Occasionally, an author of a real estate article will suggest that an ordinary title insurance policy should be responsible for defects in a boundary survey. Regrettably, this is untrue. The title insurance policy typically purchased by Buyers during escrow generally does not cover boundary defects.
There are usually two policies of title insurance issued in connection with purchase and sale transactions: An "ALTA" policy (American Land Title Association) and a "CLTA" policy (California Land Title Association).
- ALTA policy is procured by the Lender to insure its interest in the title to the real property which stands as security for the loan.
- CLTA policies are obtained by Buyers to insure their interest in the title to the property conveyed to them by the Sellers.
The policies are not identical. An ALTA policy generally provides broader coverage than a CLTA policy; consequently, it may appear that the Lender obtains better insurance coverage than does the Buyer.
CLTA Excludes Coverage for Boundary Disputes
In particular, CLTA policies usually exclude coverage for boundary disputes. This is understandable, at least in urban and developed suburban areas, where surveys are not necessarily a part of the real estate transaction. However, this unfortunate limitation in title insurance coverage became significant in a case arising out of a purchase and sale of property in El Dorado County, California.
The Buyers purchased a single family residence in Pollock Pines, a semi-rural area east of Placerville. The residence had a detached garage on the property located near a "greenbelt" area which was owned and maintained by a homeowners association.
Buyers and Sellers were represented by real estate agents. In fact, the Seller/wife was the Listing Agent, and the Selling Agent (who represented the Buyers) was employed by the same Broker.
No Independent Property Survey was Conducted
The Sellers represented to the Buyers that the boundaries of the property were as shown by wood survey stakes marked with plastic flags. The Selling Agent did not recommend that any survey be obtained, because the Sellers had provided the Selling Agent with a "blueprint" showing the boundaries of the property to be as represented by the Sellers.
About 18 months after close of escrow, the Buyers' homeowners association contacted them and instructed them to remove their garage, because it encroached into the "greenbelt" area. Sure enough, a survey concluded that the association's position was correct.
Title Insurance Companies Denied Coverage
Claims were made against the Sellers, the Listing Agent, the Selling Agent, and their Broker. In addition, the association's demand was tendered to the Buyers' CLTA policy and to the Lender's ALTA policy.
The CLTA insurance carrier denied coverage based on the policy exclusion relating to boundary defects. The ALTA insurance carrier refused to acknowledge any valid claim on the part of the Buyers, since they were not the named insured under the ALTA policy.
Furthermore, the ALTA carrier would not afford coverage to the Lender (its insured) unless:
- the Lender was required to foreclose the Buyers' interest in the property, and
- the Lender subsequently re-sold the property at a loss due to the boundary defect.
The matter resolved by settlement with the Broker and Agents. They settled the Buyer's claim fairly quickly, given their obvious exposure and the sizable amount of the claim, but there simply was no title insurance coverage.
What Would Have Solved the Problem Initially?
- The Selling Agent should never have accepted as true the Sellers' and Listing Agent's statements concerning the boundaries of the property.
- Selling Agent should have recommended that the Buyers obtain an independent survey of the property.
While these actions may not have eliminated the problem entirely, a survey would have ascertained the correct boundaries of the property. Hopefully this would have revealed the defect before close of escrow.
In addition, where a survey is obtained, the Buyers can obtain an ALTA policy themselves, which gives them greater title insurance coverage. This could prove invaluable in purchases of rural and semi-rural properties.