In a previous article, the new ALTA access, tax parcel and contiguity endorsements were discussed with an emphasis on the practical use of each endorsement as well as an elementary understanding of the divergent coverage offered by each endorsement. In this second part of the new ALTA commercial endorsement series, the following new ALTA forms will be explored: the ALTA 14 endorsement (Future Advance – Priority), the ALTA 14.1 endorsement (Future Advance – Knowledge), the ALTA 14.2 endorsement (Future Advance – Letter of Credit), the ALTA 15 endorsement (Nonimputation – Full Equity Transfer), the ALTA 15.1 endorsement (Nonimputation – Additional Insured), and the ALTA 15.2 endorsement (Nonimputation – Partial Equity Transfer).

Future Advance Endorsements

 

The necessity of obtaining a future advance endorsement is paramount for lenders when dealing with revolving credit or line of credit transactions. To further illustrate the reason for obtaining a future advance endorsement, it is worthwhile to delve into the coverage offered by the ALTA 1992 Loan Policy. In the ALTA 1992 Loan Policy Exclusion 3(d), ALTA specifically excluded from coverage any defects, liens or encumbrances on title attaching or created post-policy (with the exception of mechanics’ and materialmen’s liens, if applicable). In addition, 9(b) of the Conditions and Stipulations of the ALTA 1992 Loan Policy states that any payment of the indebtedness secured by the insured mortgage reduces the amount of insurance coverage to the insured lender. In an apparent contradiction, 9(b) further states that the amount of insurance coverage may be increased by advances made to protect the lien of the insured mortgage as long as the amount of coverage does not exceed the stated policy coverage amount in Schedule A. The ALTA 1992 Loan Policy’s 8(d) of the Conditions and Stipulations also is problematic for future advance transactions because it limits the title insurer’s liability in transactions in which any indebtedness is created post-policy (with the exception of some construction advances or advances made to “protect” the insured mortgage’s lien or prevent deterioration of the improvements on the property).

 

To combat the inconsistency of the lender’s coverage for future advance mortgages in the ALTA 1992 Loan Policy, ALTA has developed three distinct (3) future advance endorsements. Each future advance endorsement is designed to address the unique nature of future advance lending. The coverage given by each future advance endorsement is subject to the following: certain exclusions listed in body of the endorsement; the Exclusions from Coverage in the Policy, with the exception of Exclusion 3(d); the Conditions and Stipulations in the Policy, with the exception of Section 9(b); and any exceptions listed in Schedule B of the Policy. Each future advance endorsement gives affirmative coverage to the lender as to the priority and validity of its insured mortgage when advances are involved.

 

The ALTA 14 endorsement (Future Advance – Priority) is the primary future advance endorsement to be utilized most frequently by lenders. In addition to its future advance coverage for the lender, the ALTA 14 endorsement also contains variable rate coverage comparable to the coverage found in the ALTA 6 endorsement. The ALTA 14 endorsement is designed to be used only with a Loan Policy; however, it may be used with both residential and commercial transactions. When issuing the ALTA 14 endorsement, no “blanks” need to be completed to give the endorsement. In order to give the ALTA 14 endorsement to the lender, the title insurance company may require satisfactory evidence that the insured mortgage, deed of trust, or other instrument is in compliance with the applicable state law concerning future advances. For example, in North Carolina, the title insurance company may wish to review the deed of trust to confirm compliance with N.C.G.S. §45-67 et seq. in order to give the ALTA 14 endorsement.

 

The ALTA 14.1 endorsement (Future Advance – Knowledge) gives substantially the same coverage as the ALTA 14 endorsement with one key difference: the ALTA 14.1 endorsement does not give affirmative coverage to the insured for the loss of priority of an advance made after the insured has knowledge of the existence of intervening liens or other matters affecting the land. The ALTA 14.1 endorsement shall be used in states where optional advances will not have priority if the insured lender has notice of a subordinate lien before the lender makes the advance. Similar to the ALTA 14 endorsement, the ALTA 14.1 endorsement may be used only with a Loan Policy for both commercial and residential transactions. When issuing the ALTA 14.1 endorsement, no “blanks” need to be completed to give the endorsement. In order to give the ALTA 14.1 endorsement to the lender, the title insurance company may require satisfactory evidence that the insured mortgage, deed of trust, or other instrument is in compliance with the applicable state law concerning future advances.

 

The final future advance endorsement created by ALTA is the ALTA 14.2 endorsement (Future Advance – Letter of Credit). The ALTA 14.2 endorsement was created for issuance with mortgages securing future advances under a letter of credit, surety (bond) agreement, or a reimbursement agreement. Unlike the ALTA 14 endorsement and the ALTA 14.1 endorsement, the ALTA 14.2 endorsement does not provide variable rate coverage to the lender. In addition, the ALTA 14.2 endorsement gives affirmative coverage for (1) advances made after a Petition for Relief under the Bankruptcy Code has been filed and (2) the loss of priority to a federal tax lien of any advance made more than forty-five (45) days after a notice of federal tax lien has been filed in the public records. Like its predecessors, the ALTA 14.2 endorsement may only be used for the Loan Policy. Due to the nature of the financing involved, the ALTA 14.2 endorsement may only be used on commercial transactions. When issuing the ALTA 14.2 endorsement, no “blanks” need to be completed to give the endorsement. In order to give the ALTA 14.2 endorsement to the lender, the title insurance company may require satisfactory evidence that the insured mortgage, deed of trust, or other instrument is in compliance with the applicable state law concerning future advances.

 

Nonimputation Endorsements

 

Nonimputation endorsements are commonly requested when the proposed insured entity owner does not want any knowledge of the transaction “imputed” or transferred to the proposed owner by other parties connected to the entity owner (i.e. outgoing members, partners, managers, or officers of the entity owner). Accordingly, nonimputation endorsements are typically used in situations involving a corporation, partnership, or limited liability company as the insured party. ALTA has standardized three (3) nonimputation endorsements for use in commercial transactions: the ALTA 15 endorsement (Nonimputation – Full Equity Transfer), the ALTA 15.1 endorsement (Nonimputation – Additional Insured), and the ALTA 15.2 endorsement (Nonimputation – Partial Equity Transfer).

 

Each nonimputation endorsement contains an assertion by the title insurance company that it will not deny liability for loss or damage due to the Exclusions of Coverage as contained in 3(a), 3(b), and 3(e) of the ALTA 1992 Loan and Owner’s Policies. Typically, a title insurance company may deny liability for liens or encumbrances (1) created or assumed to by the insured claimant; (2) not known to the title insurance company and not recorded in the public records, but known to the insured claimant and not disclosed in writing to the title insurance company before the policy date; and (3) creating losses which would not have been sustained if the insured claimant had paid value for the estate or interest insured by the title policy. Through the use of a nonimputation endorsement, the proposed insured is assured that it will be treated in a similar manner as a bona fide purchaser for value.

 

The ALTA 15 endorsement (Nonimputation – Full Equity Transfer) is designed to be used with an ALTA 1992 Owner’s Policy for commercial transactions. In particular, the ALTA 15 endorsement may be utilized when the proposed insured entity (corporation, partnership, or limited liability company) is losing all of its previous equity holders in the transaction and is obtaining new equity holders. When issuing the ALTA 15 endorsement, several “blanks” must be completed for the endorsement to be effective; the first blank must list the exiting or contributing equity holders (partners, members, managers, officers, or directors) and the second blank must list the “incoming” equity holders (partners, members, managers, officers, or directors). In addition, only the prior equity holders whose knowledge is of potential concern to the new equity holders should be listed. Specificity as to the listing of the equity holders is a key concern when issuing the ALTA 15 endorsement. In order to give the ALTA 15 endorsement to the owner, the title insurance company may require an affidavit and an indemnity agreement from all parties to the transaction detailing the structure of the transaction along with current financial statements.

 

The ALTA 15.1 endorsement (Nonimputation – Additional Insured) is also designed for use with commercial transactions; however, instead of being used for a new ALTA 1992 Owner’s Policy, it is tailored for use with an existing ALTA 1992 Owner’s Policy. Typically, the ALTA 15.1 endorsement may be used when a previously insured entity wants to add a new equity holder as an additional insured party. In order for the ALTA 15.1 endorsement to be valid, the existing insured party must agree and consent to the inclusion of the new equity holder through execution of the endorsement. Through its execution of the endorsement, the existing insured party agrees that any payment made under this endorsement shall reduce the amount of insurance available to the insured party in case of a claim against the policy. Please note that although this endorsement adds additional insured parties to the existing policy, the policy effective date is not brought forward to the date of the endorsement. Accordingly, if coverage for the new insured entity holder is desired from the date of the ALTA 15.1 endorsement and not from the original policy date, the title must be updated and brought forward to the date of the ALTA 15.1 endorsement. When issuing the ALTA 15.1 endorsement, the new equity holder must be identified in the first blank on the endorsement with the existing or exiting entity holders identified in the second blank. Similar to the ALTA 15 endorsement, specificity as to the parties’ identity is important when issuing the ALTA 15.1 endorsement. In order to give the ALTA 15.1 endorsement to the owner, the title insurance company may require an affidavit and an indemnity agreement from all parties to the transaction detailing the structure of the transaction along with current financial statements as well as execution of the endorsement by the existing insured owner.

 

Like the ALTA 15 endorsement and the ALTA 15.1 endorsement, the ALTA 15.2 endorsement (Nonimputation – Partial Equity Transfer) is geared towards commercial transactions; it is also designed for use with a new ALTA 1992 Owner’s Policy. It provides basically the same coverage as the ALTA 15 endorsement with one key exception: the proposed insured entity is the equity holder (partners, members, managers, officers, or directors) whereas the fee simple owner of the property to be insured is the entity (corporation, partnership, or limited liability company). The proposed insured equity holder does not want to be held accountable for any undisclosed knowledge of the owning entity much like a bona fide purchaser for value. As with the other nonimputation endorsements, when identifying the existing or exiting equity holders of the fee simple owning entity in the blank on the ALTA 15.2 endorsement, the parties must be narrowly, and not broadly, named on said endorsement. In order to give the ALTA 15.2 endorsement to the owner, the title insurance company may require an affidavit and an indemnity agreement from all parties to the transaction detailing the structure of the transaction along with current financial statements.

 

Through the development of the ALTA future advance and nonimputation endorsements, ALTA has anticipated and expanded upon the unique needs of both the insured lender and insured owner. It is to the insured’s advantage to obtain such coverage as needed to further realize the full scope of title insurance coverage for their respective transactions. By using the future advance and nonimputation endorsements in the appropriate circumstances, an insured party broadens its coverage and consequently brings more value to its title insurance policy.