The State of Title Insurance Five Years After Kwok

• Publication year: 2014
• Author: By Patrick A. Kohlmann, Esq.*

THE STATE OF TITLE INSURANCE FIVE YEARS AFTER KWOK

By Patrick A. Kohlmann, Esq.*

I. INTRODUCTION

The article entitled "Kwok v. Transnation Title Insurance Company: Another Thing for Estate Planners to Worry About" appeared in Volume 18, Issue 2, of the California Trusts and Estates Quarterly and discussed the implications of the Kwok¹ decision on estate planners. There has now been some resolution to the Kwok issue.

II. REVISITING KWOK V. TRANSNATION TITLE INSURANCE COMPANY

As previously reported, Kwok involved the transfer by deed of real property to a revocable living trust.² A brief summary of the Kwok case follows (readers will find a more comprehensive discussion in the article referenced above).

In April, 2004, Mr. and Mrs. Kwok formed Mary Bell, LLC, and the LLC purchased real property located on Mary Bell Avenue in Los Angeles.³ Transnation Title Insurance Company issued a "CLTA Standard Coverage Policy of Title Insurance."⁴ The policy named the LLC as the insured.⁵

Construction of a single-family residence commenced on the property.⁶ However, the Kwoks' neighbors refused to give the LLC access to an alleged easement for sewer and drainage, asserting that the easement was invalid; construction was delayed.⁷

When it became clear that the LLC would no longer realize a profit on the sale of the property, Mr. and Mrs. Kwok decided to move in to the residence.⁸ Accordingly, on September 21, 2005, Mr. Kwok signed a grant deed, transferring the property from the LLC to himself and his wife, as trustees of their revocable trust.⁹

Mr. and Mrs. Kwok remained unable to resolve the easement dispute with their neighbors, and ultimately filed a lawsuit seeking to enforce their rights. They tendered a claim to Transnation under the policy.¹⁰ The policy stated: "the insured is that party named in Schedule A and those who succeed to the interest by operation of law."¹¹ Transnation denied coverage on the grounds that the transfer of the property by Mr. and Mrs. Kwok to themselves as trustees was a voluntary act that did not arise by operation of law, and the voluntary transfer terminated coverage pursuant to the policy's terms.¹²

The trial court granted a motion for summary judgment by the insurance company, finding that the undisputed evidence showed the property was transferred voluntarily by grant deed.¹³ Therefore, Mr. and Mrs. Kwok did not become insureds by "operation of law" as required under the terms of the policy.¹⁴ The Court of Appeal upheld the decision.¹⁵

III. TEXCOM'S LEGISLATIVE EFFORT

The concern for estate planners as a result of Kwok is that the conveyance of real property to a revocable trust may cause the loss oftitle insurance under the terms of some title insurance policies. Indeed, this author has received numerous e-mail messages from practitioners throughout California reporting that their clients have been denied title insurance coverage following the tender of a claim for precisely this reason. The language commonly included in the letter denying the claim reads something like: "Mr. and Mrs. White transferred their interest in Property to their Family Trust in 2012. Accordingly, Mr. and Mrs. White, as individuals, no longer held title to the Property when the Family Trust acquired a fee simple interest in the Property. Accordingly, the transfer to the Family Trust terminated coverage under the title insurance policy... ."

The State Bar of California Trusts and Estates Section Executive Committee ("TEXCOM") sought a solution to this problem through a legislative proposal. The proposal would have, by statute, confirmed that a title insurance policy continues coverage to the transferee when title is transferred to a trustee of the insured's revocable living trust.

Assemblymember Steve Fox agreed to sponsor TEXCOM's bill in 2013 as Assembly Bill 2196. However, the bill was quickly opposed by the California Land Title Association ("CLTA"). TEXCOM, along with representatives of Assemblymember Fox, worked hard with representatives of CLTA to find a mutually agreeable solution.

As a result of a great deal of effort, a compromise was ultimately reached with the CLTA. Assemblymember Fox agreed to withdraw the bill in exchange for CLTA's amendment of the standard form of policy at issue in Kwok (CLTA Standard Coverage Policy 1990) to include language extending coverage where the insured has transferred the subject real property to his or her revocable living trust. The amended CLTA Standard Coverage Policy 1990 became effective as to policies issued on or after May 18, 2014.¹⁶

So, estate planners have a date (May 18, 2014) after which they will have a high degree of comfort that real property purchased by their clients will not lose title insurance coverage upon transfer by deed to a revocable living trust. Of course, most of our clients, currently and for many years to come, will own real property purchased prior to May 18, 2014. The resulting quandary for estate planners is that we must remain on alert for the Kwok issue for any property purchased before May 18, 2014.

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IV. REVIEW POLICIES

Owners' policies of title insurance that have the Kwok problem generally define the insured as the "party named in Schedule A and those who succeed to the interest by operation of law." The prior Kwok article discussed many of these policies.¹⁷ Practitioners who use deeds to transfer real property to a trust, and who want to avoid unknowingly causing a loss of title insurance, need to review owner's policies of title insurance for any real property purchased prior to May 18, 2014. If the underlying policy has the definition indicated above, the attorney may recommend the following: (1) use a trust funding deed, and either obtain an endorsement to continue coverage or...