A recent unpublished California Court of Appeals decision in Pak v. First American Title Insurance Company, 2020 WL 6886551, involved issues important to the title insurance industry and its insureds. The California Court of Appeals held that coverage under a title insurance policy terminated when the originally-named insureds transferred title to their property to a wholly-owned LLC via a quitclaim deed per the language in the title insurance policy at issue, and further held that the title insurance policy could not be reinstated by rescinding the quitclaim deed.

In Pak, the plaintiffs purchased a commercial property in 2003 in their individual capacity and secured a title insurance policy from the defendant. In 2008, plaintiffs transferred their property via a quitclaim deed to an LLC in which the plaintiffs were the sole members. In 2017, a group of third parties purchased a neighboring property and informed plaintiffs that a portion of the plaintiffs’ property was burdened by an easement that granted the neighboring property the right to use a parking lot on the plaintiffs’ property. Plaintiffs notified defendant of the adverse claims against the property and made a claim under the title insurance policy. Defendant denied the plaintiffs’ claim on the grounds that the quitclaim deed to the LLC divested the plaintiffs of any interest in the property (as required by the condition of policy), thus voiding coverage of any such claims. In August 2018, plaintiffs rescinded the quitclaim deed and notified defendant of the recission. Defendant again denied coverage, reasoning that the title insurance policy was voided when title was transferred via the quitclaim deed from plaintiffs to the LLC and that the recission could not revive coverage. Plaintiffs then brought suit against defendant and the trial court dismissed the suit, finding that the title insurance policy terminated when plaintiffs transferred their property to their LLC.

The Court of Appeals affirmed the trial court decision and found that “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 Court also found that the recission of the quitclaim deed did not revive coverage because the title insurance policy immediately terminated upon the 2008 transfer. The court held that “the subsequent recission of the quitclaim deed did restore the plaintiffs and the LLC to their pre-contracts statuses vis-à-vis each other, but it did not erase the consequences and effects of originally executing the quitclaim deed, including the violation of Condition 2 and termination of coverage.”

Generally, obtaining title insurance provides the owner peace of mind that most types of adverse claims against its property rights will be covered by the title company. However, based on the language of your specific title insurance policy, transferring a piece of property into a wholly-owned LLC, via quitclaim deed, may very well void the policy protections a property owner believes are in place.  If you have transferred property into a wholly-owned LLC via quitclaim deed, you should review your title insurance policy to determine whether there is a chance coverage has terminated as a result of the transfer.  If so, and if title insurance may be important to you in the future, add-ons or renewed coverage options are very likely available.

Based on this recent ruling, it is advisable that you review your title insurance policy prior to any transfer of title to a wholly-owed LLC. Further, we recommend you contact your title company and inquire whether the title insurance policy can be amended to add the LLC as an additional insured. Otherwise, you may risk termination of the title insurance policy and the coverage it affords at the time when it is most needed.