Crisis and Risk Management: The Legal Whiteboard : Risk Management Lawyer & Attorney for Online Reputation, Crisis Management & Media Law

The current economic crisis has just suffered another casualty: the standard form creditors' rights coverage. Creditors’ rights coverage is often  viewed by lenders to be one of the most important risk management tools when negotiating title insurance coverage. That’s because the ability to purchase creditors’ rights coverage permits the shift of the risk of loss to the title company for any “covered” real property asset. More specifically, it provides coverage for the losses incurred where the subject transaction is voided by a bankruptcy or other applicable insolvency laws. Moreover, it also provides coverage for significant costs incurred in defending fraudulent conveyance or other preference challenge-type claims

While this is not a shocking development, as the availability of the coverage has been diminishing over time, it’s a significant jolt. When did this occur? Recently, The American Land Title Association (ALTA) actually decertified the ALTA Endorsement Form 21/21-06, which provides an insured with coverage against challenges and claims arising out of insolvency-type claims. This decertification went into effect on March 8, 2010. In fact, most title companies have already advised clients that they will no longer offer creditors’ rights coverage under new policies, and not will such endorsements be added to existing policies. Keep in mind, however, that decertification of the ALTA 21 does not mean that title companies cannot continue to offer creditors' rights coverage, unless prohibited by state law. Even if title insurance companies offer a special endorsement in the future, the level of coverage it will provide is unclear, and it will be likely be more expensive the  ALTA 21 Endorsement.

 How does this affect existing and future transactions? This change has already affected existing transactions and has indeed prevented some deals from closing. As to future transactions, without this coverage, lenders and buyers of distressed debt will need to perform even more extensive due diligence in order to better assess the risks of structuring transactions that could be subject to attack under applicable insolvency laws when entering into real estate purchase and/or financing transactions. Take a look at the factors title companies were examining when underwriting the insurance back in 2003. Borrowers will need to seek new advice to meet the changing expectations of their lenders. There is little information available as to which title insurance companies, if any, will offer cost-effective coverage. So for now, parties need to work to create new structures or transactional guarantees and alternative solutions to address the lack of creditors’ rights coverage. Now is a good time to update your title insurance checklist as part of your due diligence process because this may not be the only risk that has changed in the real new economy.Borrowers will need to seek new advice to meet the changing expectations of their lenders. There is little information available as to which title insurance companies, if any, will offer cost-effective coverage. So for now, parties need to work to create new structures or transactional guarantees and alternative solutions to address the lack of creditors’ rights coverage. Now is a good time to update your title insurance checklist as part of your due diligence process because this may not be the only risk that has changed in the real new economy.
 

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