The Texas Commitment - Stewart

The Texas Commitment

Charlie Craig

Associate General Counsel &

SW Regional Underwriter

Stewart Title Guaranty Company

Austin, Texas

(512) 236-0405 [email protected]

Administrative Structure

Texas Insurance Code §2703.001

• Provides that all forms to be used by Texas Title Insurers are promulgated by and

issued under the supervision of the Texas Department of Insurance, through its

Commissioner.

• TDI adopts Procedural Rules on how and when those forms are to be used, amended

or modified. Premiums are set by Rate Rules issued by TDI

• The Title Commitment form promulgated for use in Texas is the Form T-7

Definition of a Commitment

TDI Procedural Rule P-1 cc.

The Commitment IS:

• The form through which the Title Insurer offers to issue a title policy

in the future subject to the terms and conditions of the commitment

and the stated exclusions, exceptions and requirements.

includes requirement for payment of premium…

• A statement of the terms and conditions on which the title insurer

will be willing to issue its title policy

• Applies to Owner’s Policies, Lender’s Policies, and Interim Construction

Binders

Goal of the Commitment

A good Commitment will succinctly tell the proposed insured

• Who the parties are,

• Correctly describes the property and the interest to be insured,

• What title insurance coverage will be available and what will not,

• What requirements need to be met to determine coverage and issue

the policy,

• Who the title underwriter and the title agent are,

• Premiums to be charged and who gets a share of them,

• Insured’s right to arbitration and right to decline it

• TDI information on title insurance, complaints

• ALL in One Document!!

The Commitment IS NOT:

• An abstract of title

• A statement or opinion on the present condition of the title

• A guarantee of “good” title

• A title policy of insurance

When Do You Issue a Commitment?

TDI Procedural Rule P-18

• When the title company receives a bona fide order for a title insurance

policy to be issued within 90 days from the effective date of the

Commitment; OR

• The title company must deliver a Commitment to a proposed insured

Owner/Buyer if:

– The land is residential real estate (1-4 family housing OR,

– An Owner’s policy not over $300,000 in value on other land (commercial or

unimproved); OR

• All other properties, Commitment must be issued if the proposed Insured so

requests

• Title Insurer is NOT required to issue a Commitment on an order it is not

willing to insure or when the order was placed AFTER the transaction has

closed.

.

When Do You Issue a Commitment?

What about when just “Title Evidence” is being requested?

If you are asked to only provide title evidence, no full commitment or

jacket is required.

• Particularly when the issuing agent is issuing a separate

commitment using another title insurer as underwriter

• Title Information on Schedules A, B & C can be provided, but

without any reference to the examining company or title insurer

• The title exam report is for the underwriter and should not be

shared with the proposed insured

• The agent providing the evidence is under no duty to discuss

Schedule C Requirements or how to meet them.

.

When and How Do You Deliver a Commitment?


• Generally, must deliver Commitment “as soon as practicable”

– Can deliver by mail, fax or other means (CD, pdf)

– Can be delivered to :

• The Proposed Insured

• The Proposed Insured’s Agent – not the Seller or Broker

• Other Fiduciary of the proposed insured (Attorney)

• Person designated in the bona fide order

• Also look at the contract between Buyer and Seller… – TREC standard contract states delivery is no later than 20 days after the title agent receives

the contract; can be automatically extended for 15 days

• Or as required by the Lender (Loan Policy Commitments)

.

How long is the Commitment valid?


The liability and obligations under the commitment end 90 days after

the Commitment’s effective date, OR

When the policy is issued - whichever occurs first.

Can you charge for the Commitment?

TDI Procedural Rule P-18, Rate Rule R-12

Generally NO. The Commitment “shall bear no premium in addition to the

premium chargeable for the policy or policies issued pursuant thereto”. The

cost of the Commitment is included in the premium charged for the policy.

• Can’t charge a cancellation fee if the insured cancels the order. • TDI Title Bulletin 133 (May 10, 1971)

• Why not charge commitment fee in all cases? – Protects agent, title insurer against claims such as bad faith, DTPA, negligent

misrepresentation if information in Commitment has any errors

– Tamburine v. Center Savings Association, 583 Sw2d 942 (Tex. Civ. App.-Tyler, 1979)

• Title company tried to charge cancellation fee when deal failed. Court held that the

search and exam done by the title company was for the benefit of the underwriter to

determine if and how it will insure title. Since the work isn’t done for the benefit of the

parties, then it needn’t be paid for by them.

• Since the Commitment isn’t a title report but just an offer to insure, the title company is

NOT liable for errors as an abstractor, with unlimited liability. Liability is limited to

recovery under the title policy only.

Can you charge for the Commitment?

TDI Procedural Rule P-18, Rate Rule R-12

2 Narrow Exceptions: Rate Rules R-23 and R-25

1. R-23/P-14: Commitments issued under P-14 to TXDoT can charge $200 commitment

fee on owners policies;

– Premium is credited toward the premium once policy issued to TxDoT.

2. R-25/P-15: Commitments issued under P-15 to FDIC, Office of Thrift Supervision, or

RTC;

• Dinosaur from the old savings and loan bank failures of the 1980’s

• Premium = basic rate on $25,000 policy, collectable at issuance of Commitment.

• Premium is not shared with underwriter

What is in the Commitment?

The typical T-7 Commitment form must contain:

• Texas Title Information Sheet, including Complaint Notice

• Deletion of Arbitration Provision

• The Commitment Cover, or “Jacket”

• Schedule A

• Schedule B

• Schedule C

• Schedule D


Texas Title Information Sheet

• Explains the Commitment generally, the title insurance process

and the basic effect of the policy by and through the

requirements, exceptions, exclusions and conditions.

• Explains no mineral interests are covered and generally

explains possible endorsements (alluding to, but not referring

specifically to the T-19 Endorsement)

• Information on common policy options such as getting “survey

coverage” and deletion of the “parties in possession” exception.


Texas Title Information Sheet - Complaint Notice

• Notice is given about assistance that is available to the

proposed Insured from both the Underwriter and the Texas

Department of Insurance (TDI)

• Includes the Underwriter’s and the Department of Insurance’s

toll free numbers in case the proposed Insured wants to make a

complaint.


Deletion of Arbitration Provision


• Required if the policy to be issued is other than or in addition to the Texas

Residential Owner Policy (T-1R).

– T-1R contains clause requiring non-binding arbitration that cannot be deleted

• Owner Policy (T-1) and Loan Policy (T-2) each contain a clause in the Conditions

section of the policy requiring binding arbitration at the request of either the insured

or the insurer, if:

• the policy does not exceed $2 million (if the policy is larger, arbitration may not be

required);

• the insured is not an individual (if the insured is a natural person, arbitration may not be

required); or,

• the arbitration clause is not deleted by request of the insured before the policy is issued.


Deletion of Arbitration Provision


• Outlines the arbitration process, the arbitration provision in the standard owner and

mortgagee policy forms, and gives the proposed insured the opportunity to request

deletion of the arbitration provision.

• Proposed insured may request deletion of the arbitration provision, by signing the

form and submitting it prior to policy issuance.

– There is no charge to delete the arbitration clause.

• Insurer deletes section 13 of the Conditions section of the Loan policy by writing the phrase in

Schedule B:

– “Section 13 of the Conditions of the Policy is hereby deleted” OR

• Insurer deletes section 14 of the Conditions section of the Owner’s policy by writing the phrase in

Schedule B:

– “Section 14 of the Conditions of the Policy is hereby deleted”


The Commitment Cover, or “Jacket”

The Company commits (offers) to issue a policy to a specific Insured upon the payment

of premium subject to the Exceptions in Schedule B and Requirements in Schedule C of

the Commitment. The policy, once issued, will insure the interest in the Land described

in Schedule A for the estimated premium for the policy as shown on Schedule D.

Contains the terms, conditions and stipulations under which the Commitment is to be

issued. The conditions and stipulations of the Commitment relate to: • Actual knowledge of any defect, lien, encumbrance, adverse claim, etc., acquired by the

proposed insured and the need to disclose to the Company; may reduce or eliminate any liability; and

• Liability is to the Insured as defined in the policy; limited by policy amount.

• If Insurer not willing to insure, no commitment is to be issued.

The Commitment is not valid unless the identity of the proposed Insured and the amount

of insurance are shown in Schedule A and it bears an authorized signature.


Schedule A

Information about the policy that the Company is committing to issue – similar

to Schedule A in the title policy

• Effective date – the date through which the title search is certified

• Issued Date – Date on which the Commitment is prepared

• Type of Policy to be issued: depends on the nature of the property, parties and the

transaction

– Residential Real Property (1-4 family) individually owned: T-1R owners policy

– Commercial Property or any property owned by entity: T-1

– Loan Policy: T-2; Short For Residential Loan Policy: T-2R

• Policy Amount: see TDI Procedural Rule P-66:

– A. Owners Policy: sales price (if there is a sale), or current value of land and

improvements (no sale)

– B. Loan Policy is for the amount of the loan, usually…


Schedule A

• Proposed Insured – will help determine which type of policy to issue

– Owners – for individual residential = a T-1R, for an entity = a T-1

– Loan Policy – the Lender is the proposed insured, followed by identifying

the Borrower

• Interest in the land covered

– Usually fee simple, but can be others, leasehold, easement etc. Know your

transaction in advance!

• Parties in whom Record Title appears to be vested

- Check your title examination, make sure the party(s) appear in title of record

• Legal Description

• Check your title examination, very important it is done right the first time.

• Usually in the form of a “Meets and Bounds” description, prepared by a

surveyor, or a “Lot and Block” (for platted subdivision) description

referencing the volume and page of the appropriate public deed recorder’s

office records


Schedule B

Similar to Schedule B of the policy…. Tells the proposed Insured what the

policy will not cover as to the Land to be insured, through a list of Exceptions

• Exclusions vs. Exceptions

– Exclusions are preprinted in the title policy and apply generally to all properties

to be insured.

– Exceptions are shown in Schedule B and apply to the specific Land to be

insured.

• All have 9 “Standard” Exceptions, some refer to certain policy types (in

parentheses).

– Are part of every Schedule B in every Commitment issued

– Some can be modified or deleted, only by specific TDI procedural Rule • Ex. Restrictive Covenants: List ‘em or delete it. TDI Rule P-4


Schedule B

• Specific or “Special” Exceptions based on your title examination, and

review of the transaction. For example: – Easements of record, setbacks, utility easements, etc.

– Leases, specific mineral reservations, or

– Matters that would be shown on plat or survey

– Liens of record, unreleased deeds of trust, HOA liens

• General Exceptions based on underwriter’s guidelines and/or TDI Rules

– General Mineral Interests Exception – STGC Bulletin TX2012006

– Parties in Possession Exception if no inspection: TDI Procedural Rule P-3

– Area and Boundary Exception Modification: TDI Rule P-2, Survey, T-47 Affidavit

• Add a “Note” on Schedule C that agree to amend to “Shortages in Area”

• Be sure to except to specific adverse matters found on the survey

– Construction of improvements and loans: P-8 and P-19 exceptions (Mechanic’s

lien, pending disbursement clauses)


Schedule B

Making Good Exceptions

– Avoiding lawsuits : avoid giving TMI

• To protect your company’s assets, you need to avoid claims/lawsuits.

• You shouldn't provide too much detail. If you are wrong on any detail, you

can be sued. Exception should list the title of the document, and the place where

it is recorded of record.

Examples:

• Easement exceptions: avoid too much specificity or the effect - insureds can

read the easement, examine the plat for themselves.

• Marital Status: never can really tell; can show in insuring section, in an

exception, but avoid showing status in the title vesting section

• Mineral Interests: always use the term “stated” interest, like "a stated 1/8th

royalty" if the documents say so. Don’t just say "a 1/8th royalty interest".


Schedule B

Making Good Exceptions

– You shouldn't be too general either.

Be careful not to write an exception that negates all coverage.

A bad example would be "all documents recorded or unrecorded

that affect the property".

The exception is too broad. It may not be enforceable.

What have we insured?


Schedule B

Making Good Exceptions: Express Insurance

Good way to inform the insured of potential title problems while still

giving insurance.

TDI allows for Express Insurance in 3 areas under Rule P-39:

• Survey matters: ex. encroachments

• Title Defects: ex. missing probate from 1911

• Liens: relies on Rule P-11; ex. prior lien paid off but not yet released,

can insure over with insured consent

Express Insurance also for minor encroachments into easements and setback

lines, violations of deed restrictions, certain damage to surface by mineral

owners through the T-19, T-19.1 endorsements.

See, Virtual Underwriter, Checklists, at §5.30


Schedule C

• Found only in the Commitment; not found in the title policy

• Tells what Requirements must be met before the underwriter

will agree to issue the title policy

– Requirements are matters that affect title that need to be resolved before

the title underwriter agrees to take a risk.

– Title companies do not cure title matters.

– Curing the item affecting title is the job of the Seller or the Buyer/Borrower.

– If a Requirement is not resolved or cured by the parties, it will be added to

Schedule B as an Exception from coverage


Schedule C

Standard Requirements – are in every Schedule C

– Approval of documents creating the estate or interest to be insured

– Evidence no parties are in possession adverse to interest of owner

– Evidence of payment of taxes, assessments and charges

– All improvements are completed, paid, with no mechanic’s liens of record

– Legal right of access: If you are not satisfied as to the legal right of Access,

you have to add an exception to Schedule B – TDI Rule P-37

– No deed restriction violations (loan policy)

– Proof that the transaction has been funded

– Any defect or lien arising/filed after date of the Commitment


Schedule C

Specific or “Special” Requirements - Based on the parties, contract and title

examination report dealing with the specific property made the subject of your

Commitment. These can include……

• Authority or capacity of the Seller to sell and convey or Borrower to mortgage property

– Estate Matters: Probated will? Intestate? Affidavit of Heirship needed?

– Trusts/trustees : Need to obtain and read the trust document

– Powers of Attorney: must examine closely to check makers’ capacity, proper authority

given to agent, competency of principal. See Estates Code §752.051 for Form

– Entities: need foundational documents for LLC, Corporation, Ltd Partnership

• Divorce Matters: Did title really convey between the spouses? May need to req. filing

certified copy of divorce decree or a conveyance.

• Bankruptcy matters: Property exempt? FINAL Order to sell free and clear of liens?

• Survey matters: review complete and accurate survey, reserve right to make additional

exceptions/requirements

• Homestead Issues, particularly in Loan Policy Commitments

• Unrecorded contracts, or leases


Schedule C

More Examples Specific or “Special” Requirements (cont.) • Voluntary Liens: past mortgages that were paid, but not yet released

• Involuntary Liens like Abstracts of Judgment: Do they attach? If so, require a release. Same

person? If not, can get NSP Affidavit.

• Foreclosure Matters: notices and procedure followed by proper person(s) if private sale?

• Tax Foreclosure Sales: Notice and Personal service given to debtors?

• Material/Non-material Correction Instruments : Property Code Sections 5.028, 5.029

• Guardianships, Dependent Administrations – 5 Steps needed; Application, Order, Report,

Confirming Decree, Deed references Confirming Decree

• Gap(s) in the Chain of Title, “Wild” Deed, Clouds on Title

Notations “NOTE :…” – To include list of Endorsements to be issued with the policy

– To describe acceptable modifications of standard exceptions


Schedule C

Making Good Requirements

• A good requirement succinctly describes the matter that needs

correction/resolution. Again, not too much specificity, just identify the problem

and what documents / evidence may be needed to resolve the problem.

• When appropriate, make use of applicable statutes of limitation and

statutory cures. Some examples:

– Acknowledgments: if appear defective, but more than 2 years old, are not

considered defective any more. See, CPRC§16.033

– Abstracts of Judgment: If not renewed, expires after 10 years. Prop.Code

§52.006; - State AJ (Prop.Code §52.006(b)) or Federal AJ (28 USC §3201): 20 years

– Homestead Notice & Affidavit: Prop. Code§52.0012 allows for notice

and affidavit to prove AJ/lien does not attach to debtor’s homestead,

released

• Applies to Child Support Liens on Homestead too! See, Family Code §157.3171


Schedule D


Contains pre-closing disclosures on

• Who owns large portions (> 10%) of the Underwriter, unless the Underwriter is publicly

traded or is wholly owned by a parent that is publicly traded holding company; Names of the

directors and the executive officers of the Underwriter.

• Names of those who own > 1% of the Issuing Agent that will get some portion of the

premium (and those that own > 10% of the owning entity of Agent); Names of directors and

executive officers if Agent is a corporation

• Names of those third parties getting portion of the premium for services performed and the

estimated amount of premium to be received

• Breakdown of settlement charges and estimated premium payable, and to whom the

premium is being paid out – Underwriter, Issuing Agent and Third Parties – check your Rate

Rules and update!

TIPS

Know the terms and parties of the Transaction

– Read the contract

• Type of transaction will tell what policy to issue, how to fill out and

review Commitment

• Residential contract raises homestead issues

• Parties to transaction - helps trigger issues/risks to address

– Check the identification, review information on the parties early on

• Foreign Seller: FIRPTA issues

• Seller an LLC: foundation documents needed to review

• Seller or Borrower a trustee? Will need to review the trust

• Seller an Executor/Executrix of an estate? Probate review…

TIPS

Know the terms and parties of the Transaction

– Review lender instructions and again, don’t be afraid to ask

questions to lender • Example: why are you doing/not doing a home equity loan here?

– Read the title exam report thoroughly

• Exam report is the heart of the commitment preparation

• Don’t be afraid to ask examiner questions, or escalate questions to

underwriter- that’s what we are here for…

• The title exam report is for the underwriter and should not be

shared with the proposed insured

Following Up

Once Commitment issued, work on it does not stop there!

• New facts, new information that will change the face and terms of

the Commitment

– Certain requirements may be met based on review of new information,

documents received

– Surveys come in late – review may need more requirements, exceptions

– Additional requests from Lender may need to be addressed

– ALWAYS bring title search up to date…

• Final Commitment for Closing

– Double check Schedules A & B – are they correct and complete and read as it

should at policy issuance?

– Have all Schedule C requirements been met other than loan payoffs?

– If amount over underwriting limit, get over-limits approval from Underwriter


Remember: Every Commitment must have:

• Texas Title Information Sheet, including Complaint Notice

• Deletion of Arbitration Provision Form

• The Commitment Cover, or “Jacket”

• Schedule A

• Schedule B

• Schedule C

• Schedule D

Be Careful Out There

Charlie Craig

Associate General Counsel

SW Regional Underwriter

Stewart Title Guaranty Company

Austin, Texas

(512) 236-0405 [email protected]

Documents

The Texas Commitment - Stewart