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January 6, 2016

Best Practices: Lenders’ duty to give timely notice of potential title insurance claims

by Victor A. Diaz

On October 21, 2015, Starfield & Smith published an article on title insurance coverage. Attorney Jessica Conn correctly described title insurance as covering only actual losses sustained by lenders. As with all polices of insurance, coverage is subject to the exclusions, exceptions and conditions of the policy. This article will cover one of the key conditions of every lender’s title insurance policy: the duty of an insured lender to furnish timely notice of potential claims.

Most title insurance policies covering lenders contain a “Conditions Section” which may read something like this:

“NOTICE OF CLAIM TO BE GIVEN BY INSURED CLAIMANT. The Insured shall notify the Company promptly in writing (i) in case of any litigation as set forth in Section 5(a) of these Conditions, (ii) in case Knowledge shall come to an Insured of any claim of title or interest that is adverse to the Title or the lien of the Insured Mortgage, as insured, and that might cause loss or damage for which the Company may be liable by virtue of this policy, or (iii) if the Title or the lien of the Insured Mortgage, as insured, is rejected as Unmarketable Title. If the Company is prejudiced by the failure of the Insured Claimant to provide prompt notice, the Company’s liability to the Insured Claimant under the policy shall be reduced to the extent of the prejudice.” (Emphasis added)

Simply stated, the paragraph means that lenders must notify title insurers of any potential claim as soon as they are aware that a claim may exist. Even if the potential of loss to a lender appears unlikely, it would be wise for lenders to provide notice of claim to the title insurance company. The obligation of the lender to give timely notice of a potential claim is designed to furnish the insurance company with an opportunity to investigate the circumstances giving rise to the claim so that it may protect its interests. Insurers have successfully defended lender claims when they can demonstrate they were unable to take action which could have mitigated or avoided the loss. Consequently, if an insurer can establish that it was prejudiced by the failure of the lender to provide timely notice, such failure may allow the insurance company to deny or reduce coverage of the claim.

In order to be effective, the notice must be in writing and sent to the address of the insurer appearing in the notice paragraph of the Conditions Section of the policy. It should be sent via registered mail or some other method with of delivery. Notice may not be effective if sent to the agent who issued the policy. Similarly, notices sent via facsimile or electronic mail may be ineffective as not in compliance with the express language of the policy.

By providing notice of a potential claim in the manner prescribed by the policy, lenders will protect their interests by preserving their contractual right to coverage under the policy.

For more information on title insurance coverage issues, please contact Victor at vdiaz@starfieldsmith.com or at 407-667-8811.