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Rhonda L. Duddy
Does an owner policy of title insurance terminate when title is transferred to a trust for estate planning purposes? That is the question
title insurance underwriters are frequently asked by insured owners and/or their estate planning attorneys.
The answer to this inquiry is both yes and no, based on
the policy issued because the covered risks, terms, conditions and exclusions vary
depending on the kind and version of policy issued. For instance, a 1992 ALTA owner policy differs from
a 2006 and a 2021 ALTA owner policy. Additionally, the 1998 ALTA homeowner policy
(sometimes referred to as an enhanced policy) differs from a 2008, 2010, 2013 and
2021 ALTA homeowner policy.
A typical scenario
is subsequent to the purchase of the property, the named insured conveys the
property to trustee(s) of a trust for estate planning purposes. Depending on the
policy form issued at the time of purchase, if the named insured on the policy
is no longer the owner of the real estate as a result of the transfer, under
the terms of the policy coverage may have terminated due to the fact that the
property is no longer owned by the named insured. In that instance, the current owner no longer
has the benefit of the title insurance policy. Therefore, it is
important that terms and conditions of the policy be reviewed, particularly the
policy’s continuation of coverage section and the definition of insured section
in order to determine whether coverage under the policy might be impacted prior
to transferring title from a named insured.
For example, looking
at the 1992 ALTA owner policy, the continuation of coverage section contains
the following or similar language:
The coverage of
this policy shall continue in force as of the Date of Policy in favor of an
insured only so long as the insured retains an estate or interest in the land,
or holds an indebtedness secured by a purchase money mortgage given by a
purchaser from the insured, or only so long as the insured shall have liability
by reason of covenants of warranty made by the insured in any transfer or
conveyance of the estate or interest.
This policy shall not continue in force in favor of any purchaser from
the insured of either (i) an estate or interest in the land, or (ii) an
indebtedness secured by a purchase money mortgage given to the insured.
If the policy that
was issued includes this or similar language and subsequently the insured
conveys the property, the insured would no longer have an estate or interest in
the land. Depending on the terms of the
trust and how the beneficial interest is allocated, an owner might have a
personal property interest in the trust, but they would no longer have an
individual interest in the land and would no longer have coverage under the
policy.
Other owner and
homeowner policies may contain continuation of coverage language that includes
language that the policy also insures the trustee or successor trustee of the
insured’s trust or any estate planning entity to whom the insured transfers
their title after the policy date. In these
instances, no further action may be required since the terms specifically state
that policy coverage is continued under these specific circumstances, so long
as it was an insured’s trust or a trust or entity created for estate planning
purposes.
It is also
important to review the policy’s “definition of insured” section in order to
determine whether there are any other parties or entities that are included
falling under the term, other than the named insured. In certain circumstances, a transfer to a
third party or entity might not terminate coverage if that party or entity is
included in the definition of insured.
It is important to note that the definition of insured varies depending
on the version and type of policy issued.
For example, looking
again at the 1992 ALTA owner policy that contains the following or similar
definition of an insured:
“Insured”: The insured named in
Schedule A, and, subject to any rights or defenses the Company would have had
against the named insured, those who succeed to the interest of the named
insured by operation of law as distinguished from purchase including, but not
limited to, heirs, distributees, devisees, survivors, personal representatives,
next of kin, or corporate or fiduciary successors.
Some policies expand the list of successor insureds to include
certain parties who obtain title other than by operation of law, including a
spouse who receives title upon dissolution of marriage and the trustee of a
trust to whom title is transferred. If
the policy recognizes a transfer to a person or entity falling under the
definition of an “Insured” then no further action may be required in order to
continue coverage.
Due to these
nuances in the various title insurance policy forms, it is important to confirm
continuation of coverage before transferring real estate so that the title
insurance policy purchased at the time you purchased the property is not
terminated upon transfer. As discussed, some
policies have strict and limiting language relative to when coverage terminates
while others have broader continuation of coverage language.
What should you do if
you would like to transfer your property and you have a current policy? If it is determined that the existing policy
does not cover transfers to trusts, you may have the option to either buy a new policy or obtain what is called an
“additional insured” or “change” endorsement to the original policy. A policy endorsement would then name the trustee(s)
of the trust as an additional insured and coverage would continue. Be aware that it is not an option to transfer
the property out of the trustee(s) of the trust back to the named insured in
order to regain coverage. The first
conveyance may terminate coverage so conveying it back would not reinstate the
policy.
Please be sure to review your title insurance policy before
transferring real estate into a trust.
You can always reach out to your attorney or title insurance underwriter
to confirm whether coverage would continue or terminate on transfer to your
trust for estate planning purposes.
Rhonda is Massachusetts and New Hampshire Underwriting Counsel for
Steward Title Guaranty Company. Her
email address is rduddy@stewart.com.
