Condominium unit title insurance

A condominium unit is real property and, as such, is insurable under all current forms of title insurance policies, including the almost nationally accepted forms of the American Land Title Association ("ALTA"). As such, the owner's policy insures against loss sustained by the insured by reason of the following four coverages:

1. Title to the estate or interest described in Schedule A being vested other than as stated therein;

2. Any defect in, or lien or encumbrance on, the title;

3. Unmarketability of the title;

4. Lack of a right of access to and from the land.l The ALTA loan policy2 furnishes all four coverages to a condominium unit mortgagee plus four additional coverages:

5. The invalidity or unenforceability of the lien of the insured mortgage upon the title;

6. The priority of any lien or encumbrance over the lien of the insured mortgage;

7. Lack of priority of the lien of the insured mortgage over any statutory lien for services, labor or material: (a) arising from an improvement or work related to the land which is contracted for or commenced prior to the Date of Policy; or

(b) arising from an improvement or work related to the land which is contracted for or commenced subsequent to Date of Policy and which is financed in whole or in part by proceeds of the indebtedness secured by the insured mortgage, which at Date of Policy the insured has advanced or is obligated to advance;3

8. The invalidity or unenforceability of any assignment of the insured mortgage, provided the assignment is shown in Schedule A, or the failure of the assignment shown in Schedule A to vest title to the insured mortgage in the named insured assignee free and clear of all liens.4

Because a condominium unit is a unique form of real property whose ownership is normally founded upon compliance with a state statute and certain documentation,5 the title insurance industry developed a form of condominium endorsement. Without a special endorsement, standard exclusions from coverage in both the Owner's Policy and the Loan Policy would leave a condominium unit owner or mortgagee unprotected against violation of state condominium statutes or subject to liens for common charges.6 The endorsement to supplement the basic insuring provisions of ALTA policies was promulgated at the urging of attorneys for condominium unit owners and their mortgagees. The ALTA Condominium Endorsement Form 4 became available on June 1, 1987. The endorsement was later revised on March 27, 1992,7 and a supplementary endorsement Form 4.1 was adopted by ALTA on October 17, 1992.8

This article will examine the need for these endorsements and what they add to the basic ALTA policy coverage. Initially, it must be noted that a title examination normally will disclose the recording of the declaration, by-laws, plans, and possibly a set of restrictive covenants, easements, etc. These documents will be listed on Schedule B-1 of the title policy.

The basic thrust of the Condominium Endorsement is to insure against loss by reason of non-compliance with the requirements of the applicable condominium statutes and other provisions frequently found in the documents. It insures against most violations of any restrictive covenants contained in the condominium documents and provides insurance to a condominium unit first mortgagee against loss of priority of the insured mortgage by reason of charges and assessments provided for in the condominium documents. Additionally, the ALTA Condominium Endorsement insures against any obligation to remove improvements due to encroachments by other units or any of the common elements, failure of title resulting from a right of first refusal, or loss or damage by reason of the unit not being entitled by law to be assessed as a separate tax parcel. Of course, a special condominium endorsement can be negotiated and custom crafted, subject to state regulatory restrictions, but the standard ALTA endorsements are usually the only ones available and utilized.

This article will examine the seven additional items of insurance coverage contained in the ALTA Condominium Endorsement, noting the variations between the original June 1, 1987, endorsement, the March 27, 1992, revisions, and its variation from the October 17, 1992, Form 4.1.

Paragraphs one and two in each of the forms are identical and read as follows:

The Company insures the insured against loss or damage sustained by reason of:

1. The failure of the unit identified in Schedule A and its common elements to be part of a condominium within the meaning of the condominium statutes of the jurisdiction in which the unit and its common elements are located.

2. The failure of the documents required by the condominium statutes to comply with the requirements of the statutes to the extent that such failure affects the title to the unit and its common elements.9

These provisions insure that the unit is part of a valid statutory condominium and that the documents do not adversely affect title to the unit. In most states, it is possible to create what is sometimes referred to as a "common law condominium." With proper and extensive documentation, it is possible to convey a physical part of a building. That documentation should deal with the relationship of the parcel conveyed to the balance of the structure and the land upon which it stands. However, the contemporary notion of condominiums existed in various parts of the world hundreds of years ago without any known special statutory basis. It is normally preferable, however, to be in compliance with the condominium statute of the particular jurisdiction, since those statutes not only sanction this type of subdivision of the parcel, but also create valuable additional rights that could not be claimed by a common law condominium. Although the various state statutes differ in numerous details, these statutes usually create valuable and desirable "bundles of rights" for purchasers, owners, and lenders. Those rights usually deal with the operation of the condominium, termination, eminent domain, insurance, separate unit taxation, and the creation and priority of liens for common charges. Some statutes also contain valuable consumer protection provisions.lo Subsequent and more sophisticated statutes such as the Uniform Condominium Act ("UCA")11 and the Uniform Common Interest Ownership Act ("UCIOA")12 have not only provided for the aforementioned rights but have provided flexibility as to expansion or contraction of a condominium, leasehold condominiums, borrowing powers, and numerous other matters.


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