Risk: nip it in the bud

Risk, risk management and risk management strategy are words and phrases that have dominated solicitors’ lexicon in recent decades.

Last July, for example, we witnessed a major lender announcing the appointment of a chief risk officer. In such a changing market, property lawyers in particular may wonder how close the day is when each practice will have a permanent full-time position for such a role.

Alistair Sim’s enlightening article “Lender claims” (Journal, July 2008, 52), further highlights the importance of a good risk management strategy. Indeed it is only one of many risk management articles which have appeared recently in the Journal spotlighting property law problems.

As property lawyers we must ask ourselves what is available in the market to deal with these issues. In particular, consideration should be given to what mechanisms can be put in place before a problem arises, as when it does, it may be too late.

Title insurance can assist here. To most practitioners and in most cases, title insurance is considered a distress purchase rather than a purchase to save distress. By incorporating title insurance earlier in the transaction, the benefits will be greater and the cost could be less.

Cover features

So what exactly is available?

In addition to traditional policies for the more common risks, such as lack of title, insurance is available for a number of less obvious issues. There follow a few examples, but it should be noted that if a risk is title-related, cover may be available.

• Failure to record/register

Title insurance can usually be arranged to provide cover for lenders where a lender has suffered loss due to a defect in the recording or registration of a document. By implication this extends to failure to record or register a deed such as a standard security. This like most of the other coverages for lenders would be done on a block basis only under a block policy, although individual portfolios could be provided if required.

• Ranking issues

Again, under a block policy, a lender can be protected against losses due to ranking errors. Provided both loans continue to be paid, no loss can be shown, but when repossession is completed and a loss ascertained, the cover kicks in.

• Title issues

Block policies in the name of an individual lender, or master policies for unspecified insureds, can be used to cover lenders for an extensive range of titles and title defects. This would include lack of title, adverse minerals reservations and missing planning and building control documents.

• Mortgage fraud

It would be virtually impossible not to notice the number of articles appearing in the national press highlighting the increase in mortgage fraud. Title insurers in Canada have been offering this cover for years, and the good news is such cover is available to lenders in the UK. Again this is provided under a block or master policy.

The future

In 2006 the American Land Titles Association (ALTA), the umbrella organisation for title insurers in the US, updated their basic policy forms to address calls from the property and real estate industries for coverages to meet market demands.

Included in those new risks was cover for a defect in title caused by a document not properly recorded in the public records, including failure to perform those acts by electronic means authorised by law.

Commenting on these policy changes, James L Gosdin, Senior Vice President, Senior Underwriting Counsel and Chief Reinsurance Counsel of Stewart Title Guarantee Corporation, stated that risk wordings such as these are not exhaustive and would not prevent other matters that fall within the general category of title risk from being covered.

This would not seem to preclude cover for mistakes in registering deeds in ARTL, for example, and could also encompass faults at the Land Register itself.

At the same time as the coverage for electronic transactions, an amended survey coverage was also introduced. This would be similar to a boundary check.

It would be impossible for a practitioner to check title boundaries on the ground for each and every transaction. At most, the legal description and/or the deed or title plan would be sent to the purchasers to comment on the extent of the property and to confirm that the legal and occupied extents were the same.

Again, with the introduction of home reports such cover may be available to buyers, sellers or report providers, subject to meeting appropriate underwriting criteria.

So although a full-time risk officer for legal firms may never be required, partners by incorporating title insurance into a firm’s risk management plan will not only protect the firm but add value to the service provided to clients, benefiting sellers, purchasers and lenders alike. Who knows, such a move could even lead to a decrease in claims in property cases, and reduced PI premiums for the firm.