By Jones Osborn II

Every commitment for title insurance contains a list of exceptions disclosing the liens, easements, restrictions, and other matters that will not be covered by the policy. These are the specific items that a particular property is burdened with, and they will generally be described by title, date, and recording information. They are sometimes referred to as the "Schedule B items." For example, a property may be subject to deed restrictions, an easement for a power line, and an existing mortgage, each of which will be described with particularity in the "exceptions" portion of the commitment. If not removed prior to the closing, they will eventually become exceptions in the insurance policy itself, meaning that the buyer has no insurance protection for matters arising out of the listed exceptions.

Even experienced buyers, however, often ignore the exclusions set forth in the commitment. Exclusions are different from exceptions in that exclusions are a description of general types of matters that the policy simply does not cover.

Exclusions. All policies issued in the State of Arizona are subject to the same or very similar exclusions. They may be summarized generally as follows:

• Claims arising out of laws, ordinances, or governmental regulations, unless there is a recorded notice of a violation or a lien resulting from the violation. Examples include zoning laws, building codes, parking requirements, lot split or subdivision requirements, and environmental matters. This is sometimes known as the "police power" exclusion, and it means that the policy does not insure against any loss arising out of the government's inherent power to regulate the use of real property.
  
• Losses arising from the exercise of the power of eminent domain, or condemnation, unless notice of the pending condemnation has been recorded against the property or the condemnation has been completed. This means that the buyer has no title insurance protection if all or a portion of his property is condemned or threatened with condemnation after the closing unless notice of the pending condemnation was filed with the County Recorder prior to close of escrow. Of course, the buyer is entitled to compensation from the government, which may or may not be adequate under the circumstances.
  
• Claims arising out of matters known to the buyer but which are (a) not recorded and (b) not known to the insurance company, unless disclosed to the insurance company in writing. This prevents the insured from sandbagging the insurance company by purchasing property with a known title defect, and then pursuing a claim against the title company. If a buyer knows of a title problem not shown on the commitment, he should notify the insurer in writing to avoid risking his coverage.
  
• Losses arising out of matters attaching or created after the date of the policy. This might seem obvious, but inexperienced purchasers sometimes assume that title insurance policies protect them against title problems even if they arise out of claims attaching after close of escrow, which is simply not the case.
  
• Claims that are based on the failure of the buyer to pay fair value for the property. Basically, this means there is no insurance if the sale is later set aside on the theory of "fraudulent conveyance," which is a law designed to protect creditors from an insolvent debtor disposing of his property for less than fair value. Therefore, if a buyer has reason to believe the seller is in financial trouble and that the property is being sold for substantially less than its fair value, the buyer should be aware that he may have no title insurance protection if the sale is later set aside. Successful fraudulent conveyance claims are typically brought against relatives, friends, or others receiving preferential treatment from an insolvent seller, but they can be brought against any purchaser who fails to pay fair value to an insolvent seller.
  
• Claims based on a sale being deemed a voidable preference under the bankruptcy laws. In general, this means that when a property is sold or transferred for less than fair value within 90 days of the bankruptcy of the seller, the buyer has no claim against the title insurance company if the sale is later set aside by the bankruptcy court.

Conclusion. Exclusions cover matters that occur relatively infrequently. However, if they void coverage in a particular case, the results can be disastrous. Therefore, it is important to be aware of the exclusions from coverage that are a part of every policy and to take steps to protect yourself if you are purchasing property where an exclusion may apply. If you know of a potential problem covered by an exclusion, you should discuss it with the title company to see if the exclusion can be deleted or if an endorsement insuring over it can be purchased. If not, you should consider carefully whether you ought to proceed with the purchase.