When The Left Hand Is Not The Same As The Right


It is commonplace for an owner of real estate to convey their property from one entity that they own or control to another that they also own or control. There are many reasons for such transfers, including, most commonly, the desire to hold a particular property in a "single purpose entity" in order to satisfy a lender's requirement, or to attempt to shield the asset from potential creditors of the transferring entity. While owners who engage in such transactions may give consideration to the effect that the transfer will have on an existing loan, or possible tax implications, it is likely that little, if any, thought is given to the potential impact of such a transfer on the title insurance coverage of the transferring entity.

It is common for the title insurance policy obtained by an owner of real estate to include language that the coverage afforded by such policy remains in effect only "so long as the insured retains an estate or interest in the property," or only "so long as the insured shall have liability by reason of covenants of warranty made by the insured in any transfer of the property." Whenever the insured owner transfers its property, even if from one entity that it owns to another, it runs the risk of its title insurer asserting that it "no longer owns an estate or interest in the property," and thus, the coverage afforded by the policy no longer is in effect. While the owner may argue that such a transfer is merely a transfer from the owner's proverbial "left hand" to its "right hand," various courts (there is no case directly on point in Arizona, yet) have rejected such an argument, and have held that regardless of the close relationship between the transferring entity and the entity to which the property was transferred, the coverage afforded by the policy no longer applies.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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