Whenever a transfer of real property for estate planning or asset protection planning takes place, the attorney is confronted with the issue of whether the property’s title insurance policy will extend coverage to the new owner/grantee. Regardless of the form of new ownership (e.g., trust, corporation, family limited partnership, or limited liability company), if real property was transferred, in order to extend coverage to the new owner/grantee, an endorsement to the property’s title insurance policy may need to be obtained adding the new owner/grantee as an additional insured.

Title insurance is protection against loss arising from problems connected with a property’s title. There may be a weak link at any point within the property’s chain-of-title that could emerge to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.

On February 10, 2009, in an alarming case entitled Patrick Man Kee Kwok, et al. v. Transnation Title Insurance Company, an order allowing a title insurance company to deny coverage was affirmed because the property owner, Mr. Kwok, did not obtain an endorsement to the insurance policy when he transferred real property from a limited liability company to his family trust.

In this Court of Appeal case from the State of California’s Second Appellate District, Mr. Kwok established Mary Bell, LLC, a limited liability company (the "LLC"), for the purpose of building a rental property located on Mary Bell Avenue in Los Angeles, California. At time of purchase, Transnation Title Insurance Company ("Transnation") issued a CLTA Standard Coverage Policy of Title Insurance. The LLC was the only named insured on Schedule A of the policy. After an easement dispute with a neighbor and a downturn in the real estate market, Mr. Kwok decided to move into the property and use it as his primary residence. The property was eventually transferred out of the LLC and into Mr. Kwok’s family trust. Several months later, the LLC was dissolved. Mr. Kwok never obtained an endorsement to the title insurance policy adding his family trust as an additional insured.

Mr. Kwok was unable to resolve the easement dispute with his neighbor, and ultimately filed a lawsuit seeking to enforce his property rights. Mr. Kwok tendered a claim to Transnation. The title insurance company denied coverage under the policy on the grounds that the transfer of the property by the LLC to his family trust was a "voluntary act" that did not arise by "operation of law" and therefore terminated coverage.

In this case, the Court stated that "coverage did not continue because title to the property did not devolve to [Mr. Kwok] as member of the LLC on dissolution of the LLC, but rather was transferred by deed from the [LLC to Mr. Kwok’s family trust], a totally separate legal entity." Under the terms of the title insurance policy, the family trust could only become insured by operation of law. In other words, when an owner of real estate transfers title to his or her family trust, the CLTA Standard Policy does not automatically extend coverage to the trust!

In another case entitled Gebhardt Family Restaurant, LLC v. Nation’s Title Ins. Co.of New York1, involving an ALTA Owner’s Policy, the Court held that a transfer of land from two family members to an LLC, of which they were the only members, terminated coverage under a policy naming the individual family members as the insured parties. The Court reasoned that a LLC is an entity separate from its members and, thus, the transfer of property from a member to the LLC is more than a change in the form of ownership, "it is a transfer from one entity or person to another."

Considering these two cases, it may seem a prudent course of action for an LLC or trust, to which real property has been transferred as part of an estate or business plan, to obtain a new owner’s title insurance policy at the time of the conveyance; however, this course of action may be expensive (although a reissue rate may apply). A better solution may be for the grantee/entity to request an "additional insured" endorsement from the title insurer which would be effective as of the date of the conveyance. This endorsement will specifically amend the existing owner’s insurance policy to the trust or LLC as a named insured. The cost of such an endorsement is usually nominal, and many title insurers will routinely issue the endorsement for successor LLC’s as well as for family trusts.2

Since the Court concluded that a transfer of a property’s title from an LLC as the named insured to the nonmember family trust terminated coverage under a CLTA Standard Coverage Policy as a matter of law, the author suggests each property owner who has transferred real estate into, or out of, a legal entity or trust, for business or estate planning purposes, to review their policy to ensure that the new grantee has been added as an additional insured, or to contact their title insurance company and complete the endorsement procedure adding the new owner/grantee as an additional insured.

1. 132 Md. App. 457, (2000).
2. If there has been a substantial increase in the property’s value since the date the title insurance policy was originally issued, it may still be prudent to have the policy updated or reissued to extend the coverage amount to the current Fair Market Value.

This recent case was brought to the author’s attention by the Law Office of Richard Ball. Mr. Ball is an attorney who concentrates his practice to title insurance matters, and was a contributing advisor to this article. Mr. Ball’s office is located in Escondido, California.

Bradley G. Barth is a Partner of the Orange County, California office of Barth Berus & Calderon, LLP, and Supervising Attorney of the firm’s Transactional and Estate Planning Department. Mr. Barth provides counsel on a wide range of individual and business matters with a concentration on estate and wealth transfer planning, probate and trust administration, corporate counsel and formations, asset protection, real estate law, non-profit corporations and foundations.