QUIT CLAIM DEED MAY VOID TITLE INSURANCE COVERAGE

Quit Claim Deed May Void Title Insurance Coverage

The next time you plan to transfer property by Quit Claim Deed, stop and think. The transfer might invalidate your title insurance policy.

The Michigan Court of Appeals recently considered this very issue. An individual, Thomas Prose, purchased a building through his corporation. He was the sole shareholder. Metropolitan Title Company issued the title commitment and First American Title Company underwrote the title insurance policy. The policy named the corporation as the insured. The title commitment and policy both failed to reflect a detrimental recorded easement burdening the property.

Shortly after closing, the corporation transferred the property by Quit Claim Deed to Tom Prose's wife. The transfer was done for estate planning purposes. After discovering the easement, the corporation sued both title companies. The corporation claimed the property had decreased value as a result of the easement.

The Michigan Court of Appeals held that the title insurance policy coverage terminated when the corporation executed the Quit Claim Deed. Why? Because the corporation did not retain any ownership interest in the property. The corporation's argument that the Quit Claim transfer was done only for estate planning purposes, did not carry any weight with the Court.

The Court may have reached a different result if the transfer were done by Warranty Deed. The fine print in the title policy, like most title policies, states that, "The coverage shall continue in force in favor of an insured only so long as the insured retains an estate or interest in the land ... or only 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 highlights the difference between a Quit Claim Deed and a Warranty Deed. A Warranty Deed warrants certain matters pertaining to title. In contrast, a Quit Claim Deed warrants nothing. It conveys whatever interest the Grantor actually holds, if any.

Assume you purchase property, receive a Warranty Deed and owner's title insurance policy. You then transfer the property to your spouse, a living trust or a related corporation (the grantee) for estate planning, tax or business purposes. After the transfer, you discover a title defect. If you transfer the property by Quit Claim Deed, the grantee has no recourse against you, since you quit claimed the property. Therefore you could not make a claim under your title policy. On the other hand, if you transfer the property by Warranty Deed, upon discovery of the title defect, the grantee may maintain an action against you for breach of the title warranties inherent in a Warranty Deed. This could then permit you, as insured under your title insurance policy, to make a claim.

Moral of the story: The next time you transfer property for business, tax or estate planning purposes, think about using a Warranty Deed. It could preserve your rights under the title insurance policy.

Gregg A. Nathanson is a shareholder with the law firm of Couzens, Lansky, Fealk, Ellis, Roeder & Lazar, P.C. in Farmington Hills, Michigan. Mr. Nathanson practices real estate, environmental and general business law. Mr. Nathanson is a frequent speaker at Michigan State Bar and Institute of Continuing Legal Education programs. He has published articles on various topics in real estate law and recently edited the book, Michigan Residential Real Estate Transactions. Mr. Nathanson also chairs the Michigan State Bar Residential Transactions Committee. He may be reached at (248) 489-8600; or by E-mail at gregg.nathanson@couzens.com.

Reprinted with Permission from Building Business & Apartment Management