July 2, 2019
As we discuss here and here, title insurance provides a lifetime of coverage to the insured owner, and covenants in a general warranty deed also last forever. This is true, however, only as to losses sustained by the insured under a title insurance policy and the grantee under a general warranty deed, and essentially as to no other party. Let me explain.
An owner’s policy of title insurance is a one-time premium in exchange for permanent coverage of losses sustained by the insured. And what this means is that coverage is in place as to both (a) losses sustained by the insured while he is the owner of the property and (b) claims against the insured after he conveys the property by general warranty deed (only as to claims that existed before the policy was issued).
Similarly, when a grantee acquires title to real property from a grantor by a limited warranty deed or a general warranty deed, he benefits from those covenants forever (read about different warranty covenants here). This extends beyond his ownership of the property to claimants who acquire the property through a chain of warranty covenants. Each owner can sue “up the chain” to the grantor who conveyed property to him or her up to the party who first created the title problem. This “chain” is created and maintained by successive general warranty deeds.
Breaking the chain
But the benefits of both of these forms of indemnity are destroyed when a grantor deeds property to another by limited warranty deed or quit claim deed. This is because the insured, or grantee under a warranty deed, no longer has a risk or “an insurable interest” in title to the property when he conveys the property away by quit claim deed. And since a limited warranty deed only applies to title problems arising after the grantor acquired title, there is nothing to blame on anyone else “up the chain”. Because that grantee can’t claim “up the chain,” the insured no longer has liability. And further, since the insurance or warranty covenant covers only the grantee’s or insureds “risk,” and he no longer has any exposure, there is nothing to insure or against which to indemnify.
Insured’s estate planning or asset planning
Many times, an owner of real property will convey property into his own limited liability company or estate planning trust for liability protection or tax benefits. And in doing so, whether on their own or through their attorney, the owner transfers the property by quit claim deed. That’s effective to transfer real estate, but all of the benefit of the title insurance (that someone paid good money for) or the warranty deed is completely, unconditionally and forever destroyed.
A better option: General Warranty Deed
Thus, when conveying property between an owner, and his trust or his own LLC, it is advisable to do so by means of a general warranty deed, thus preserving all benefits acquired by an owner’s policy of title insurance or general warranty covenants.