Both the standard owner’s and loan policies of title insurance contain exclusions from coverage in the policy jackets that some people may not be aware of. It’s often referred to as acts of the insured or the 3(a) or 3(b) exclusions.
The intro paragraph of the Exclusions of Coverage section reads:
“The following matters are expressly excluded from the coverage of this policy and the company will not pay loss or damage, costs, attorney’s fees, or expenses that arise by reason of:
The intro to Section 3 reads: Defects, liens, encumbrances, adverse claims or other matters
3(a) reads: created, suffered, assumed, or agreed to by the Insured Claimant.
3(b) reads: Not known to the company, not recorded in the public records at date of policy but known to the insured claimant, and not disclosed in writing to the company by the insured claimant prior to the date the insured claimant became an insured under the policy.”
What Does This Mean?
Most courts have concluded that coverage would be denied if the insured knew of and intended to take title even with the defect, or the insured contractually assumed an obligation to perform some act and then failed to perform. A good example of the latter would be improvements to be performed on the property that were contracted by the insured, but who then failed to pay the contractors causing mechanic’s liens against the property. More particularly, exclusion 3(b) would exclude defects known to the insured and not disclosed to the title company in writing.
An example of the 3(b) exclusion may be if a buyer of the property happened to know that there was an encroachment on the property and the encroachment was is not disclosed to the title insurance company before closing and the issuance of the title policy. If the buyer were to later make a claim under the owner’s policy for the encroachment, there would be a 3(b) exclusion raised by the title insurance company.
It’s wise for the parties who are going to be insured under the policy to disclose in writing to the title insurance company any defects that they become aware of that might become a claim against the title insurance policy on the property. Then if the title company decides to provide coverage for those items in the title policy via affirmative coverage or endorsement, there most likely would be coverage for those defects in the title insurance policy.