Marketable title is one of the more difficult title insurance coverage concepts to grasp because it seems to conflict with the common sense usage of the term "marketable." Virtually all title insurance policies provide coverage against the loss and damage associated with unmarketable title and each policy and version of a particular policy has its own definition of unmarketable title. The ALTA Loan Policy (6-17-06) jacket defines an unmarketable title in the following fashion:
(m) "Unmarketable Title": Title affected by an alleged or apparent matter that would permit a prospective purchaser or lessee of the Title or lender on the Title or a prospective purchaser of the Insured Mortgage to be released from the obligation to purchase, lease, or lend if there is a contractual condition requiring the delivery of marketable title. 1
Two words in this definition "title" and "marketable" provide the key to the confusion surrounding the concept. When one uses the word market in a financial context, he thinks of the stock market or the real estate market. Both of these markets revolve around the concept of value. What is the price of the stock? How much is the parcel of real property worth? But marketability in the context of title insurance is not a value concept. It relates to the condition of Title (with a capital T) that is the subject of the insurance.
A 1951 California Supreme Court case, Hocking v. Title Insurance and Trust (1951) 37 Cal. 2nd 644, 651 sets this proposition forth in axiomatic form: "One can hold title to land that is valueless; one can have marketable title to land while the land itself is unmarketable."
The plaintiff in Hocking purchased two unimproved subdivision lots in Palm Springs. The developer had failed to comply with a city ordinance which required the posting of bonds and agreements for paving and grading the streets in the subdivision before recording the map. The plaintiff alleged that grading and paving expenses would be in an amount in excess of what she had paid for the lots. She stated that without the bonds which would get the streets paved in place she really did not have title to subdivision lots.
The California Supreme Court disagreed. It said that the failure of the developer to comply with the city ordinance impaired the value of the lots but did not make them unmarketable. The court said that she had fee simple title to the lots for whatever that was worth and that if she had been damaged by false representations she needed to turn to the party who had made them not the title insurer. Marketability applied to the title to the lots which was not impaired not their value which was.2 She had marketable title to the lots even though it was improbable that she could sell or develop them with graded and paved streets.
Hoching is in accord with an earlier case, Nishiyama v. SAFECO Title Insurance Company (1978) 85 Cal. App. 3d Supp 1. The plaintiffs argued that the property had been subdivided in violation of the California Subdivision Map, CA Government Code § 66499.30 et. seq. and that non-compliance with the Act made the property unmarketable. The sellers had not been aware of the violation. But the policy contained an exclusion from coverage for failure to comply with governmental regulations, and ordinances. The violation of the Act did not prohibit or prevent the buyers from reselling the property, so the Litle was marketable, even though it was unlikely anyone would buy or lend on the lots until the violation had been cured.3 Under the terms of the policy the insured is indemnified against a defect that exists prior to the issuance of the policy that makes the policy unmarketable but does not guarantee that the title will be marketable in the future. 4
Similarly in Dollinger Deanza Associates v. Chicago Title Insurance Company (2011) 199 Cal. App. 4th 1132, Chicago Title issued the plaintiff a policy that described the land in terms of a parcel map that showed seven separate parcels. The policy did not show a notice of merger that made the seven lots one. The existence of seven separate parcels was crucial to the plaintiff because it intended to sell one of the parcels. The plaintiff alleged that the merger made the single parcel unmarketable.
Douglas Borchert, JD, is an accomplished California Real Property & Title Attorney with over 40 years of experience in Title Insurance. Mr. Borchert worked in all aspects of the business from Poster to Title Officer to Title Insurance Underwriting Attorney. He has experience with commercial and residential transactions of every type involving liabilities running into the tens of millions of dollars. Mr. Borchert has worked on all facets of title insurance and escrow for Western Title Insurance, SAFECO Title Insurance, and TICOR Title in Sacramento, Tulare, and Ventura Counties.
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