Transfers of real estate between related parties happen all the time for a number of reasons—a parent LLC transfers its office to a subsidiary LLC for bankruptcy protection, an individual homeowner transfers their home to a trust for estate planning purposes, or a property held by two joint tenants is automatically transferred on the death of one tenant via the right of survivorship. While the foregoing examples, along with many others, present little to no functional difference in ownership, many title insurance policies treat these types of transfers differently than you might think.

In fact, one of the more frequent reasons for denial of a title insurance claim is due to the fact that the named insured on the title insurance policy is no longer the owner of the real estate. For example, let us assume that a business owns an office and transfers it to a subsidiary of said business. Older title insurance policies do not recognize the business and its subsidiary as the same entity when determining the named insured under the policy. As such, if the subsidiary were to then make a claim under the policy, it is possible the title insurance company would consider the policy terminated due to the fact that the property is no longer owned by the named insured under the policy. 

Under a title insurance policy, only the named insured is entitled to make a claim under said policy and receive coverage for the policy’s covered risks; a transfer to someone other than the named insured terminates the policy. All ALTA Owner’s policies state that the definition of “insured” includes not only the named insured, but also a party to whom title passes by operation of law.¹ The term “by operation of law” is not defined in the policy, but almost every court has held the phrase to mean a transfer that is automatic and that occurs according to a legal principle or statute.² The 1992 ALTA Owner’s Policy lists, as examples, distributes, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors. For example, when the insured is a natural person, a party may become a successor insured under the policy on a transfer by operation of law if the party was an heir, distribute, devisee, survivor, or next of kin. When the insured is an entity, a party that takes title to the property by operation of law on the dissolution of the entity becomes the successor insured. However, a transfer of the real estate prior to the dissolution of the insured entity does not qualify the transferee as an insured; in this case, the policy is considered terminated.³

The 2006 ALTA Owner’s and Loan policies expand the list of successor insureds who take title other than by operation of law, including “successors to an Insured by its conversion to another kind of Entity” and if the insured is sole owner of the grantee, the grantee wholly owns the insured, or the insured and grantee are both owned by the same entity.⁴ There are limits, however, to type of grantees who become successor insureds. The 2006 ALTA policy language is clear that the insured must wholly own the grantee, or vice versa. A partnership that takes title from the named insured, but in which a party other than the named insured is also a partner, does not qualify as a successor insured, and the 2006 policy terminates upon such a transfer. Further, in order for the grantee to qualify as a successor insured, the conveyance must be without payment of "actual valuable consideration". Courts have ruled that even if a transfer from an individual to that individual’s LLC is for no monetary consideration, the benefits conferred from the protections involved in a limited liability company are considered “actual valuable consideration”.⁵

The 2010 ALTA Homeowner's Policy expands 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.⁶

The 2006 and 2010 ALTA policies thus recognize as successor insureds the grantees in many types of voluntary transfers for no consideration; these grantees would not have been considered successor insureds under the 1992 and prior policies, and such transfers would have caused those policies to terminate.⁷

Under the most recent 2021 ALTA Owner’s policy, the requirement that the transfer be made without valuable consideration is removed. Thus, in contrast to the 2006 policy, under the 2021 policy, a transfer for valuable consideration (including a transfer to an LLC as noted in the example above) to a person or entity falling under the definition of an “Insured” would not terminate the policy.⁸

Due to these nuances in the various title insurance policy forms, both entities and individuals should take caution before engaging in any sort of related party transfer of real estate to ensure that the title insurance policy purchased at the time of acquisition of the real estate is not terminated. Depending on the policy form purchased at the time of acquisition, the transfer could void the policy, and a new policy will have to be purchased. Not only is the premium for said new policy an expense, but the new policy will list as exceptions all encumbrances that have been placed on the title to the property since the original policy was issued. This will result in a lack of coverage for issues that would have been covered under the original policy, the resolution of which may be complicated, lengthy, and expensive. 

If you are considering a transfer similar to those discussed in this post, please do not hesitate to reach out to Dentons for assistance in avoiding these issues.

[1] See ALTA Owner’s Policy of Title Insurance, 2006, Condition 1.d.

[2] Durbano & Garn Investment Co., LC v. First American Title Ins. Co., 2014 UT App 150, 330 P.3d 119 (Utah App. 2014), cert.den. 337 P.3d 295, Oct. 1, 2014; Kwok v. Transnation Title Ins. Co., 170 Cal.App.4th 1562, 89 Cal.Rptr.3d 141 (Cal.App. 2 Dist. 2009), rev.den. April 29, 2009.

[3] Fairway Development Co. v. Title Ins. Co. of Minn., 621 F.Supp. 120 (N.D. Ohio 1985).

[4] ALTA Owner’s Policy of Title Insurance, 2006, Condition 2.b.

[5] Gebhardt Family Investment, L.L.C. v. Nations Title Ins. Co. of New York, Inc., 132 Md.App. 457, 752 A.2d 1222 (Md.App. 2000).

[6] ALTA Homeowner’s Policy of Title Insurance, 2010, Condition 2.b.

[7] Keys v. Chicago Title Ins. Co., 2012 WL 4510471 (S.D.Miss.) (unpublished).

[8] ALTA Owner’s Policy of Title Insurance, 2021, Condition 1.f.