property owner who may be concerned that in the event of a total failure of title his/her property would not appraise for anything near a value equal to the owner's out-of-pocket expenses to acquire and improve it.

For example, the owner may have vacant land valued at $350,000 which he or she has plans to develop as a major commercial project. The owner requests title policy coverage in the amount of $10 million. The owner may already (or may in the near future) have expended legal fees of $100,000 and architectural/design fees of $400,000 in connection with this planned project. In the event of a total failure of title the owner may want the so-called "Maximum Actual Loss" endorsement so that the reimbursable loss would be $850,000 rather than the appraised value of the vacant land ($350,000).

Likewise, as construction proceeds the owner will invest more into the land which may not add to its appraised value until completion of the project--and may request this endorsement to more fully cover his investment.

The endorsement can be given, although Richard suggests the title underwriter review the actual and proposed "soft costs" before insuring, to gain a comfort level that the costs are reasonable. This is a variation on the "know your customer" theme, and where the customer is a known entity we may be more willing to give the endorsement. Richard also suggests the underwriter consider putting caps on coverage at certain stages of completion.

Oscar also sees this as an endorsement which might be requested by owners of radio towers, or other unusual improvements which may be difficult to value using traditional appraisal methodology. Same deal. Get the facts, get to know the customer, and try to craft an endorsement tethered to fair and reasonable limits of coverage.

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

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Following Thursday's posting Dave Westcott (Sacramento) writes:

I've been requested to and have issued the actual loss end. With Cliff's help. The going concern end. (FA 68) is, I believe, the better choice for radio station antenna sites (in fact, if I recall correctly, that is exactly the purpose for which it was first drafted.)

Comment: Several Savants have expressed interest in seeing this form. The version Dave refers to above can be viewed by clicking on the URL below. CAVEAT: The Senior Underwriting Dept. asks that you not issue this form until after speaking with one of them. There are important issues to be considered whenever this is requested--and we want to make sure we are all on the "same page."

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Following up on last Thursday's posting, Rich Angelo (Valley Forge/Philadelphia) writes:

I was once involved in insuring a water co-generation plant, where the turbines were to sit in the waters of a major river. A FERC license was obtained to place the improvements in the river, and the lender wanted insurance for $100 million or so. But we could not insure the FERC license as "title", and since the bulk of the improvements/value was to sit in the river, we were unwilling to insure the power line easement for the total $100 million cost. We ended up making some accommodation to the lender and insured the easement for much more than it was worth, but nowhere near the $100 million. We looked at the cost of obtaining alternate easements and added to that. But counsel insisted for some time that they had to have "all costs" insured. hey eventually relented, especially when we pointed out to them that the turbines could be pulled up and reused, etc. I agree that we have to know the customer and understand the deal before insuring for more than the inherent value of the land.