For attorneys procuring title insurance policies by giving their opinion to a title company, tacking onto existing title insurance policies can be both efficient and cost saving. Particularly in loan refinances where the existing owner’s policy is five to 10 years old, tacking is often times preferred by the client. But is it a wise practice, especially when the only available policy is a lender’s title policy?
“Tacking” is the term commonly used to describe an abbreviated title search that is less than the 30-year (or longer) search period (also called a “full search”) required to fall within the protections, albeit limited protections, afforded by the Real Property Marketable Title Act, Chapter 47B of the North Carolina General Statutes. There are certain risks inherent in the practice of tacking onto an existing title insurance policy. Those risks include inability to discover title defects that were either missed in the prior search or were intentionally omitted from the prior title policy. The decision whether to tack to an existing policy, rather than conducting a full title search, should be made with consideration of the facts surrounding the transaction and the property, and in consultation with the client. A terrific resource for guidance on the factors to consider can be found in North Carolina Real Estate With Forms, by Edmund T. Urban, A. Grant Whitney, Jr. and Nancy Short Ferguson, See Sections 5.11, 5:12, 5.13 and 5.14.
While there are certain risks an attorney should consider when tacking onto any title policy, it is well-settled that tacking onto an owner’s title insurance policy is not presently an ethical violation under the North Carolina State Bar’s ethics opinions. Whether an attorney may legally or ethically tack onto a lender’s title policy, however, is not as straightforward.
Until 2010, a North Carolina ethics opinion held that “tacking should be limited to tacking onto owners’ policies.” See RPC Opinion 99, published April 12, 1991. However, on October 29, 2010, the Ethics Committee published a formal ethics opinion that essentially deleted that part of the 1991 opinion. In 2009 Formal Ethics Opinion 17, the Ethics Committee was directly asked whether an attorney could “render a title opinion to a title insurance company by tacking to a mortgagee’s (lender’s) title insurance policy?” The Ethics Committee opined that the answer depended on deciding whether the attorney had utilized the appropriate standard of care and that this issue was outside the Ethics Committee’s purview. Specifically, the Committee stated that “[w]hether tacking to an owner’s policy or a mortgagee’s policy, a lawyer’s duty is to provide competent representation to his client, consistent with Rule 1.1” and that to provide such representation, the lawyer must “reasonably consult with the client about the means used to accomplish the client’s objectives” consistent with Rule 1.4(a)(2). Thus, the Committee concluded that tacking onto a lender’s title policy was not an ethical violation, but that failure to disclose the risks of tacking onto a lender’s policy with a client could be a violation of the Rules of Professional Conduct.
Before choosing to tack to a lender’s title policy, it is recommended that you consult with your title insurer to confirm that the title insurer will allow tacking to the lender’s title policy. There are additional risks to tacking to a lender’s title insurance policy that are not as likely to be risks in an owner’s title insurance policy. The chief of these risks is the more likely possibility, particularly in the context of a commercial transaction that the prior lender’s policy “insured over” certain matters of title by intentionally excluding such matters from the list of exceptions in the lender’s policy. This proclivity is recognized in RPC Opinion 99. Title companies are often more willing to insure a lender against loss from title defects when they would not insure the owner because the risk of a claim on a lender’s title policy is often viewed as more remote (due to lender’s claims typically arising in the context of commencing a foreclosure action) and of less monetary consequence (due to the coverage amount on the loan policy reducing as the loan is paid). “Title insurers make business decisions and take underwriting risks every day and if a company decides that allowing certain ‘short cuts’ such as tacking or shorter searches is something that they wish to do for competitive reasons, that is a business decision that each company is allowed to make[.]” See 2008 FEO 13 – In response to some misunderstandings and misinformation, NCTLA, NCBA Real Property Newsletter Vol. 30, No. 3, February 2009, pp. 1 and 4. Thus, even if the attorney decides to tack onto a lender’s title policy, this may not be an option if the title insurance company does not approve due to the risk imposed on the insurer of a greater possibility of a claim being made on the new policy due to undiscovered title matters.
Before tacking onto any policy, the attorney has an ethical obligation to inform the client that the attorney is undertaking an abbreviated title search and the risks inherent in the limited search. See RPC Opinion 99. It is recommended that the communication to the client be in writing whenever possible, though the RPC Opinion 99 expressly states that written consent of the client is not required. The risk to the client when all title matters are not discovered due to tacking onto a lender’s policy is that the client will not be fully informed of title matters that could affect the client’s decision to purchase or lend on the property. Even though they may receive a title policy that “insures over” these matters, the existence of undiscovered title matters can still be very problematic for the client. The title claim process can be lengthy, and the outcome will not in all cases address the client’s losses or costs, including consequential losses due to delays and the property possibly not being saleable during the pendency of the title claim. The title insurance company has discretion on how to handle a title claim, including paying out the claim (subject to policy limits), defend the title in litigation or negotiation, or otherwise undertake to correct the underlying basis of the claim. (In all of the foregoing, the assumption is that there is no dispute between the insured and the title company on whether the title defect is covered by the title policy.)
An example is in order: An attorney represents a fitness center business looking for a new location for a fitness center. The attorney and client agree that the attorney may undertake a limited title search and “tack” onto a prior lender’s policy because the prior owner’s policy cannot be found. A restrictive covenant forbidding the operation of fitness centers is not discovered due to this exception not being included on the prior lender’s policy. Unbeknownst to the attorney and new title insurer, the prior title insurer and lender expressly negotiated for the exception restricting fitness centers to be excluded from the exceptions in the lender’s policy. After purchasing the property, the client discovers that it cannot operate its fitness business on the property and files a claim with the title insurance company. The client is not able to operate its desired business until and unless the restriction is removed through the claims process, and the client may not have an economically desirable opportunity to sell the property. “But look at the bright side,” the attorney says to the client, “at least you have title coverage.” Odds are that the client would have rather found out about the restrictive covenant before purchasing the property, at which point they could have decided either not to purchase the property, or to negotiate with its seller to obtain the seller’s aid in changing the covenant, or purchasing the property with the full knowledge of the issue.
Although the foregoing example of a use restriction being “insured over” by removal from a lender’s policy is in all likelihood an unusual underwriting decision by a title insurer, this writer has seen situations somewhat similar to the fact pattern above. A more common, and likely, example is the title insurer’s decision to omit from the exceptions a prior deed of trust which should have been paid and satisfied in the transaction. The insurer in this case will issue the policy upon the opinion of the attorney procuring the lender’s policy that the deed of trust has been paid in full with the transaction proceeds. If in fact the prior deed of trust is not paid, whether due to malfeasance or error, then the new unsuspecting owner still must go through the claims process. And, even a short and efficient claims process can create issues for the owner if the underlying title defect is discovered in a context where the owner does not have the luxury of time.
We have not undertaken an exhaustive search for North Carolina cases assessing whether or not tacking to a lender’s policy is within the “appropriate standard of care for rendering a title opinion.” Anecdotally, we think the practice may be common. We urge that practitioners use caution, deliberation on each individual situation, and open communication with the client when making the decision on whether to tack to an existing title policy, especially if the only title policy available is a lender’s policy.
This information should not be interpreted as legal advice with respect to specific situations. Article originally appeared in the March 2014 NC Bar Association's Real Property Newsletter. Reproduced with permission.