Voiding Title Insurance by Titling Property in LLC After Closing?

11 Replies

Hey there BP Legal Community. I recently closed on a SFH, am under contract on two others, and am looking forward to buying 3 more before year's end. Aside from adequate Landlord/Liability/Umbrella Insurance, I am also working to title each property in an LLC all it's own for added asset protection. Luckily for me the cost to do this are very low given the state I am invested in (Louisiana). I thought I knew all there was to know on how to properly execute this strategy (i.e. no co-mingling of monies, 'due on sale' clause, etc) but at closing, I was informed by my title company that doing this will invalidate my title insurance as it only covers myself, not the LLC. first, is this true and second, if so, is there anyway around this?

They're saying that because you're closing on the property using the LLC that it invalidates title insurance? That seems odd to me. I know we're in different areas, but all my properties are in LLCs and they all have title insurance.

Perhaps ask someone else in that office or call up other title companies and ask them.

Is the original, individual buyer the sole Member of the LLC? Is this a Zero consideration ($0) transfer? If so, the LLC would meet the definition of "the Insured" under the standard ALTA owners policy... per the below

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(d) “Insured": The Insured named in Schedule A.

(i) the term "Insured" also includes

(A) successors to the Title of the Insured by operation of law as distinguished from purchase, including heirs, devisees, survivors, personal representatives, or next of kin;

(B) successors to an Insured by dissolution, merger, consolidation, distribution, or reorganization;

(C) successors to an Insured by its conversion to another kind of Entity;

(D) a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the Title

(1) if the stock, shares, memberships, or other equity interests of the grantee are wholly-owned by the named Insured,

(2) if the grantee wholly owns the named Insured,

(3) if the grantee is wholly-owned by an affiliated Entity of the named Insured, provided the affiliated Entity and the named Insured are both wholly-owned by the same person or Entity, or

(4) if the grantee is a trustee or beneficiary of a trust created by a written instrument established by the Insured named in Schedule A for estate planning purposes.

(ii) with regard to (A), (B), (C), and (D) reserving, however, all rights and defenses as to any successor that the Company would have had against any predecessor Insured.

@Tom Gimer I don't think he's saying that the owner/seller is a LLC. He's saying that the title company will not give him title insurance because he intends to purchase the property in his own LLC.

@Account Closed

You personally will still have title insurance. If the LLC doesn't buy title insurance the LLC won't have title insurance. You can talk about a transfer of title insurance from you to the LLC with the title company.

Why aren't you buying the property in the LLC name and also doing all insurance in that name?

Originally posted by @Nicole A. :

@Tom Gimer I don't think he's saying that the owner/seller is a LLC. He's saying that the title company will not give him title insurance because he intends to purchase the property in his own LLC.

His title company should just close shop already if that's what they are telling customers. 

The way I read his post, he's acquiring these properties in his individual name and then transferring them to his wholly-owned LLC.

@Nicole A. My apologies, I should have been a bit clearer. I am leveraging this property personally, not under an LLC. I simply wish to quit claim it to the LLC and manage it accordingly. I can add the LLC as a 'Covered Persons' to the current insurance policy and my lender advised me not to be concerned about the 'Due on Sale' clause - I have it in writing.

@Tom Gimer It will be a zero consideration transfer. Would I still be in the clear if the LLC was my wife and I instead of just me? I'd like to add language to the OP Agreement that prevents forced transfer (subject to partner approval).

Also, just to be even clearer, I have title insurance for myself personally (the purchaser). I've been advised that once the property is deeded to the LLC, then that LLC would need to buy Title Insurance as mine would not cover the LLC and would be essentially void.

Ah okay! I'm tracking now. I read it 5 times and thought my brain must be fried for the day. =P

Tom can probably help more as I'm no pro in title specifics, but I do believe what they told seems probable to be accurate.

Originally posted by @Account Closed It will be a zero consideration transfer. Would I still be in the clear if the LLC was my wife and I instead of just me? I'd like to add language to the OP Agreement that prevents forced transfer (subject to partner approval). 

Also, just to be even clearer, I have title insurance for myself personally (the purchaser). I've been advised that once the property is deeded to the LLC, then that LLC would need to buy Title Insurance as mine would not cover the LLC and would be essentially void.

The wife screws this up if she's a member of the LLC but not an original buyer (and therefore not the named insured under the title policy). The way I would solve this is take title with wifey then convey to jointly-owned LLC in exact percentage as acquisition/LLC membership.

The problem is the transfer method - the Quit Claim Deed. @Account Closed mentioned), and how “insured” is defined in the policy. You take a risk which could result in cancellation of your title insurance and complete loss of your real property without compensation in the event that a title issue regarding your real property arises.

Contact your title insurance company to determine coverage and if your policy does cover transfers , and when or how. 

Or...use a warranty deed to transfer with title insurance.

I wrote a blog article about this a few years back: https://www.biggerpockets.com/blogs/4643/47008-why-the-quitclaim-deed-might-void-your-title-insurance

Long and short of this is that a warranty deed can be the solution to the issue by maintaining the chain of "warranty" liability through yourself to your LLC.

You may also be able to rely on the "without consideration" conveyance mentioned above.