Usually, an individual will transfer real property to an LLC either to pursue asset protection or to achieve estate and gift planning. However, owners commonly neglect to either transfer title or liability insurance. A recent decision shows why owners need to pay attention to transferring title insurance to LLCs at the time they transfer legal title to the property.
In the California Second Appellate District case of Pak v. First American Title Insurance Company, 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 the 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 contended:
“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. The starkly shows the importance of transferring title insurance coverage at the same time that the property is transferred to an LLC.
If you are forming a business entity or transferring real property to the entity it is imperative that you first discuss the entire process and its consequences with your business attorney.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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