Chapter 12 Title Insurance

• Library: Practical Guide to Commercial Real Estate in South Carolina (SCBar) (2024 Ed.)

Chapter 12 Title Insurance¹

Teri K. Callen

A. Introduction

Title insurance is a difficult concept even in the residential arena but can be more problematic for South Carolina practitioners handling commercial transactions, where multiple parties and their lawyers routinely cross state lines. Many out-of-state players in local commercial real estate transactions come from environments where title insurance companies act as escrow agents and, in addition to issuing title insurance commitments and policies directly, that is, without the benefit of title insurance agents, also perform due diligence work, gather documents and funds, close transactions, disburse, and record. Closings in those environments take place pursuant to escrow instructions typically addressed directly to the title insurance companies acting as escrow agents. Rarely do parties gather in conference rooms, and South Carolina practitioners find themselves in the challenging role of explaining to a lender from California or New York that attorneys must perform or supervise many of the functions they expect to be performed by title insurance companies. This chapter will address the fundamentals of title insurance and its coverages, along with the nuances and challenges for a South Carolina practitioner dealing with title insurance issues with participants who are unfamiliar with the customs, practices, and requirements in South Carolina.

B. The Role of the South Carolina Transactional Lawyer

Lanny Lambert, one of the members of the editorial board for the first edition of this book, often discusses the "hats" required to be worn by transactional lawyers in South Carolina. It may be possible under our ethics rules to represent more than one party to the transaction, but in the commercial arena, most practitioners represent only one party because of the likelihood of actual conflicts among the parties. But transactional lawyers do have obligations to multiple parties because of opinion letter situations and title insurance company agency agreements.

Please refer to the chapter of this book written by Mark Sharpe dealing with multistate practice and ethics for a discussion of the issues surrounding conflicts, unauthorized practice of law and other ethics issues that impact the various roles the closing attorney must perform. Please refer to the chapter written by Ed Menzie on opinion letters. This chapter focused only on transactional lawyers and their relationship to title insurance and title insurance companies.

Several decades ago, most lawyers in South Carolina obtained title insurance for their closings by certifying to title insurance companies directly. Others certified to an agent who was often the only agent in a county or multiple-county region. This was true as late as the early 1970s. Beginning in the 1970s, however, title insurance companies began marketing to attorneys, asking them to become agents for the purpose of issuing title insurance commitments and policies for their own transactions. Lawyers struggled with the multiple roles, and several authorities weighed in.

Ethics Advisory Opinion 82-08 opined that after full disclosure of the effect of dual representation, a closing attorney may also act as issuing agent for a title insurance company. Ethics Advisory Opinion 89-17 approved the closing attorney-title agent dual function and also stated it is ethical for a closing attorney to own a separate title insurance agency. Ethics Advisory Opinion 92-03, citing South Carolina Code Ann. Section 38-75-960, recognized that lawyer-title agents are a producer of title business under Title 38 of the South Carolina Code and must disclose any financial interest they have to clients and further, that South Carolina Regulation 69-18 requires among other things, that an attorney acting as a title insurance agent disclose in writing to the client the rate or amount of the title insurance commission.

Title insurance companies in South Carolina work under a system of filed rates (S.C. Code Section Ann. 38-75-980) and statutory splits (S.C. Code Ann. Section 38-75-1000). The amalgamation of these authorities acting in the background of our business environment has had several results. First, transactional lawyers in South Carolina act as title insurance agents. It is rare to encounter a transactional lawyer who is not issuing title insurance for his or her clients. From time to time, regional or national law firms starting to do business in South Carolina will initially forego establishing title insurance agencies if they do not operate title agencies in other states. However, because of the economic reality of earning a portion of the title insurance premium, the local lawyers in those practices usually prevail in short order, and agencies will be established.

Second, the "customers" of title insurance companies doing business in South Carolina are transactional attorneys because, for the most part, attorneys select the title insurance companies for their transactions. Many large firms write with multiple title insurance companies. When asked the reasons for dealing with multiple sets of paperwork, reporting practices, etc., these attorneys respond that they want to be able to place the business where the client wants it placed, they want to be able to receive referral business from multiple companies, they want to be able to call on multiple underwriters in case one is slower to respond or quicker to say "no" to an underwriting request, or all or some combination of these reasons. Title companies are able to attract the business of closing attorneys with their excellent service and referral business.

It has been predicted for many years that title insurance business and transactional business itself will be controlled more and more on a national level. While it is true that some national lenders and developers may select title insurance companies on a national level, most title insurance continues to be controlled at the local level. The transactions that are placed on a national level typically work through a national business office of a title insurance company and are referred to the South Carolina state office of that company, which places the business with a local agent. Some companies may write the title insurance directly, but because searching titles is the practice of law in South Carolina, those companies must have independent local lawyers certify title to them. Local agents will complain that the companies are competing with them if business is written directly, so most referral business is placed with a local attorney agent when the client does not require it be written by and through a national title office.

Whether the business is placed locally or on a national level, the South Carolina closing attorney must represent his or her client and must also follow the underwriting guidelines of the title insurance company. The attorney does not represent the title company but does act as its agent. The loyalties may become an issue from time to time, but lawyers should always resolve those issues in favor of their clients.

The best transactional lawyers spend a great deal of time by telephone or e-mail with underwriting counsel seeking to obtain the best possible coverage for the client. The attorney should seek to remove the standard exceptions, should seek to remove all the special exceptions that do not apply, and should obtain affirmative coverage in Schedule B or by endorsement for all objectionable matters. The relationship with the title insurance company lawyer is not adversarial, but the transactional lawyer who does excellent work for the client will make multiple, strong requests for coverage.

Often, a transactional lawyer will be on the receiving end of those strong multiple requests from out-of-state lawyers and clients as well as from national offices of title insurance companies. In those cases, the local underwriting counsel for the title insurance company will become the first line of defense. Underwriting counsel will work with the other lawyers, clients, and national offices to make sure local guidelines are followed and to deflect the difficult decisions from the local title insurance agent. Transactional lawyers should pay careful attention to documenting their files as to all of these matters. If a claim ever occurs, the attorney's file will provide the best evidence of how the various decisions were made.

Lenders' closing instruction letters are often problematic. Lenders doing business in other states are accustomed to addressing their letter to title insurance companies, directing them to search titles, issue commitments and policies, disburse the funds when the lender can be placed in first lien position, and record the documents. Since those functions must be performed or supervised by attorneys in South Carolina, many hours are spent explaining to lenders that their letters must be revised. The result of these negotiations is often that the letters are addressed to the closing attorney and the title insurance company because between them, all the required functions will be performed.

Employees of national offices of title insurance companies often struggle with these roles and will prefer to deal with their local operations because agents are not as easy to control. Local counsel for the title insurance companies become the agent's ally in these situations, and transactional lawyers should not hesitate to rely on them for assistance.

C. Title Insurance Basics—What is It and How and Why is It Issued?

Title insurance is a fundamental part of most commercial closings because lenders routinely require mortgagee title insurance. Title insurance is the evidence of title a lender typically requires to make a loan on real estate. Every tract of land has historically been involved in a chain of title representing the deeds, plats, mortgages, leases, easements, restrictions, judgments, liens and other encumbrances...