By: Robert S. Bozarth (Fidelity National Title Group) and Stevens A. Carey (Pircher, Nichols & Meeks LLP)
This article will propose, for review and comment, a form of equity title insurance endorsement. [1]
By “equity title insurance,” the authors mean title insurance provided to the purchaser of an equity interest in an entity (typically, a limited liability company or a partnership) that, directly or indirectly, owns real estate. There is a need for such insurance but little uniformity, and potential shortcomings, in the manner in which it is currently obtained, if obtained at all. A recent article explained the need and some of the related challenges when a buyer purchases a membership interest in a real estate venture:
The buyer may be concerned that the venture’s existing title insurance coverage is inadequate because:
- it is out of date;
- it may be less than the current value of the property; and
- it may not be available due to the knowledge, acts or omissions of the existing members.
If so, the buyer may want better title insurance. But unless the selling or continuing member is willing to pay the additional costs, the buyer may not want coverage for more than its interest. Will it be possible to obtain acceptable coverage for the buyer alone and if it is possible, will it be complicated and time-consuming to do so? Whether the buyer is obtaining new coverage or relying on existing coverage, it may still not want that coverage to be impaired by the knowledge, acts or omissions of the existing members. The selling member may be willing to provide a non-imputation indemnity as to its own knowledge, acts or omissions. But who will be willing to provide a non-imputation indemnity as to the continuing member?
Carey, Real Estate Venture Exit Strategy Provisions, 33 Prac. Real Est. Law. 41, § 4.4.1 at 46 (March 2017) (endnotes omitted).
Assuming the requisite non-imputation indemnities are obtained, the concerns identified above are often addressed by obtaining an owner’s title insurance policy (with the buyer as the named insured) and then attaching an ALTA Endorsement No. 15.2‑06 (Non‑imputation – Partial Equity Transfer). But does this approach work as intended in all circumstances? For example:
- If the coverage is limited to the equity value of the buyer’s membership interest, should a payment under a loan policy result in an automatic reduction in coverage under Section 11 of the ALTA owner’s policy conditions?
- How should claims under any pre-existing venture owner policy be treated and should there be an obligation to pursue the pre-existing policy first?
- How does one determine the relevant “proportionate share” when there is often, if not usually, a promote structure that is not proportionate.
The draft endorsement that appears at the end of this article is intended to address these and other related issues. This endorsement has not been reviewed, approved or otherwise endorsed by anyone other than the authors and we welcome further input to improve the form. Comments and thoughts may be directed to Robert Bozarth at robert.bozarth@fnf.com or Stevens Carey at scarey@pircher.com.
Please click here to see the proposed draft endorsement: 
draft_endorsement.docx
[1] This article was previously published in ACREL News & Notes in December 2017.
