Posted over 8 years ago

Why the Quitclaim Deed Might Void Your Title Insurance

In an earlier post, we covered a brief history of deeds and what the quitclaim deed actually does versus a warranty deed. In this post, I'll take you into an actual title insurance policy and explain why using a quitclaim deed to convey property is almost always a bad idea when you or your company is on the receiving end.

Do a search for "quitclaim" on BiggerPockets and you'll find plenty of posts advising people to use them. As a title insurance agent, I want you to take this advice with a giant boulder of salt, and also to understand why warranties are important, especially when you give them to yourself!

In order to do this I pulled this excerpt directly from a title insurance policy that I have used for a client in the past. Pay careful attention to the language that mentions "warranties."

Normal 1446826528 Title Insurance Jacket Excerpt Warranties

Okay, so we're looking at a clause that defines how long the title insurance coverage will last. Let's break this down into list format. Insurance coverage will continue only as long as:

the policyholder owns the land;
the policyholder sold the land with seller financing and still has a mortgage on the land;
as long as the policyholder is on the hook because he gave warranties to a purchaser.

What's the practical application of this?

Let's assume John Doe holds some rental property which he conveys to his LLC using a quitclaim deed. Later, the LLC is sued by the wife of the previous owner of the property because she never signed the deed conveying the property to John Doe. She wants $30,000 to sign away her interest. Doe pulls out his title policy, calls his agent, and the agent tells him no deal: John Doe no longer owns the property, he doesn't hold a mortgage on the property, and he never gave warranties to the current owner. The title agent tells him to take a hike, and good luck with the lawsuit.

How could this have been prevented? If John Doe had only used a warranty deed to convey his property to the LLC, the title policy would have still covered him because of the third clause. The scrappy lawyer he hired to represent the LLC will immediately join John Doe in the lawsuit under warranties of title, and John Doe can now bring in his title company to take over his defense in the litigation. Problem solved.

Be wise, guys: use warranties. What have you got to lose if you give a warranty to yourself?

All the best,

Christian Carson
Attorney & Counselor at Law
Principal, Carson Law Firm LLC
Principal, Fairmount Title Agency LLC

Comments (3)

This article is an oversimplification and may be bad advice.
Step 1 of any investor considering this scenario is to review the Definition section of the Conditions and Stipulations of the Owners Jacket (Owners's Policy of Title Insurance). "Insured" is a defined term. Insured maybe defined as "a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying Title ....(1) if the stock, shares, memberships, or other equity interests of the grantee are wholly owned by the named Insured, (2) if grantee wholly owns the named insured.
This is not legal advice stating you may be covered in a QCD scenario. Always contact your Title company and your separate independent Real Estate Attorney to review the Policy prior to making your QCD decision.

Brad Schaeppi, about 8 years ago
1. One may be able to rely upon coverage concerning a "deed delivered without payment of actual consideration," but the issue of whether valuable consideration was actually paid will probably be one of material fact, giving the insurer the ability to deny the claim and invite litigation. By contrast, when the LLC grantee takes via warranty deed, the individual grantor, (the "Insured"), may make a claim by virtue of his or her duty to defend the title of the grantee LLC, and there would be no issues of fact allowing the insurer to deny the claim in good faith.
  As it were, your mileage may vary, and the applicability of law varies based on individual circumstances of every case, so you ought to seek an attorney to check your own situation against these vague musings before doing anything that would trigger a malpractice claim.
  
  Christian Carson, almost 6 years ago
Title issues are a real issue, which most people ignore.

Russell Brazil, over 8 years ago