By Jones Osborn II

Virtually every owner's policy of title insurance issued in Arizona contains a "patent exception." This is a standard provision which excludes title insurance coverage for "reservations in patents or in Acts authorizing the issuance thereof."

Is this something you should be concerned about if you are purchasing real property? The answer is - "sometimes."

What Is a Patent? First, let's define what is meant by a patent. In property law, the patent is the instrument by which the government first transfers title to real property to a private individual. In essence, it's a deed from the government. Because most land in Arizona was originally owned by the Federal government, the first recorded deed for property in Arizona is usually the patent. This means that if title is searched back through time, the search ends with the patent.

Patents are issued under the authority of a law, or Act, that spells out the details and conditions of the patent. Oftentimes the patent reserves mineral rights of various kinds, or certain water rights, or even easements.

The Patent Exception. As mentioned above, virtually every owner's title insurance policy issued in Arizona contains the standard patent exception, which is very general. Some policies will also contain an additional and more specific patent exception set forth in what is known as "Schedule B, Part II," which is the specific list of title insurance exceptions for the particular property being insured. This specific exception often (but not always) summarizes the type of exceptions contained in the patent. For example, policies often contain an exception stating something like the following:

This specific exception is obviously helpful because it alerts the buyer to the nature of the patent exception so he can decide for himself whether there might be a problem.

When To Be Concerned. Because patent exceptions are so commonplace, it is tempting to ignore them. In most cases, the patent exception never causes a problem because the rights reserved in the patent are never exercised, or if they are, they are exercised in a manner which causes no damage to the property.

Every so often, however, the patent exception does cause a problem, sometimes a big one. If your policy contains a patent exception, as most do, you may not have insurance to protect you against that problem. Therefore, it is wise to pay at least some attention to the patent exception and to consider the risk it may pose for you as a property owner.

An actual case can illustrate the type of problem that can occur. Recently, an individual purchased several adjacent parcels of land in north Scottsdale for the purpose of combining them into a single lot and building a large home. His title policy contained a general patent exception, but it didn't specify that each of the parcels was subject to the reservation in the patent of a 33-foot public roadway easement along one or more boundaries. This meant that the parcels could not be combined because there were unused public roadway easements crossing the middle of the assembled parcels. When he filed a claim with the title insurance company to indemnify him against the loss caused by the undisclosed easements, it denied coverage because of the general patent exception.

The first step in protecting yourself is to examine the patent exception in the commitment for title insurance to see if the nature of the patent exception is disclosed. This will help you decide if it is a problem. If the patent exception set forth in the commitment is silent about the nature of the patent exception, or if you wish to be particularly careful (as you might be for a large purchase) you can order a copy of the patent from the title company and review it for yourself.

If, after reviewing the patent exception, you still believe you may have a problem, you might decide to cancel the purchase or in some cases you may decide to purchase a patent endorsement to your title policy. The price of the endorsement is normally very reasonable, and it can provide substantial additional protection. Because patent endorsements differ in exactly what they cover (for example, some cover only damage to improvements while some cover all losses), you should carefully read the endorsement before purchasing it to make sure it covers what you want to cover. (Some title companies refer to the most complete endorsement as Special Endorsement No. 6.)

Conclusion. Do not blithely ignore the patent exception in your commitment for title insurance. Be sure you understand the nature of the reservations contained in the patent, and if they appear to be a potential problem, consider whether you should decline to purchase the property or obtain a patent endorsement.