In this final article on the new ALTA commercial endorsements, the ALTA 16 endorsement (Mezzanine Financing), ALTA 20 endorsement (First Loss – Multiple Parcel Transaction); and ALTA 21 endorsement (Creditor’s Rights) will be discussed. Each of the endorsements provides distinct and valuable coverage to the insured. In particular, standardization of the ALTA 21 endorsement provides much needed clarification for the title insurance industry.
ALTA 16 endorsement (Mezzanine Financing)
Mezzanine financing is a middle layer of financing between the lender secured by a deed of trust or mortgage on the real property and the lender with an unsecured loan. A mezzanine lender does not have a lien on the title to the real property; instead, the mezzanine lender has a security interest in the entity owner of the real property. Accordingly, traditional title insurance coverage is not available to the mezzanine lender. ALTA drafted the ALTA 16 endorsement to serve as an option for coverage for the mezzanine lender who wants to have “loss payee” status similar to the insured owner in the event of a claim against the policy. In the ALTA 16 endorsement, the insured owner agrees, as additional collateral to its mezzanine loan, to assign its right of payment (not to exceed the amount due the mezzanine lender) under the owner’s policy to the mezzanine lender.
Not only does the ALTA 16 endorsement contain “loss payee” coverage to the mezzanine lender, but it also contains various other title insurance coverage such as a “first loss” provision, nonimputation coverage, and “fairways” coverage. The “first loss” language provides that, in case of a loss against the policy and the acquisition of any interest in the insured owner by the mezzanine lender, the title insurance company shall be liable to pay the amount of the loss suffered without requiring the mezzanine lender to pursue any additional remedies against any other collateral securing the mezzanine loan. The nonimputation coverage included in the ALTA 16 endorsement is basically the standard nonimputation coverage as given in the ALTA 15, 15.1, or 15.2 endorsements: the title insurance company will not deny liability to the mezzanine lender for loss or damage due to the Exclusions of Coverage as contained in 3(a), 3(b), 3(c) and 3(e) of the ALTA Owner’s Policy because of any knowledge of the insured owner as long as the mezzanine lender does not have actual knowledge of the defect creating loss under the policy. The nonimputation coverage given to the mezzanine lender applies even if the mezzanine lender acquires an interest in the insured owner on or after the date of the policy. “Fairways” coverage is also given to the mezzanine lender; the title insurance company agrees that it will not deny liability to the mezzanine lender if any or all of the ownership interests in the insured owner have been transferred or acquired by the mezzanine lender on or after the policy date.
To obtain the desired coverage listed above in the ALTA 16 endorsement, the mezzanine lender affirms that the title insurance company retains its right of subrogation after payment to the mezzanine lender of any loss suffered under the policy; in other words, the amount of insurance coverage is reduced by the amount paid by the title insurance company for a loss under a loan policy. The title insurance company also has the right to insure mortgages or other conveyances of the insured property without obtaining the consent of the mezzanine lender. The title insurance company is also given the right to interplead any disputed amounts into the court with the insured owner and mezzanine lender being jointly and severally liable for paying any costs associated with the proceeding along with attorney fees.
The ALTA 16 endorsement is designed to be used with an existing or new Owner’s Policy for commercial transactions. When issuing the ALTA 16 endorsement, the name of the mezzanine lender must be noted on the endorsement. In order for the ALTA 16 endorsement to be valid, the existing or new insured owner must agree and consent to the inclusion of the mezzanine lender coverage through execution of the endorsement. The mezzanine lender is also required to execute the endorsement in order for it to be effective. In order to give the ALTA 16 endorsement for the Owner’s Policy, the title insurance company may require indemnity agreements from all parties to the transaction detailing the structure of the transaction along with current audited financial statements.
ALTA 20 endorsement (First Loss – Multiple Parcel Transactions)
Before its current standardized form, many different versions of First Loss coverage endorsements were present throughout the title insurance industry. With the advent of the ALTA 20 endorsement, ALTA has formulated an endorsement encompassing the traditional features of first loss coverage as well as expanding and improving upon prior versions. The term “First Loss” refers to a scenario when multiple pieces of property make up the insured land under the title policy and, subsequently, a title defect is discovered which does not affect all the land insured under the policy. After the title defect is located, the lender may have a claim against the title policy; however, the title insurance company may contend that the lender does not have a valid claim until and unless the lender forecloses on its loan even though the title defect only affects a portion of the insured land. By utilizing the ALTA 20 endorsement, the lender may prove and collect on its loss on a portion of the land without declaring a default on all the insured property.
The ALTA 20 endorsement shall only be used with the ALTA 1992 Loan Policy for commercial transactions. When issuing the ALTA 20 endorsement, no “blanks” need be completed for the endorsement to be effective. In order to give the ALTA 20 endorsement to the lender, the property to be insured must include multiple parcels of real property.
ALTA 21 endorsement (Creditors’ Rights)
Perhaps the most commonly requested and misunderstood endorsement is for creditors’ rights coverage. When ALTA drafted the ALTA 1992 Policies, it included an exclusion from coverage (#7 on the loan jacket and #4 on the owner’s jacket) for creditors’ rights matters arising out of a fraudulent transfer; because this new exclusion from coverage was not present on the ALTA 1970 Policies, it became the practice of some lenders to require either the deletion of provision #7 from the exclusions from coverage or affirmative coverage over creditors’ rights issues when the ALTA 1992 Policies were introduced. Pursuant to the demand for such creditors’ rights coverage, title insurance companies struggled to create a consistent solution for providing the requested coverage. The ALTA 21 endorsement was created as a compromise to the outright deletion of exclusion #7 for mortgagee policies and exclusion #4 for owner’s policies.
The ALTA 21 endorsement gives affirmative coverage to the insured if an avoidance or court order providing a similar remedy is issued regarding the voidability of the insured instrument in Schedule A as a result of a fraudulent transfer or preference under creditors’ rights laws occurring on or before the date of the policy. However, the ALTA 21 endorsement does not provide coverage if the insured had knowledge when it acquired the interest shown in Schedule A that the transfer or mortgage was meant to defraud creditors. Also, the ALTA 21 endorsement does not provide coverage if the insured party is found by the court to be a transferee or purchaser without good faith.
The ALTA 21 endorsement may be used with either a Loan Policy or an Owner’s Policy. It is anticipated that the ALTA 21 endorsement shall be used primarily with commercial transactions; however, it may also be used as necessary with residential transactions. When issuing the ALTA 21 endorsement, no “blanks” need to be completed to give the endorsement. In order to give the ALTA 21 endorsement, the title insurance company may require detailed information as to the structure of the transaction (i.e. Is it a refinance? Is it a purchase? Is it a construction loan? Where are the funds going at closing?). Based upon additional analysis of the structure of the transaction, the title insurance company may require receipt of satisfactory, audited financial statements to determine the party’s solvency. Note that creditors’ rights coverage is generally viewed as an “extra-hazardous” risk by title insurance companies; thus, be prepared to discuss issues surrounding the structure of the transaction in order for your title insurance company to gain a comfort level in providing this coverage.
ALTA’s proactive approach to the ever-changing marketplace is a decided benefit to consumers, lenders, attorneys, and title insurance companies who can depend on a quality and uniform product to offer the insured. With the adoption of the new commercial endorsements discussed in these three articles, ALTA has revamped commercial endorsements commonly used within the title insurance industry to gain a new uniformity and value to the title companies who issue their products, the insured parties who purchase their products and the attorneys who must explain their products.