Monthly Archives: October 2010

A PRELIMINARY TITLE REPORT OR A TITLE COMMITMENT IS NOT TITLE INSURANCE.

Frequently clients come to the office having acquired a piece of real property or made a loan secured by a deed of trust on real property only to discover there is a lien or some other encumbrance that has priority over their interest in the property. Clients bring with them a preliminary title report, also known as a title commitment, on which they relied. They will seek to bring an action against the title company that issued the report because the report does not disclose the existence of a title defect or encumbrance. Clients assume they can rely on the preliminary title report or commitment. That is a mistake.

The preliminary title report or a commitment to insure is an offer to issue a policy of title insurance subject to the terms, conditions and exceptions stated in the report and does not constitute a representation as to the condition of title to the real property. The title company is not responsible for omitting a lien or encumbrance in a preliminary report unless its offer to issue a policy of title insurance is accepted, the premium is paid, and the title insurance policy is issued.

The title insurance policy is a contract of indemnity as of the date of the policy but a preliminary report is not. The title policy is not a guaranty. It is a promise to indemnify the insured against losses resulting from defects in the title or for liens and encumbrances affecting the title as described in the policy at the time the policy was issued. The title company is only obligated to disclose in the title policy the encumbrances it is not willing to insure or indemnify against.

As opposed to a preliminary report or a commitment, an “abstract” of title is a written representation by the title company listing all recorded, conveyances, instruments, and documents which impart constructive notice with respect to the chain of title of the real property described in the abstract. The title company does have liability if it issues an abstract of title that fails to list a recorded document that imparts constructive notice. However, a preliminary report or title commitment is not an abstract.

The lesson here is to pay the premium and have the title policy issued. It is penny wise and pound foolish to pay for a preliminary report and not take the next step and obtain the appropriate policy of title insurance.