Title Insurance Behind the scenes, title insurance underwriting is anything but dull.
For most real estate professionals, title insurance is something that they know they must have - but that they really don't understand that well. The title policy appears at the closing, the deal goes through, and everybody's happy.
If they were to think about the title underwriting process, they'd probably picture a group of serious-minded lawyers and other professionals spending countless hours checking and re-checking facts and documents.
And they'd be missing some fascinating stories. While the title industry - like many other professions - may have its share of tedium, it is not without its challenges, tribulations and in some cases, outright adventures.
For this year's special focus on title insurance, we asked several leading professionals to share their favorite "war stories" with us.
FIRST AMERICAN TITLE INSURANCE CO. - Savvy research reduces odds for casino client
THE RECENTLY OPENED Rivergate Casino in New Orleans has been the subject of one of the most well-known - and complex - cases of title law in recent memory. The fabled downtown site, now owned by Harrah's, has been the subject of on-and-off litigation since the 1700s.
"The challenge was to determine who really has ownership and rights to that area," explains Cliff Morgan, senior vice president of underwriting and new product development for First American Title Insurance Co., Santa Anna, Calif.
"The reason for this confusion is the Mississippi River. Before it was channelized the way it is today and before the cement borders were built, the river would change in flow and direction from time to time," adds Morgan. "Land would be added due to the buildup of soil, and the question arose as to who owned it - the private parties who owned upland property, or the city government?"
First American became involved with the site in 1993 because the city of New Orleans wanted Harrah's to come in and build a casino. After winning the bidding process, Harrah's had planned to tear down the existing Rivergate Convention Center. However, a lawsuit was filed by one of the local citizens, an heir to a previous upland owner. "He claimed that he in fact was the owner of that land," notes Morgan.
Although Harrah's was leasing the land from the city, the plaintiff claimed the city had no right to lease it. "Another title company had issued a policy on the property in 1993 as part of this process, but Harrah's couldn't go forward with the project without additional funding, and it needed title insurance to do that," says Morgan. "The client needed us to issue a policy in excess of $800 million."
First American began by reviewing the previous litigations and agreements surrounding the site. "In 1821, the city and all these owners entered into an agreement that stated the city could put in streets on this land as long as it was used for public purposes, such as dikes. But if it ceased to be used for public purposes the ownership would revert back," notes Morgan.
"Then, in the 1850s, the argument was renewed. A new agreement was reached and blessed by the Legislature. The city would auction off the areas, and then use the proceeds for public purposes. This agreement had no reversionary provision."
After reviewing the previous agreements, Morgan and his staff met with the mayor, representatives from Harrah's, local lawyers, and the city attorney.
"We finally decided the claims were bogus, that the plaintiff would not be successful in his suit. We committed that we would put a policy together to provide coverage and to insure Harrah's against any loss in case the plaintiff was granted ownership," says Morgan.
Wasn't First American taking a risk? "Perhaps we were, but we had underwritten it very carefully," asserts Morgan. "We felt the law in Louisiana was unique; it is not common-law based, but rather based on the French civil code. The perfection of rights differs; you have to have your rights recorded in the land record system - and that had not been done.
"If in fact this property was to revert, the plaintiff should have made his claim in 1960, when the convention center was built, because that's when it ceased to be used for public purposes," adds Morgan. "Also, because the city was the owner and was leasing the property, our view was that the casino, because of all the peripheral benefits to government and to the citizens, would, in fact, serve a public purpose."
Ultimately, the plaintiff lost the case. The casino later went into bankruptcy, but was issued additional title insurance after a reorganization. Morgan concludes, "This is truly one of the best examples of how the title insurance industry is capable of facilitating the transaction of business."
OLD REPUBLIC TITLE - A title tale of plants and minerals
APPARENTLY, ALL THAT glitters is not real estate - at least in the title insurance profession. That's the lesson that Jim Uecker, chief title counsel of Old Republic Title, Minneapolis, and his staff learned while undertaking a particularly unique multi-state transaction.
The client was a chemical company, and the assignment involved manufacturing facilities. But it also involved undeveloped sites containing mineral deposits owned by the United States or by the state in which the chemical company had mineral leases to mine the property.
"Ordinarily, title insurance does not deal with issues like this," notes Uecker. "Minerals are very unique. Often, the records are maintained somewhere other than where normal county records are maintained. Under many state laws, there is a different sense of ownership of property or easements when it is to be used for specific purposes."
The chemical company was looking for a series of policies covering not only its ownership interests in the chemical plants, but also insuring its leasehold rights in the mineral property. The company was applying for a series of loans, and the lenders were interested in securing those loans with the rights to use leased property for mining purposes.
This required the use of a number of Old Republic branch offices in the various states, coordinated out of a regional office. "This way, the title evidence could be produced by different offices but put together centrally for more cohesion; the commitments and policies needed to be somewhat consistent," explains Uecker.
"We also had to meet with local U.S. agencies concerned with theses cases and with the state offices that had granted the leases to the original leaseholder, confirm the leases were in existence, and confirm that they had been validly assigned and approved," says Uecker.
"We were dealing with civil servants, and we were outside our normal area of expertise. We had to review the leases and assignments and make sure they were proper, and we also had to insure them for a specific number of years to a certain date," adds Uecker.
Uecker and his colleagues also had to go back to school in order to be able to deal effectively with those state and federal civil servants. "Our lawyers basically educated themselves; we had to enter into discussions with the state and federal officials, review the laws, and get ourselves up to speed on those laws to make sure we were adequately representing our client's interests," recalls Uecker. "This was a highly unusual case."
In the end, Old Republic produced three types of policies - policies for the property owned outright by the chemical company; policies insuring the rights to mineral leases in state and federally owned properties; and a loan policy to the lenders.
"The manufacturing facilities were straightforward - they were large chemical plants," notes Uecker. "But we couldn't have done one set of policies without the others. In order for our client to get the loan, the lenders required the plants and the minerals. We ensured that our client was able to close on all those things."
STEWART TITLE GUARANTY CO. - Modest assignment: underwrite 1,800 properties
LIKE THE DETERMINED pooch that finally catches the proverbial bus, the title professionals at Stewart Title Guaranty Co. in Houston found themselves facing a daunting task last fall. "We were contacted by a seller with whom we had not done business before," recalls Jo Ann Stevens, director of national title services (NTS).
"They explained they were in the process of interviewing a couple of different title companies for a project they had come up with."
That project, it turns out, encompassed approximately 1,800 sites in 13 states, ranging from small tracts up to 1 million sq. ft. warehouses.
The good news was that the client said the closings could take place over a 12-month period. So Stevens and her staff began considering how the closings could take place, and how the assignment should be priced in light of the manpower that would be required. The sellers felt relatively sure the purchases could be grouped by state, and they hoped for one person to oversee the activity in each state. Stevens also had to take into consideration the needs of existing customers.
The proposal was submitted, and one week later Stevens got the news: she had caught the bus. The first critical issue to address was staffing. "We looked at our internal staff and reorganized our other accounts to help the workflow on this one," Stevens notes. The company brought in temps to handle the clerical work involved, including copying and huge volumes of processing.
"Then we looked at the kind of expertise our staff needed: title work, underwriting authority, survey re-views. As matters progressed, especially when we had more than one state to close in during the same month, we would call our other NTS offices in major markets around the country to lend their services. In many instances they would have someone who had the ability to fly down to Houston and stay and work with us for a couple of weeks," adds Stevens.
While the task has been a gargantuan one, the workflow has been uneven. For example, the first state scheduled for closings was Alaska, and the weather created a serious time crunch for opening title and getting the work done. "Unfortunately, the client did not get all of the approvals that were required, so the closings got delayed," says Stevens, noting that in some states there were 50 sites, while in others there were hundreds.
In another closing there was a significant penalty clause to the seller, but Stewart was never informed of the condition. "All we knew was that there sure was a lot of pushing to get things done on a timely basis," she says. The deadline was nevertheless met.
In the month of August four states were closed, representing more than 500 sites. Things were a bit slower in October, so more time was spent preparing policies.
The assignment has been grueling, to say the least. "I can honestly tell you that some weeks we had staff working seven days a week, depending on the number of closings, and at least 10 to 12 hours a day," says Stevens.
"We would organize by project. For example, we had three states coming up; we would assign a closing group for each state, so even though we weren't formally organized into shifts you might have one team working on Texas, another on Arkansas, and a third on Alaska, all working at different times of the day."
Of course, Stevens points out, Houston remained "mission control," tracking the title work coming in from offices all around the country, checking for objections, coordinating all surveys, awarding work and so on.
To date, Stewart Title has closed 10 states, with three remaining. One was to be closed the end of November, with the rest closing in 2001. So far, closings have been held on approximately 1,400 of the 1,800 properties.
All of this hard work has not gone unnoticed. "The customer has now told us that because we've sold all these properties, it has money it needs to reinvest over the next 18 months, and that the company will probably make in excess of 3,000 acquisitions," Stevens reports. Naturally, company officials want Stewart Title to do the work. "They say they've broken us in now," says Stevens.
CHICAGO TITLE - Client insists on completed policies at closing
A 35-PROPERTY DEAL with multifamily projects in 13 different states secured by a $250 million loan may seem complicated enough, but that's not what Tom Garner, vice president and regional manager at Chicago Title of Dallas, remembers about the transaction. "The real challenge was that the lender was requiring complete policies at closing - the Real McCoy - not just a pro forma or a template of some sort. What he wanted was a policy that was signed and properly executed at closing."
Typically, Garner explains, title offices will offer a commitment to insure the property or properties subject to specific stated conditions. For example, liens may need to be paid off in order to clear title. "As we collect items during a transaction or at closing, we are then free to remove those items," says Garner. "Some, in fact, remain in the policy as exclusions. Once the conditions are removed, or once we get all of the necessary documents, we prepare a clean policy, insert recording documents from the county, and send the policies out."
What has become the norm in the title industry, then, is what is called a "marked-up" commitment. Title insurance professionals will literally take a red pencil and mark through the policy at closing. "When we leave the table with a policy marked up and signed, it is as good legally as the final product," notes Garner. But it was not good enough for this particular lender, who wanted a "real" policy.
"What we had to do, then, was take the title commitment and somehow get it into our computer system, on screen, delete items rather than mark up the policy, and print out the final product at the closing," explains Garner. "At first, we were at a loss as to which way to go. Then we went to our tech people, who suggested scanning in the necessary information."
Because there were 35 different properties, 35 title commitments had to be obtained from a variety of offices. These offices had to work closely with the attorneys to agree beforehand on what exceptions or requirements would be included in the final policy.
"What I had to do before going to New York for the closing was to take 35 commitments, scan them into my computer, download them on a disk to take to the closing," explains Garner. "Then, once it was agreed which of the outstanding issues could be removed and which would remain as exclusions, we had to pull the commitment up on the screen of my laptop, delete the exceptions and print out a newly revised commitment. What was printed out became the inserts, and we just put a pre-printed, boilerplate policy `jacket' around the inserts and signed the policy."
Had only one or two properties been involved, this requirement for "clean" policies might not have presented much of a challenge, notes Garner.
"But one of the toughest problems we faced, because of the number and location of the properties, involved regulatory issues," he explains. "In some states, the only person who can sign the `jacket' is someone licensed in that state, and this regulation applied in seven states in our transaction. So, in addition to printing the inserts, we had to coordinate printing the jackets and getting them pre-signed in those markets where those specific signatures were required. For the properties located in states in which this was not required, I could sign them myself."
The number of properties also made for an increase in the amount of information that had to be stored on disk, and "regurgitated" at a moment's notice. Of course, without computers the assignment would have been far more daunting - if not impossible.
"This was probably our greatest use of computer technology to date," observes Garner. "We successfully melded computers with older ways of doing business to produce the end product required by our customer. And the key incentive, as always, was satisfying our client."
Five hours to prepare a policy?
How would you like to be given just a few hours to completely process a title policy? That's precisely the challenge that faced Paul Liszewski, underwriting counsel in the Chief Underwriting Counsel's office at Chicago Title.
"When I was underwriting manager in the Chicago national business unit we had a local customer call who had a client in bankruptcy," he recalls. "He notified us that if we were able to close that very day his client would save $100,000."
The deal required more than "fast-tracking." While the loan was to be funded in New York, the debtor's counsel was in Chicago and the debtor was in Ohio.
"We were able to contact a person out of our Ohio office, who drove to the debtor's office to acknowledge that an employee of Chicago Title was in possession of documents from the debtor," explains Liszewski. "There were mortgage documents in New York that had been pre-signed by the debtor. Someone from our New York organization had to go to the office of the lender's counsel to acknowledge receipt of those documents. This was all done by phone."
Once Liszewski had verbal acknowledgements from all parties across the country, he was able to sit down in Chicago with the debtor's counsel, get the lender's counsel on the phone and complete the transaction.
"We verbalized the mark-up over the phone with the lender's counsel, then our New York person wrote out the mark-up, delivered it to the lender's counsel, and we finished the deal," Liszewski says.
Even at high speed, a transaction like this would normally take two or three days to complete. "And in a typical deal, it takes at least a couple of weeks from the start of the order to closing," notes Liszewski. "In this case, the client called me around 9:30 a.m., and we funded at about 2:30 in the afternoon. You could say we were lucky to have the people we needed available, but there is also an advantage in having a national presence. Having parts of your organization located all over the country is a real plus."