Title Talk Archive
Indemnity Treaty Revised
     
     The Inter-Underwriter Indemnification Agreement (commonly known as the “Indemnity Treaty”) has been amended and restated as of December 2009, and has now been executed by almost all title insurers doing business in New Jersey. 
 
     In 2006, most of the title insurance underwriters doing business in this State entered into an Inter-Underwriter Indemnification Agreement (commonly known as the “Indemnity Treaty”). It was later amended by a First Amendment (2006). The 2006 Treaty (as amended) served to eliminate the preparation and delivery of indemnity letters in most (but not all) circumstances where they were pre- viously customarily issued. In 2009, the underwriters decided to improve the treaty by revising it. The result is the Amended and Restated Treaty of December 2009. The December 2009 version supersedes the original 2006 Treaty and its First Amendment, and is referred to herein as the “Treaty (2009)”.
 
     Many of the revisions made in the Treaty (2009) are technical in nature, but others are substantive. Nevertheless, the basic principles under- lying the operation and effect of the Treaty (2009) (discussed in more detail below) remain the same. A summary of the most significant changes follows:  
  1. A definition of the word “Estate” has been added.
  2. The liability limit has been increased from $500,000 to $1,000,000 (or face amount of the existing policy, whichever is the lesser).
  3. The scope of the coverage has been expanded to include the following title objections:
 judgments, federal tax liens and any other statutory or common law liens; 
 alleged or actual defects or irregularities in judicial proceedings; and 
 lack of a metes and bounds or filed map description, or scrivener’s  errors (provided that the land conveyed is identifiable)
  
     How does the Treaty (2009) work? The short answer is that it works the same as the 2006 Treaty. Assume that an examination of title discloses the existence of an unsatisfied mortgage made by a prior owner. The open mortgage is set up as an exception in the commitment, and then a policy insuring the current owner, which policy does not list the mortgage as an exception, is produced. It is unnecessary to request a letter of indemnity from the insurer which issued the policy in order to omit the mortgage as an exception. The Treaty (2009) provides that the title insurer is indemnified against loss, as if an indemnity letter had been issued. But, even though the Treaty (2009) is broader in scope than the previous versions, it is important to remember that it does notapply to all situations. For example, tidelands claims and outstanding ownership interests are still not covered. 
  
     The Treaty (2009) uses the terms Prior Insurer and Current Insurer (as did the previous versions). Prior Insurer means the company which has issued a policy (which is still in effect) and which is thereby being requested to indemnify the Current Insurer. The policy must – in general -- be an owner’s policy. If the Prior Insurer’s policy is a loan policy, the insured lender (as opposed to another party) must have acquired title by foreclosure or deed in lieu of foreclosure.
 
     The Prior Insurer’s policy must not have lapsed; i.e., the insured under the policy must still hold title to the land insured. Assume that B obtained a policy from X Title Insurance Co., but B has conveyed to C, and Current Insurer is asked to insure a conveyance from C to D. The Treaty (2009) is not effective against X, because its policy lapsed when B conveyed to C. 
           
     It is also important to remember that the liens, interests and other matters listed above cannot have arisen against the current owner. They must have arisen against a prior owner and must not have been excepted from coverage. This is because the Treaty (2009) does not cover matters which are excluded or excepted from coverage under the existing policy.  
           
     The Current Insurer is indemnified by the terms of the Treaty (2009) “… against loss or damage, including reasonable legal fees…”. The amount of indemnification is limited to the lesser of: (a) the face amount of the Prior Insurer’s policy; or (b) $1,000,000.00 (formerly $500,000). Note that the Treaty does not require the Prior Insurer to take 
affirmative steps to remove from the record an exception raised by Current Insurer. Instances where so-called performance (or undertaking) indemnity letters were customarily requested under prior practice are thus beyond the scope of the Treaty (2009). 
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