On June 24, Wisconsin’s Office of Commissioner of Insurance (OCI) issued a bulletin effectively prohibiting the practice of some title companies to include "blanket exceptions" in title insurance policies (TIPs). These blanket exceptions provided questionable title insurance coverage for consumers, who were often unaware of such exceptions within their policies. The OCI issued the bulletin in response to concerns raised by the WRA lobbying team, after receiving complaints from REALTORS® and other representatives of the real estate industry.

Background 

Title insurance policies (TIPs) protect a property owner’s or lender’s financial interest in real property against loss due to title defects, liens or other claims on title. Before issuing a TIP, title insurance companies typically search and examine all public records for mortgages, easements and restrictive covenants to ensure that the seller is transferring a good or “merchantable” title to the property. Defects, liens or encumbrances are generally listed as specific exceptions in the policy or excluded from the scope of the policy’s coverage. Most TIPs will exclude encumbrances that cannot be discovered through a public records search.

Recently, several title agents in Wisconsin have begun including broad exceptions in TIPs that undermine the purpose of the owner’s TIP and threaten to hurt consumers involved in real estate transactions. This “short form” practice provides for broad “blanket exceptions,” which exclude from coverage the most common encumbrances on title such as recorded restrictions, covenants and easements that could generally be discovered during a public records search. The following is an example of blanket exception language (emphasis added): 

Covenants, conditions, and restrictions, if any, affecting title which appear in the public records; easements or servitudes, if any, which appear in the public records or are shown on any recorded plat or certified survey map; reservations of mineral or mineral rights, if any, appearing in the public land records. 

Blanket exceptions exclude all encumbrances — those that can and cannot be discovered through a public records search. TIPs with such exceptions are essentially worthless because they provide the consumer with very little, if any, title insurance coverage. Blanket exceptions may allow title insurance agents to perform less research and provide less insurance coverage, while charging consumers the same rate for a policy without a blanket exception. 

Blanket-exceptions are harmful to consumers

Historically, blanket exceptions have existed primarily in a lender’s TIP. However, such a practice in an owner’s policy can be harmful to consumers if they do not understand blanket exceptions or how the exceptions could impact their legal interests or their property values. 

Undermines the purpose of a TIP: A TIP that excludes all encumbrances seems to directly conflict with the purpose for which buyers request a title insurance commitment. If all or most possible claims are excluded from title insurance coverage, the TIP has very little value to the consumer. Wis. Stat. § 631.23(1)(d) requires that TIPs provide a “reasonable minimum standard of insurance protection that is needed for policies to serve a useful purpose.” 

Invalidating the real estate transaction: Lines 351-355 of the WB-11 Residential Offer to Purchase require the seller to provide merchantable title “subject only to liens which will be paid out of the proceeds of closing and standard title insurance requirements and exceptions, as appropriate.” A TIP with a blanket exception arguably does not satisfy the “merchantable title” requirement, possibly allowing a buyer to invalidate the transaction prior to closing if the buyer objects to such a TIP. 

No title insurance protection for a buyer: A buyer who purchases property subject to a TIP that includes a blanket exception may have no insurance coverage for an encumbrance on the property (such as a public easement) that (a) prevents the buyer from using the property in the manner that he intended, or (b) decreases the value of the property. 

New owner unaware of restrictions: Most consumers expect that the title company will search the public records for liens and encumbrances that negatively impact title to property they are purchasing and list them in the title insurance commitment. If not listed, new owners may be dismayed to later learn they cannot build the fence, gazebo or other improvement they had their hearts set on because the project violates recorded restrictions or easements that were not pointed out in the title commitment.

Increased liability for anyone involved in the transaction: If the buyer’s TIP does not provide adequate insurance coverage due to a blanket exception in the policy, the buyer might sue everyone in the transaction — the seller, title insurance agent, and the REALTOR^® — for failing to adequately explain the lack of insurance coverage resulting from this blanket exception.

OCI bulletin

To protect consumers from this practice, the OCI issued a bulletin to all title insurance companies prohibiting further inclusion of blanket exceptions in TIPs. The bulletin indicates that blanket exceptions are misleading because the “benefits are too restricted to achieve the purpose of title insurance.” As a result, the OCI indicated that it will disapprove any future title insurance forms that include blanket exceptions issued after June 24, 2014. Moreover, a title insurer or title insurance agent who issues a TIP with a blanket exception after June 24, 2014 may be subject to enforcement action by the OCI. 

With the issuance of this bulletin, Wisconsin joins 20 other states that currently prohibit the writing of any policy of title insurance until the title company has conducted a reasonable search and examination of title and made a determination of insurability in accordance with sound underwriting practices.

For more information on blanket exceptions in TIPs, contact Tom Larson via email at tlarson@wra.org or by phone at 608-240-8254. See the official OCI bulletin at http://165.189.60.209/bulletin/0614titleins.htm

Tom Larson is Vice President of Legal and Public Affairs for the WRA.