In the United States, it is generally understood that an owner’s policy of title insurance is not transferable to a third party buyer of the insured real property. In contrast, the potential for continuing coverage under an owner’s policy upon transfers between related parties or entities or upon the dissolution of the insured property owning entity is often misunderstood. In Kwok v. Transnation Title Ins. Co., 170 Cal. App. 4th 1562 (Cal. App. 2d Dist. 2009), the appellate court concluded that the title insurance policy was no longer in force because the appellants were not successor insureds “by operation of law” upon dissolution of the insured entity.  

The Facts and Allegations  

Mr. and Mrs. Kwok, through a limited liability company owned by them, acquired a residential lot with the intent of building a home for third party sale. At the closing of the acquisition, the limited liability company obtained a Standard Coverage Owner’s Policy insuring both fee title and title to a sewer/drainage easement on adjacent property. After construction commenced, a dispute arose with the adjoining property owner who asserted that the easement was invalid. Following a substantial delay and a decline in market conditions, the Kwoks decided to occupy the residence themselves and conveyed the property from the limited liability company to themselves in their capacities as trustees of their revocable trust. The limited liability company was then dissolved.  

Thereafter, the Kwoks filed an action against the adjoining property owner to enforce their easement rights and tendered a claim to the title company under the title policy issued to the limited liability company. The Kwoks asserted coverage under the Owner’s Policy issued to the limited liability company as successor insureds “by operation of law.” The title insurer denied coverage on the ground that the conveyance of the property from the limited liability company to the Kwoks as trustees was a voluntary conveyance that terminated coverage under the policy. The Kwoks filed suit against the title insurer for breach of contract and bad faith.  

The Issues and Results  

In granting the title insurer’s motion for summary judgment, the trial court found that the Kwoks, as trustees under their revocable trust, had not succeeded “by operation of law” to the interest of the limited liability company since (i) the trustee was not a member of the limited liability company and (ii) the limited liability company was not dissolved until after the “voluntary” conveyance to the trust. At the appellate level, the Kwoks challenged the title company’s definition of “by operation of law” and asserted that they became successor insureds “by operation of law” upon their “decision” to dissolve the limited liability company, a date they argued predated the deed into the trustee and the filing of the certificate of cancellation.  

In affirming the trial court’s decision, the appellate court quickly disposed of the Kwoks claims, finding that (i) under the terms of the policy, the Kwoks could only become insureds by “operation of law,” (ii) the transfer of the insured property from the limited liability company to the revocable trust was a voluntary conveyance and not by “operation of law,” (iii) as the Kwoks were not members of the insured limited liability company in their capacities as trustees. Upon dissolution any transfer by “operation of law” would have been to the Kwoks as individuals rather than as trustees. Therefore, the transfer of title from the limited liability company to the nonmember trustees terminated coverage under the policy as a matter of law.

The decision reached in Kwok is not without precedent. In a 2003 unpublished case, Gray v. First American Title Ins. Co., 2003 Cal. App. Unpub. LEXIS 1163 (California Unpublished Opinions 2003), the court held that when individuals acquired and insured real property in their individual capacity and later conveyed the property to a partnership in which they held a substantial interest, coverage under the policy of title insurance terminated upon the transfer. Similar holdings were also reached in Stevens v. Dakota Title & Escrow Co., 2004 Neb. App. LEXIS 298 (Neb. Ct. App. Oct. 26, 2004), (transfer by individuals into a wholly owned corporation); Butera v. Attorneys' Title Guar. Fund, Inc., 321 Ill. App. 3d 601 (Ill. App. Ct. 1st Dist. 2001), (transfer from a trust to a wholly owned corporation and then to the sole shareholders of the corporation who were the beneficiaries under the original trust); Gebhardt Family Inv., L.L.C. v. Nations Title Ins. of N.Y., Inc., 132 Md. App. 457 (Md. Ct. Spec. App. 2000), (transfer for estate planning purposes by individuals into a limited liability company); and, Pioneer Nat'l Title Ins. Co. v. Child, Inc., 401 A.2d 68 (Del. 1979), (a case alleging attorney malpractice and breach of a title insurance policy, where counsel for the insured vested and insured title in an unqualified corporation and subsequently corrected the error by transferring the property to the taxpayers who subsequently conveyed into a tax-qualified corporation).  

Avoiding the Problem  

The Kwoks, for a nominal fee, could have easily avoided the loss of their title coverage. At the time of transfer of their property to their trust, the Kwoks could have obtained from their title insurer an Additional Insured Endorsement (CLTA Form No. 107.9 or 107.10) which would have expressly acknowledged the Kwoks, as trustees, as being insureds under the existing policy. Alternatively, the Kwoks could have preserved their coverage as insureds “by operation of law” by first conveying their membership interests to themselves as trustees of their trust, followed by a dissolution of the limited liability company. (See, Historic Smithville Dev. Co. v. Chelsea Title & Guaranty Co., 184 N.J. Super. 282 (Ch.Div. 1981)). An unanswered question is whether coverage would have been preserved (or restored) had the Kwoks revoked their dissolution of the limited liability company under California Corporations Code Section 17357, filed a certificate of continuation (LLC-8 Form) with the Secretary of State and then conveyed the property back to the limited liability company pending resolution of the lawsuit to enforce the easement.  

While some of these “afilliated transfer” issues have been resolved by the expanded definition of “Insured” in the ALTA 2006 Owners Policy, the Kwok case highlights the need to carefully review title policies and consider the impact of transferring ownership within a family group or group of affiliated entities.