This is the second part of a two-part series laying out a quick checklist covering title insurance issues—and highlighting topics that should be investigated. This is an important and often overlooked topic.
- Was UCC insurance obtained (covering attachment, perfection and priority of lender’s security interest in personal property)? Here are the types of transactions where UCC insurance is important:
–Factoring credit facilities (where the collateral includes a right to payment or claim covered by a UCC filing).
–Mezzanine loans (where the collateral is ownership interests in the borrower entity) covered by UCC filings.
–Asset based credit facilities (for example, where collateral includes inventory and accounts receivable covered by UCC filings).
–Mixed collateral structures (for example, where collateral includes both real and personal property—such as a hotel or a restaurant).
- Title insurance polices can contain a long listing of “exclusions” from coverage. There are items that are not covered by the policy. These can include the following, each of which can limit the use and value of the collateral: easements; restrictions; use agreements; development agreements.
–Do these exclusions impact the current use and physical attributes of the collateral?
- Note that zoning compliance and building code restrictions typically are not included in the basic title insurance coverage. Therefore:
–Does the policy contain a zoning endorsement?
–If “yes,” then what are the terms of the endorsement?
–Has the current use and physical attributes of the property changed since the issuance of the endorsement?)
Note that a zoning endorsement to a title insurance is a separate and distinct topic from ordinance or law casualty insurance. Apples and oranges.
- Does the title policy (and endorsements) in the file contain the terms requested at loan closing?
–For example, if the removal of the “creditors’ rights” exclusion was requested at closing, was it removed (or endorsed “out”) of the policy? A “creditors’ rights exclusion” removes creditors rights issues from coverage of the policy – such as fraudulent preferential transfers.
Note that creditor rights commonly present risks in these types of transactions:
–Multi-collateral, with separate SPE or “single purpose entity” ownership entities
–Leverage buyout transactions
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