Business Law

Transfer to an LLC May Void Title Insurance

It is common that an individual will transfer real property to an LLC either to pursue asset protection or to achieve estate and gift planning.  Often the owners neglect to either transfer title or liability insurance,  sometimes to their detriment.  A recent decision cautions members to pay attention to transferring title insurance to LLCs at the time they transfer legal title to the property

In Pak vs. First American Title Insurance Company, 2020 WL 6886551 (Cal.App.2 Dist., 2020) the Paks acquired real property in 2003 and obtained a title insurance policy from First American.  In 2008, they formed an LLC and quitclaimed the property to an LLC but neglected to obtain a binder transferring the title insurance to the LLC.  In 2018, when an issue arose concerning a parking easement, they made a claim on the policy.  

Section 2 of the Policy’s listed conditions and stipulations (“Condition 2”) stated:  “The coverage of this policy shall continue in force as of Date of Policy in favor of an insured only so long as the insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money mortgage given by a purchaser from the insured, or so long as the insured shall have liability by reason of covenants of warranty made by the insured in any transfer or conveyance of the estate or interest. This policy shall not continue in force in favor of any purchaser from the insured of either (i) an estate or interest in the land or (ii) an indebtedness secured by a purchase money mortgage given to the insured.”

First American successfully argued that:

“Because the quitclaim deed to the LLC divested the Paks of any estate or interest in the Property, and the policy’s coverage – which only continued in favor of the insured so long as the insured retained an estate or interest in the land had lapsed. “ .  .  .  “Because it is well established that a limited liability company is an independent legal entity and the members of such a company have no interest, much less a fee interest, in the company’s property, the transfer of the Property to the LLC triggered Condition 2 and terminated the Policy.”

The Paks effort to revoke the quitclaim deeds were found to be ineffective.  This case points out the importance of transferring title insurance coverage at the same time that the property is transferred to an LLC but the same can be said of liability and other forms of insurance. 

This e-bulletin was prepared by Phil Jelsma, Esq., of Crosbie Gliner Schiffman Southard & Swanson LLP, in San Diego.  pjelsma@cgs3.com

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