What is the difference between an Exclusion and an Exception?

In one of my earlier blogs, I discussed the different parts of the title insurance policy. One of the parts of every title insurance policy is the part dealing with Exclusions from coverage. In that blog, I said this about the Exclusions:

“The policy Exclusions limit the coverage of the policy. They deal with issues that are outside the control of the title company, and for which the title company assumes no liability. The ALTA Owner’s Policy contains five exclusions, which include matters such as governmental regulations on the land and eminent domain, as well as title matters created or agreed to by the insured, or title defects known to the insured but not disclosed in writing to the title company prior to the date of the policy. The policy does not insure against any defect or title issue that is created or attaches to the property after the date of the policy. Also, the policy does not insure against the effects of bankruptcy law on the transaction creating the insured interest.”

The Exclusions are part of the boilerplate language that is printed on the jacket of every title policy issued. The Exclusions apply to every policy and are not transaction specific. You can see the actual wording of the ALTA Owner’s Policy exclusions at the ALTA website http://www.alta.org/forms/ . Scroll down the page to “Most Requested”, then click on “ALTA Owner’s Policy (6-17-06)”. The ALTA Loan Policy form has seven exclusions, and is also there for you to compare.

Exceptions, on the other hand, are not part of the boilerplate language, and are added to each policy on an individual basis. That means that exceptions are transaction specific, and are based on the status of the title, and the nature of the transaction creating the estate or interest insured. Exceptions are shown on Schedule B of title commitments (in order to show the exceptions that will be in the policy) and in Schedule B of the final policy. Having said this, it is important to be aware that a few states require all title policies to contain certain standard exceptions. One example is the state of Texas, which regulates the business of title insurance, and promulgates the forms of policies and coverages that may be given, including requiring Schedule B of all title policies to contain several standard exceptions.

For example, Texas regulations require a Schedule B exception for “Homestead or community property or survivorship rights, if any, of any spouse of any Insured.” This exception works for most residential transactions, but does not apply when commercial property is involved. However, the Texas regulations do not allow the title companies to delete this exception from any policy, and title people in Texas have to explain this to out-of-state attorneys on practically every commercial transaction. Another standard exception in Texas is “Any discrepancies, conflicts, or shortages in area or boundary lines, or any encroachments or protrusions, or any overlapping of improvements.” The regulations do, however, allow this exception to be amended to read “Shortages in area” if an acceptable survey is provided to the title insurance company. But the title companies are not allowed to totally delete the exception. Compared to Texas, most states do not have regulations requiring standard exceptions in policies, but in certain areas of the country, there are states that have developed standard exceptions in the title commitment, which can then be deleted or amended if the title company has been satisfied that they do not apply to the current transaction.

After the pre-printed standard exceptions, the title company will list exceptions to the title based on the title search, the survey, and any documents which affect the title. Examples of these are exceptions for easements and rights of way that are shown in the title search, as well as any encroachments or overlaps revealed in the survey. Any outstanding mortgages or deeds of trust will also be listed here, along with restrictions and covenants that run with or affect the land. Any leases, other possessory rights and mineral interests that affect the land are also shown here as Schedule B exceptions.

Sometimes, a title search will reveal an old document which affects the title, and the title company will list it as an exception in Schedule B of the title commitment. Often, these exceptions are old easements or mortgages which have expired or no longer affect the title, and the attorney for the proposed insured can ask the title company to delete the exception if she can prove that the item no longer affects the title. Other times, the title commitment may contain an exception that the purchaser or his attorney had not been aware of, and which could affect the purchaser’s ability to deal with the property as he intended. When the title commitment contains this kind of surprise, it is important for the purchaser or his attorney to contact the title company to determine the exact nature and extent of this exception. Title companies are often willing to review, negotiate, amend or delete a Schedule B exception if there are reasonable grounds upon which to do so. In some cases, the title company can be persuaded to accept an indemnity from the seller and insure over the risk described in the exception. But when the exception is a valid matter affecting the title, and there is no way to release or indemnify over the risk, it does not do any good for the purchaser or his attorney to insist that the title company delete it, because the title company’s underwriters are going to be unwilling to put the company’s assets at risk in the event of a claim over the matter, and asking the title company to do so will only create ill will. The purchaser’s option at that point is to take the property with the title as is, try to re-negotiate with the seller, or walk away from the transaction.