Case Information
*1 March 9,,1948, Rau, J. P. Gibbs, Gemmissioner
Casualty Insurance Division
l)oard, of ,Inaumgcs CUmZssi~ners
Au&in 14, Texas Bon. Ned ~Price, Director
GAttention: *
Title Seotion.
Opinion No. v-517 Re: Authority aompanies, to’ is,sue a~ binder them t8 isaud,~ at obligating the option of the,, insured, 8 mortgagee’s tit& poli,oy ink-, the lien ‘for advancea ,euring rar construction .prior to the COmpletiOn Qf the idprOVOlXCitd;, and whether dn additiomal rate should be. prraulgated for the ” ‘: _ issuance‘ of such a bin&e.r.
Dear sir:
Yeur. letter or Deoember 2 ~bubmits frrour con-
sideration ,8 rim ar binder praposed:for the use of title insuranoe oompaaies, designed to’obligate the title sursnoe company to:issue a, mortgageeta policy. Suoh for construction l dv8nces, polioy would insure the lien and wauld be i8~sued upon oampletion rf.the impnvements, or at say tima prior thereto d.uring ‘6he couree~ of COP-’ option of ~the;‘,inaurea. You ask whether struation,~ at the ‘add$tidna& risk asaumed~,~by :the binder iS within corporate power8 of title insuranor :companies oper8ting under Artrole, 1302a, V. C, S., ,You.Plao request our opi.n- ion as, Cog the, necessity of an, addi~tional, premium or higher ra;%en view of the, adaitiinal. prateationafforded by i
You indicatethat a. question is .raiaed, as to insurahoa. cqapiu~l~s to a.asume the the authority of titlr risks contemplated by tha binder -in view of the proteot- ion afforded thereby being “tr a limited degrees somewhat
.’
Hon. J. P. Gibbs, Page 2, V-517.
similar to s completion,bond”, You advise that “a number of title company officials have expressed doubt as to #a validity of the binder, contending that protartlon oftordrd by tha binder in effeotWt ;urzty- ship rather than a titb &Iarsnty uovorage”.
also been furnished oomprebrnsive bt&8Pe presenting some As to your s000na objootiono, to such a binder. question, you observe thst there sight be s question of,unfair di,a- criainstion if a title ins’uranoe company should issue bFnder and the subsequent policy at the aaae rate OhMgOd for a policy without the binder.
Neither the policy in question nor the binder is a suretyship contract, but they definitely constitute an insurance Contract, being an agreement to indermrify the form any of the obligations insured against loss rather than a contract to per-
of any third parties. The insuring agreement in the standard form policy promul- gated by the Board, whioh the title insurer would bind itself to issue, provides that the company will pay to the assured, as interestmay appear,
“all loss or damage not exceeding dollars which the assured z the executor, administrators, sucoeasor s 1 or assigns of the assured aej sustain or suffer by reason of the failure of, defects in, enoumbrances upon or liens or charges the title of the mortgagors or grant- ors . e existing at or prior to the date of this policy, including mechanic * s end jm ter- ialmen’s liens now having priority or now ex- is ting but inoomple te , which msy Itsreafter be oompleted 80 as to gain priority, over lien of the assuredW.
The binder simply obligates the insurance company to is- sue such a policy at a future date, in an amount equal to such advances, made up ta that date under the lien as are approved by the insurer. denture,
Whether or not the coverage oontemplated the obligations assumed by the title insuranoe company constitute ‘It itle insurance” is the primary question.
If the coverage is other than title insurance, it WOUld not falls under the control and supervision of the Board forms of policies and unaor- es to rules, regulations, and premiums therefor by virtue writing contracts, Article 1302a, Set tlon 3, nor wiiuia UI insurance company *3 Hon. J. P. Gibbs, Page 3, V-517.
authorized, solely to write title insurance be author- ized to incur the obligations contained in the binder and the policy.
The statutory conception insurance is contained in Article 1302a, Section 1, Subsection (11, which authorize a, rporations created thereunder
“to insure titles to lands or intsr- . . ana indemnify the owners ests therein Of Such l&k?, or the holders of interests in or liens on such lands, against loss’ or damage on accaunt of encumbrances upon or defects in title to such lands or interests thare in”.
It is necessary, of course, in all casea that the in- sured have a title to, or lien on, the land upon which the improvements are to be msde, aa otherwise a title company would not have power under the above statute to issue it.
We have found no cases which decide the ques- tion presented, nor for that matter, which attempt to prescribe the limits beyond which contracta oease to be “title insurance”. In the brief submitted, we are referred to Trenton Potteries Company v. Title Guarantee & Trust Company, 68 N. E:. 132, 134, 176 N.Y. 65; Mayers vi Van Schaick, Superintendent of Insurance, ,197 N. E. 296, 297, 268 N. Y. 320; Foehrenbach v. German American Title B Trust Company, 217 Pa. 331, 66 A. 561, 12 L. R. A. (N. S.) 465, 118 Am. St. Rep. 916; State of Minnesota ex rel. Sohaefer, Public Examiner v. Minnesota Title Insurance & ~Trust Company, 104 Minn. 447, 116 N.W. (N. S.) 639, 124 Am. St. Re,p. 633; 944, 19 L. B. A. Title Insurance & Trust Company v. City of Loa Angeles, 2l4 Pac. 667, 6l~Cal. App. 232. These oases a&rely dis- ouas the natures of title in passing upon other The la uage of those case8 describes pointa, aurance aa ass uz ng the risk of presently existing de- fects and encumbrances at the date of the policy or at tha date of the closin of the .title ‘transfer.
ative an intention to &sure aa title i.ZZagf- the riaka of failure of tttla or encimbranoes thereon ha;- ing their inception subsequent to such dates. Butthe risk of the subsequent attaching of mechanic’s and mater- ialmen’s liens is a risk of presently existing defects since the basis of the priority of sub- and encumbrances, sequently perfected Irechanic’a and materialmen’s liens *4 Hon. 3. P, Gibbs, Page 4, V-517. kook tr tho b@ghaLag ,S
the thoory Uat they ralats improvsmaat Sao OrLentoL Rots1 Camps 33 s. WY. 652, 30 L, R. A. %5v*5?% 88 Tox. fiths, v. CoUra&o Sal4 Coa- St. Rep. 790; Saogulnott & Starti v* Dallas Plumblag Corn-’ pang, 150 5. W. 490; Guggoaheim pany, 59 S. No (24) 105; Sullfvan vb Texas Brlqurtto aid Coal’ Company, 94 %sx. 541, 63 9, iv. 307; D. Juao and Cam- pany v, Bake , 20 S. W, 402 ; Seymour Opera-Haua e v. Thora- ton, 45 So Mf, 815; Dtlworth & Orera ve Ihi Steve8 & S0ns, 169 S. W. 630, error llsnissrd, 197 ‘Pox. 73, 174 5. W. 279; Southern Building & Loan Aaooeiation 0, Bean, 49 S.W. 910; Fritz hIotor company V@ aabort, 41 S. W, (2d) 72; and Article 5459, V, C. S, At least, umber a21 r0 these 08888, the poasibllity of 8uWisqusntly a@trrhhg Mchanio’s liens ,heving priority over materia&ueh’a the lien for ad- vanoamehts ia a presently exiatlng'defeot or possibility for aa- of encumbrance rppsrsnt upon tho f@aa ip the lien vmoemehts by re8sOn OS i,ts very nsturee l&e lender improvements makes advances charged with notice of this inolpient risk0 The insurer is .lllcawire charged WI th such notloe and malear a decision the risk upon to aooept ciroumstanoes which exist at .the tinm. ft is true that the ‘failure of priorl@y may depend u on future acts of third parties over which it has no d i!r oot oogtrol, but such is true of the r&k OS a first. lion mWtgagse’a pol- of o b&&or, a8 o&n be icy without tha prior ,issuanoe Tha a tanaard seen from the insuring clause above-quoted, ao oontrmplrtas Texas title contract by its ex- press language V
St appears then, that the substantial objec- tion to the binder, !.S the objection lee aound, would also lodge against issuance of sny title insurance policy during the oourae OS &y construction.
I‘t cannot be said that the rick of non-completicn improvements ia net known t0 title inauranoe, 68 re- by reported oases dealing with title flected insurance. The opinion in the aase of Pennsylvania company etc. v. Central Trust &. Savings Company, 99 AtI.* 910, describes a title policy, as foll0ws:
“The policy issued in this oaae is the form of an ordinary insuranoo policy with appropriate provisions to Cover loss or damage sustained by reason of non-oompletion of the premises”.
Hon. J. P. Gibbs, Page 5, v- 517.
In the case of Wheeler v, Real-Estate Title
Insurance and Guaranty Company, 28 Atl. 849 (Po.J, insurer assumed a risk identical in nature to the risk contemplated by the binder in this case. The poli~cy was issued upon a mortgage during the progress of im- provements on the mortgaged premises, there being risk of the possibility of the perfection of mechanic's liens which would obtain priority over the mortgage and the resultant risk of a deficiency in the security for loan. While the insurer declined to assume the risk of loss to the owner, because of unmarketability of the , it did insure against actual losses by reason of such possible liens. The Court there recognized that such liens are such as have a present possibility.
We cannot say, therefore, that such a risk beyond the corporate powers of a title insurance company, in connection with its insurance of titles and first liens, in the absence of express statutory prohibitions.
We feel that the binder would be construed sim- in connection with the policy, as insuring only ilarly, those encumbrances that have their inception at or prior to the date of the binder. It is the usual prac- tice that an insurance policy whiah closes a binder has as its inception date the inception of the binder. If there is doubt in this regard, the binder may be made more specific in that respect. We are not attempting to pass upon the sufficiency of the binder to prevent a broader coverage than contemplated, but confine our considerations to the legality of issuing the type of insurance contract which assumes the risk of loss due to attachment of sub- sequent mechanic's and materialmen's liens arising out of the improvements for which advances are made under a mort- gage.
The statutory conception in- dicated in Article 1302a contains no express limitations which would exclude the risk of subsequently attaching mechanic's and materialmen's liens. The regular first lien mortgagee's policy promulgated by the Board recog- nizes as an insurable risk the possibility of future per- fection of such liens.
Finally, considerations suggested regarding either the legality Or propriety of liens improve- ments on a homestead would not affect the legality of such liens on other property. Even if surance of such liens on homesteads is in fact illegal,
*II. if, I. Oibbn, Irga 4,~ V4l7.~ we o*uld nat aw that tie fez* ib’ ille’gal meroll booruae it nigkt ba usd am suoh~a suRI)Joct,
Yeu are, therefare, @dvisod that the Beti -3 premlgate l r ,~)preVe suck 0 Unaer. We do net, Of OOUPLa, infer that ,tko BurQ.$e ro@roil rr’cupelle& tie Pa 8oW
Your &&end question, ‘as t6 the m&&@tq ‘et fix- $p~: a highor ‘ro.ts of pm&J& where queh ~8 L &a&! b is- &oil, thar the regular sc&sUule~ charge ,now,, n effort $W I” rmertga BQ’B tttb ireU~?loa@e ap arps to be a questi- Sop Qetorm nntfon Iy the Boa@ l f !z f s~rnce Comi.ssi?nrPg Wilor ” of Sect2on 3 ef Artlclp ~~h&rotisiens ,‘1302@, whioh @MI : ; \, “The Board of Insurance COm¶is~im~era
e.hall karo .tke right ml it skaLL be ‘its lUtp *romtigate,~ the rite8 ,t,@~ be ,olrrg#d te fix d, by owp*retioas &reatoQ or ~operating hwreunbr for pre*iums •a~ joliqi.es or’ certirieatee an4 unaerwriting The.rate fixed by tko contracts, Board shall .bs reasonable to’ the public and am-conf Wx$*ry to t,&3 comp8ng” >, It appeqg ti ,us’ that, if the .kard l f Iu8ur&%oo Couiseio&ers in the proper way,.lotor~$1o,a ,tka t the rlrk t.maer the binder ,is sufficiently thaa the aero 'hnzarlous newel risk of a mortgagee’s pOlicy, it i,s authrriz64 by te give a11 suoh risks a sep@rPtF cb.UifiO@- the statute rate. We cansLet, ef oourae, tion aaQ 8 separate anQ $i&er advise you, aa to the propriety of mtters which Pro niti- in your fact finding -authority.
The Board of Insurance Cea&sie~~ro is authorized to ,prorulgate a binil6r fern Iesigaei te obligate title,inaurers to is- me, et the option of tke insurd, a fir&. lien mortgagee’s policy insuring ~a lien for advances for conntruction prier *7 Hon. J. P. Gibbs, Page 7, v-517.
to the dompletion of the improvements. The Board my, by proper classification, promul- gate the rate insurance under such binder. Yours very truly, ATTORNEY GWBAL OF TEXAS Ned MoDanlel Assistant APPBOWD:
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