March 9,,1948,
Rau, J. P. Gibbs, Gemmissioner
Casualty Insurance Division
l)oard, of ,Inaumgcs CUmZssi~ners
Au&in 14, Texas
GAttention: Bon. Ned ~Price, Director *
Title Seotion.
Opinion No. v-517
Re: Authority of title insurance
aompanies, to’ is,sue a~ binder
obligating them t8 isaud,~ at
the option of the,, insured, 8
mortgagee’s tit& poli,oy ink-,
,euring the lien ‘for advancea
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 in-
sursnoe company to:issue a, mortgageeta title policy. Suoh
polioy would insure the lien for construction ldv8nces,
and wauld be i8~sued upon oampletion rf.the impnvements,
or at say tima prior thereto d.uring ‘6he couree~ of COP-’
struation,~ at the option of ~the;‘,inaurea. You ask whether
the ‘add$tidna& risk asaumed~,~by :the binder iS within the
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 the
. i
You indicatethat a. question is .raiaed, as to
the authority of titlr insurahoa. cqapiu~l~s to a.asume the
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 the
protartlon oftordrd by tha binder is in effeotWt ;urzty-
ship rather than a titb &Iarsnty uovorage”.
also been furnished oomprebrnsive bt&8Pe presenting some
objootiono, to such a binder. As to your s000na question,
you observe thst there sight be s question of,unfair di,a-
criainstion if a title ins’uranoe company should issue the
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 insured against loss rather than a contract to per-
form any of the obligations 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
1 the executor, administrators, sucoeasor s
or assigns of the assured aej sustain or
suffer by reason of the failure of, defects
in, enoumbrances upon or liens or charges
against 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 the
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 in-
denture, as are approved by the insurer.
Whether or not the coverage oontemplated and
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
es to rules, regulations, forms of policies and unaor-
writing contracts, and premiums therefor by virtue of
Article 1302a, Set tlon 3, nor wiiuia UI insurance company
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 of title insurance
is contained in Article 1302a, Section 1, Subsection
(11, which authorize a, rporations created thereunder
“to insure titles to lands or intsr-
ests therein . . . ana indemnify the owners
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 insurance 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.
944, 19 L. B. A. (N. S.) 639, 124 Am. St. Re,p. 633; and
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 insurance in passing upon other
pointa, The la uage of those case8 describes title in-
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 against 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
and encumbrances, since the basis of the priority of sub-
sequently perfected Irechanic’a and materialmen’s liens is
Hon. 3. P, Gibbs, Page 4, V-517.
the thoory Uat they ralats kook tr tho b@ghaLag ,S the
improvsmaat Sao OrLentoL Rots1 Camps
fiths, 88 Tox. 33 s. WY.652, 30 L, R. A. %5v*5?%
St. Rep. 790; Saogulnott & Starti v. CoUra&o Sal4 Coa-
pang, 150 5. W. 490; Guggoaheim v* Dallas Plumblag Corn-’
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 and
materia&ueh’a liens ,heving priority over the lien for ad-
vanoamehts ia a presently exiatlng'defeot or possibility
of encumbrance rppsrsnt upon tho f@aa ip the lien for aa-
vmoemehts by re8sOn OS i,ts very nsturee l&e lender for
improvements makes advances charged with notice of this
inolpient risk0 The insurer is .lllcawire charged WI th such
notloe and malear a decision to aooept the risk upon the
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-
icy without tha prior ,issuanoe of o b&&or, a8 o&n be
seen from the insuring clause above-quoted, Tha a tanaard
Texas title insurance contract ao oontrmplrtas 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 the issuance of sny title insurance policy
during the oourae OS &y construction.
I‘t cannot be said that the rick of non-completicn
of improvements ia net known t0 title inauranoe, 68 re-
flected by reported oases dealing with title insurance.
The opinion in the aase of Pennsylvania company etc. v.
Central Trust &. Savings Company, 99 AtI.* 910, describes
a title insurance policy, as foll0ws:
“The policy issued in this oaae is the
form of an ordinary title 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, the
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 the
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
the loan. While the insurer declined to assume the risk
of loss to the owner, because of unmarketability of the
title , 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 is
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-
ilarly, in connection with the policy, as insuring only
against 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 of title insurance 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 for improve-
ments on a homestead would not affect the legality of
insurance of such liens on other property. Even if in-
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 lr ,~)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,, I”n effort $W
rmertga BQ’B tttb ireU~?loa@e ap arps to be a questi- Sop
Qetorm f nntfon Iy the Boa@ lf !z s~rnce ” Comi.ssi?nrPg Wilor
~~h&rotisiens of Sect2on 3 ef Artlclp ,‘1302@, whioh @MI
:
;
\,
“The Board of Insurance COm¶is~im~era
e.hall karo .tke right ml it skaLL be ‘its lUtp
te fix d, *romtigate,~ the rite8 ,t,@~ be ,olrrg#d
by owp*retioas &reatoQ or ~operating hwreunbr
for pre*iums •a~ joliqi.es or’ certirieatee an4
unaerwriting contracts, The.rate fixed by tko
Board shall .bs reasonable to’ the public and
am-conf Wx$*ry to t,&3 comp8ng” >,
It appeqg ti ,us’ that, if the .k a r l df Iu8ur&%oo
Couiseio&ers in the proper way,.lotor~$1o,a ,tka t the rlrk
t.maer the binder ,is sufficiently aero 'hnzarlous thaa the
newel risk of a mortgagee’s pOlicy, it i,s authrriz64 by
the statute te give a11 suoh risks a sep@rPtF cb.UifiO@-
tion aaQ 8 separate anQ $i&er rate. We cansLet, ef oourae,
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 title policy insuring ~a
lien for advances for conntruction prier
Hon. J. P. Gibbs, Page 7, v-517.
to the dompletion of the improvements. The
Board my, by proper classification, promul-
gate the rate for insurance under such binder.
Yours very truly,
ATTORNEYGWBAL OF TEXAS
Ned MoDanlel
Assistant
APPBOWD:
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