What is Title Insurance and Why is It Important?
We’ve previously discussed the importance of a title search on this blog. A title search occurs before a real estate closing to ensure that the property in question is free of any liens, pending lawsuits, unpaid taxes, and other similar issues that could “cloud” the title.
Once the title search is completed, the purchaser may then wish to buy title insurance. While South Carolina doesn’t require buyers to get title insurance, lenders typically do, meaning if you have a mortgage on property in SC then you most likely have title insurance to cover it.
Title insurance was the subject of a case that went before the South Carolina Court of Appeals in 2020, Jericho State v. Chicago Title Insurance (read the opinion here). This case demonstrates what’s at stake for property owners who discover a defect or encumbrance on their title and shows how the court views the role of title insurance in protecting property owners’ interests.
Jericho State v. Chicago Title Insurance Background
The case centers around a large piece of commercial real estate in Horry County, South Carolina.
In 2006, Peachtree Properties of North Myrtle Beach, LLC (Peachtree) bought 131.40 acres in Horry County (the Property) from the McClam family for $22.5 million. The plan was to develop the land into a residential subdivision on the waterway. It was financed with two mortgages: one from Jericho State Capital Corporation of Florida (Jericho) and one from R.E. Loans, LLC (REL).
In 2007, Peachtree defaulted on the loans. Jericho foreclosed and successfully bid on the Property at sale, getting a master’s deed to the land that was still subject to the REL mortgage, which was later assigned to Lynx Jericho Partners, LLC (Lynx Jericho).
Two years later, in 2009, the South Carolina Department of Transportation (SCDOT) filed an eminent domain action against Jericho for 10.18 acres of the Property to use for a roadway, the Carolina Bays Parkway.
Previously, in 1999, Horry County created a map which included proposed locations for parts of the Carolina Bays Parkway, and a 2002 amendment to the map added a right of way that had the parkway bisecting the property in question and crossing the intracoastal waterway. The 1999 Official Map Ordinance (Ordinance) had established Horry County’s right to reserve future locations of streets, utilities, and other building projects in the public interest, as allowed by South Carolina law. The land SCDOT claimed for eminent domain was land that had been reserved for future use in Horry County’s map.
Jericho and Lynx Jericho were awarded $2.1 million dollars in 2014 by a jury as just compensation for the government taking the land. During the litigation, Jericho and Lynx Jericho submitted title insurance claims to Chicago Title Insurance Company (Chicago Title), which had written both title insurance policies for the two original mortgages.
Chicago Title denied their claims, which led to Jericho and Lynx Jericho (collectively, the Appellants) suing Chicago Title for breach of contract, breach of the covenant of good faith and fair dealing, and bad faith refusal to pay insurance benefits. A special referee granted summary judgment to Chicago Title. The case was then appealed.
What is Title Insurance and What Does Title Insurance Cover?
While title searches should, ideally, discover all actual or potential defects and encumbrances to a piece of property so they can be dealt with before closing, it’s not guaranteed that a title is entirely free and clear. That’s where title insurance comes in. Title insurance protects the real estate buyer or the mortgage holder/lender from problems that arise due to a defect in or encumbrance on the title to the land. The court of appeals defines encumbrance as “a burden on the land that is adverse to the landowner’s interest and impairs the value of the land but does not defeat the owner’s title.”
Many title insurance claims are related to:
- Back taxes
- Pre-existing liens
- Unmarketable title
- Fraud and forgery
- Inheritance issues (e.g., conflicting wills or undisclosed heirs)
Title insurance is different from other common kinds of insurance. Car insurance and homeowners insurance, for example, protect you against things that happen after you purchase your car or home. But title insurance protects you against losses that arise from issues that were already present before you purchased the property. Quoting another case, the court of appeals says the purpose is to “place the insured in the position he thought he occupied when the policy was issued.”
The SC Court of Appeals’ Findings in Jericho
The questions for the court of appeals in Jericho are whether the Appellants’ claims were covered or excluded by their title insurance policies and whether the special referee erred in granting summary judgment to Chicago Title.
The relevant part of the title insurance policies (which used the same language, as they were created using the same standard form) is as follows:
“SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE… AND THE CONDITIONS AND STIPULATIONS, CHICAGO TITLE INSURANCE COMPANY… insures, as of Date of Policy… against loss or damage… sustained or incurred by the insured by reason of:…
“2. Any defect in or lien or encumbrance on the title;
“3. Unmarketability of the title…”
When it comes to what’s covered, the insured has the burden of proving its claims fall under the policy’s coverage. When it comes to what’s excluded, the burden of proof flips, and it’s up to the insurer to show that the claims are excluded from the policy’s coverage. With that in mind, here are some issues the court discusses:
Did the Ordinance constitute a defect or encumbrance that was subject to the insurance policy?
The Appellants argued that the Horry County Ordinance caused a defect or encumbrance on the title which burdened the land and depreciated its value. The court of appeals agrees. It concludes that the Ordinance went beyond regulating use of the land and created a third-party interest in the Property in favor of the County. Such a defect or encumbrance is covered under point 2 in the policy.
Chicago Title argued that the Ordinance allowed landowners to appeal and oppose their property’s inclusion on the map which reserved lands for future use, but that just proved the Appellants’ point: the Ordinance created an encumbrance on the Property.
Did the Ordinance affect the marketability of the title?
Quoting another case, the appeals court says, “A marketable title is one free from encumbrances… It is a title which a reasonable purchaser, well-informed as to the facts and their legal significance, is ready and willing to accept.” It must be not only free of defects and encumbrances but “the reasonable probability of litigation,” too. Here, the Ordinance did create a reasonable probability of litigation over the title.
Chicago Title argues that the Ordinance only regulated the use of the Property and therefore didn’t affect the marketability of the title. But the court again stresses that the Ordinance created a “third party interest in the Property,” saying that it was “so foreign” from normal land use measures that there’s no real argument here that it made the title unmarketable. The court agrees with Chicago Title that any landowner may face eminent domain claims, but the Ordinance and maps made Horry County’s intentions clear several years earlier and there was a high probability of such a claim here.
The court sides with the Appellants on the issue of the title’s marketability and reverses the special referee’s grant of summary Judgment to Chicago Title.
Were the Appellants’ claims excluded from coverage?
Exclusion 1 bars coverage for “Any law, ordinance or governmental regulation… restricting, regulating, prohibiting, or relating to (i) the occupancy, use or enjoyment of the land…” However, as discussed above, the Horry County Ordinance didn’t just affect the use of the land, but its title, and therefore Exclusion 1 doesn’t apply.
Exclusion 2 bars coverage related to eminent domain, but the Appellants’ complaint is for the loss of value in the title when they acquired it in 2007, not for the eminent domain action that occurred in 2009 (after the effective date of the policies). Therefore, Exclusion 2 does not apply.
Exclusion 3(d) excludes coverage for defects, liens, encumbrances, and so on that occur after the effective date of the policy. Since the Ordinance and the 2002 amendment to the map creating the encumbrance were already in existence years before the policies went into effect, Exclusion 3(d) does not apply.
The court of appeals determined that none of the Appellants’ claims were barred by the policies’ exclusions, and that the special referee erred in finding they applied.
Summing up the purpose of title insurance and how exclusions should be interpreted, the court of appeals says, “Real estate investors buy title insurance to protect against such unforeseen ‘off the record’ risks… The fundamental idea behind title insurance is to cover rather than exclude unforeseen and unknown risks; otherwise, title insurance would not provide the peace of mind it touts.”
Help with Commercial Real Estate Deals in South Carolina
When it comes to buying real estate, having a free and clear title as well as title insurance is important to protect your interests, whether it’s a commercial deal or a private one.
If you’re involved in commercial real estate transactions in South Carolina, work with an experienced commercial real estate attorney like Gem McDowell. Gem has nearly 30 years of experience practicing law in South Carolina and has closed over $1 billion in real estate deals, including one deal worth $270 million. He helps his clients close the deal while advising them, protecting their business interests, and preventing problems before they arise. He’s ready to do the same thing for you.
Call Gem and his team at the Gem McDowell Law Group in Mt. Pleasant, SC today at 843-284-1021 to schedule your free consultation.