Untitled Texas Attorney General Opinion

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: mdo: jmc