Among the many business risks involved in loaning money, a lender must be aware of potential title issues affecting the property securing its loans, including undisclosed prior liens and other encumbrances that may reduce or destroy the lender’s security. Although much of this risk is ameliorated when a lender obtains a title insurance policy, an issue arises when an insured lender suffers a loss because of a title issue: the date on which the loss is calculated under the policy. Some title insurance policies define which date should be used to calculate the loss—for example, certain title insurance policies in use in Texas state that the measure of damages is “based on respective values determinable as of the date of this policy.” However, most policies do not.
The date of loss matters because lenders’ title insurance policies typically limit liability to the lesser of the amount listed on the policy, the amount of the indebtedness, or the difference in value of the insured property with and without the defect. Therefore, the date on which the loss is determined affects whether the lender can recover the full amount loaned. Moreover, if the court addressing a dispute between the lender and title insurance company follows the majority rule and uses the date of the foreclosure sale, as opposed to the date of the loan, the lender’s recovery is likely subject to any post-closing real estate market turbulence.
