The following is an except from the 7/2000 Supplement to Chapter 4 of Joyce Palomar’s treatise, TITLE INSURANCE LAW, published by Westgroup.
§ 4.04 TRUSTS
Both the trustee who holds legal title and beneficiaries who hold equitable title have insurable interests and may be named insureds under a policy insuring title to real property held in a trust. The trust should not be named as the insured, except in states where a trust is statutorily recognized as a legal entity capable of holding title. Most often, the policy names the trustee as the insured. Questions have arisen when the trustee or trust is the named insured and a beneficiary of the trust makes a claim against the policy. It has been held that a title insurance policy is for the benefit of the owners of equitable title, although they are not named insureds in the policy. Therefore, the policy’s non-assignability clause did not preclude the beneficial owners of the property from asserting a claim under a policy issued in the trustee’s name.
If the record title and the policy are in the trustee’s name, a transfer of the beneficial interests in the trust does not require a record transfer of the real property and, therefore, should not require the issuance of a new title insurance policy. Neither would the resignation of the named trustee and appointment of a successor trustee require issuance of a new policy or defeat a claim by the successor trustee. As one writer summarizes, “In . . . a title insurance analysis, a trust shares in the corporate attribute of continuity of existence until the trust has been terminated by operation of law, by statute or an express trust provision.”
With increased use of revocable living trusts for estate planning, it is important to understand whether a title insurance policy’s protection continues after the insured has deeded property to the trustee of the insured’s revocable living trust. Can the title insurer deny a subsequent claim of the named insured on the grounds that the insured no longer owns an interest in the land? Can the title insurer deny a claim by the trustee on the grounds that the trustee is not the named insured under the policy or a “successor” of the named insured? Must owners or lenders who transfer insured property interests into their own revocable living trust pay for a new title insurance policy naming the trustee as the insured?
The standard American Land Title Association [“ALTA”] owner’s policy is limited to cover:
only so long as the insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money mortgage given by a purchaser from the insured, or only so long as the insured shall have liability by reason of covenants of warranty made by the insured in any transfer or conveyance of the estate or interest. This policy shall not continue in force in favor of any purchaser from the insured . . ..”
The ALTA policy does include within its definition of “the insured” those who succeed to the insured interest by operation of law as distinguished from purchase, including “heirs, distributees, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors.” A trustee does not “purchase” the property from the insured “trustor” and some have argued that the trustee of the named insured’s trust could be considered a “fiduciary successor.” Yet, the insured’s conveyance by deed to a trustee is not a succession “by operation of law” as the policy definition specifies.
The United States District Court for the District of Wyoming has considered some of these questions in the context of a title insurance policy that defined “the insured” as “the heirs, devisees, personal representatives of such Insured, or if a corporation, its successors by dissolution, merger or consolidation.” An insured ranch owner had quitclaimed his ranch to his revocable living trust and named his wife as beneficiary. Two years later, the trustor died and three years after that, a title problem caused a loss. The trustee contended that the intent of the policy definition was to provide coverage so long as the substance of the insured did not change, and only the form did. Conversely, First American Title Insurance Company argued that the policy unambiguously limited coverage to the named insured owner and those successors identified in the policy, and that the trust was not an heir, devisee, or personal representative. The court granted First American’s Motion for Partial Summary Judgment, concluding, “The plain language of the policy limits coverage to L.B. Maytag, Jr., and his heirs, devisees, and personal representatives. The Maytag Trust is not an heir, devisee, or personal representative, thus the policy does not cover it.” The Tenth Circuit Court of Appeals agreed with the District Court’s analysis in an unpublished Order And Judgment (which is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel, and may not be cited except under the terms and conditions of Tenth Circuit Court Rule 36.3).
These courts looked only at narrow definitions of the words “heirs, devisees and personal representatives” and failed to recognize the substantive reality that continuing a title policy’s coverage in favor of an insured’s trustee or beneficiaries presents no different or greater risk to the insurer than does the policy’s express continuing coverage in favor of the insured’s heirs, devisees and personal representatives. Had the insured owner’s wife received title to her husband’s land via his will or state intestacy laws, either she or her husband’s personal representative would have had a claim against her husband’s title policy. Should the result be different solely because her husband was advised to use a revocable living trust as an estate planning device rather than a will?
If the insured trustor in this case had still been living when the title problem was uncovered, he should have had a cognizable claim under his title insurance policy for the loss in value of the property interest he retained pursuant to his power to revoke the trust. In a property insurance case, Queen v. Vermont Mutual Insurance Company, a Massachusetts court has held that a couple who transferred their home to a revocable trust that named themselves as beneficiaries retained an insurable interest in the home when it later was destroyed by fire. They, therefore, had a claim under the homeowners insurance policy that named them personally as insureds.
In October 1998, the American Land Title Association resolved these questions for future homeowners by adopting a new form policy for owners of one-to-four family residences. Its definitions and its “continuation of coverage” condition expressly extend this policy’s coverage to the trustee and beneficiaries of a living trust to which the insured transfers the home after the policy date. The title insurer does retain the right to assert against the trustee or beneficiaries any defenses the insurer would have had against the insured trustor. The California Land Title Association added such coverage to its Homeowners policies earlier the same year. Additionally, the ALTA reportedly is working on an extended coverage residential loan policy to match its Homeowner's policies.
Nevertheless, with residential policies prior to 1998 and with policies that insure title to property other than homes, disputes still may arise regarding whether the policy covers (i) claims by the named insured after the insured has deeded the property into her revocable living trust and (ii) claims by a trustee or beneficiary of the trust. The same issues may arise when an insured owner transfers property to a family limited partnership, limited liability company or Subchapter S corporation in which family members are given interests in the property or the transferee. In each of these situations, the title insurer could attempt to defend against any claim on the basis that the transferee is not an insured under the policy.
Counsel for insureds who are making or have made such transfers of real property when estate planning for clients can avoid problems like those above in several different ways. One technique is to have the insured owner ask the title insurer for an Additional Insured Endorsement. Some title insurers have a version of this endorsement that is specifically entitled "Inter Vivos Trust Endorsement." Title insurers will issue these with minimal charge or no charge and thereby extend the insured owner’s protection to a donee such as the trustee of the insured’s living trust. The title company will want full disclosure of the particulars of the transaction, including the status and relationship of all parties, so that it can determine that the transfer truly is donative in nature and does not actually constitute a sale or otherwise increase the title insurer’s risk. The drawback to this technique is that the additional insured’s protection will only be as per the title insurance policy’s original terms. This means, first, that the policy will only indemnify for losses caused by defects, liens, or encumbrances that existed before the date the original policy was issued. Thus, the policy and endorsement will not cover any title defect stemming from the transfer to the trustee. A particular example is that, in a state where a trust is not a legal entity, if the deed erroneously named the trust as grantee rather than the trustee and the conveyance subsequently is avoided, the policy would provide no coverage. Second, unless the policy contains an inflation rider, the maximum recoverable will be the amount of insurance purchased, which usually equals the amount the insured originally paid for the property. If the property value has increased significantly, the trustee may be underinsured. For these reasons, counsel should discuss with the insured whether it would be prudent to obtain a new owner’s policy rather than relying on an endorsement to the original owner’s policy.
Purchasing a new title insurance policy that names the trustee as the insured, insures the property for its current value, and has an effective date after the recordation of the deed to the trustee is the second technique for avoiding disputes about whether coverage continues after an insured owner deeds the property to her revocable living trust. Of course, the cost is the deterrent to purchasing a new policy. In most areas, a reissue rate is available if the new title insurance policy is purchased from the same company that issued the transferor’s policy, since the title company may feel comfortable merely updating its title examination from the date of the earlier policy.
A third technique many employ is to transfer to the trustee by warranty deed, rather than the quitclaim deed often used for intra-family transfers. Standard ALTA title insurance policies provide that coverage continues “. . . so long as the insured shall have liability by reason of covenants of warranty made by the insured in any transfer or conveyance of the estate or interest.” Upon discovering a title defect, the trustee can make a claim against the trustor, who then can make a claim against its title insurance policy. However, the same limitations exist as when the insured trustor adds an endorsement to the original owner’s policy rather than purchasing a new policy in the trustee’s name, i.e., (1) the policy will not indemnify for losses caused by defects, liens or encumbrances created after its original date, including any created in the transaction transferring title to the trustee; and (2) recovery will be limited to the amount of insurance stated in the trustor’s policy. Additionally, this technique will not be effective in states where recovery under warranty deed covenants limited to the consideration the grantor received. Since the trustee pays no consideration for the estate planning transfer, the trustor would have no liability for damages and, thus, would have no loss recoverable under his title insurance policy. Further, if the trustor is deceased by the time the title defect is uncovered, as in the Wyoming case discussed above, the trustee has no one to sue. Another risk of this technique is that, if the trustor is still alive at the time the title defect is discovered, but by that time the trust has sold the property to another, that transferee would have an action against the trustor, since warranty deed covenants normally run with the land. In some states, the trustor might be permitted to avoid this latter problem by limiting the warranties to the benefit of the initial transferee/trustee only. One more risk of this third technique stems from the fact that the trustee must assert a claim against the trustor for breach of the warranty deed covenants in order to trigger the title insurer’s obligation to defend and indemnify under the trustor’s title insurance policy. Though this act is intended to cause the trustor’s title insurer to defend and pay the claim, in the midst of depositions and lawsuits, the trustor could become offended at the idea that family members to whom the trustor has given a gift of valuable property would file a formal claim or a lawsuit against the trustor.
 Spellings v. Lawyers’ Title Ins. Corp., 644 S.W.2d 804, 807 (Tex. App. 1982).
 Weinreich, Commercial Transactions: Who Does the Title Insurance Cover?” 6 Prob. & Prop. 42, 46 (1992).
 Id. at 46.
 See at Joyce Palomar, Title Insurance Law, Appendix D, ALTA 1992 Owner’s Policy, Conditions & Stipulations ¶ 2 (10/17/92). See also discussion of the policy’s continuation of coverage condition at Joyce Palomar, Title Insurance Law § 4.04[a] & [b].
 See Joyce Palomar, Title Insurance Law, Appendix D.
 Order On Motions for Partial Summary Judgment, in Covalt v. First American Title Ins. Co., No. 95-CV-1044-B (D.C. Wyo April 26, 1996). This Order has not been published.
 Id. at p. G-21.
 Covalt v. First American Title Insurance Company, 105 F.3d 669, 1997 WL 4273 (10th Cir.(Wyo.)).
 Queen v. Vermont Mut. Ins. Co., 589 N.E.2d 325, 327 - 328 (Mass. App. 1992).
 See Joyce Palomar, Title Insurance Law, Appendix H. The 1979 and 1987 ALTA Residential Policy forms both provided continuation of coverage for “anyone who receives your title because of your death.”
 Id. First American Title Insurance Company had first begun offering this coverage in its "Eagle" policy forms for homeowners. Other companies copied First American’s Eagle, and gave their variations brand names of their own, like Lawyer’s Title’s “Advantage” policy or Stewart Title’s Gold policy. When the CLTA, and then the ALTA produced standard versions of these policies, they called the standard policies the CLTA or ALTA “Homeowner’s Policies.” E-mail to the author from Robert S. Bozarth, Vice President & Major Transactions Counsel, LandAmerica Financial Group, Inc. (Jan. 10, 2000).
 E-mail to the author from Robert S. Bozarth, Vice President & Major Transactions Counsel, LandAmerica Financial Group, Inc. (Jan. 10, 2000).
 Jonathan Rivin, Thomas J. Stikker, Title Insurance For Estate Planning Transfers, p. 15, Probate and Property (May/June 1998). This article considers the issue of who is insured from an estate planning perspective. In addition to who is insured when an insured owner transfers title to a revocable living trust, the article notes that title insurance concerns may arise when an insured owner makes an outright gift of a half or other partial interest in the real property and when an insured owner deeds real property to another person or entity for estate planning purposes, but does not record the transfer. The authors advise:
Of course, new title insurance resolves any questions about partial interest transfers. Additional Insured endorsements, perhaps by analogy to Fairway endorsements, can cover the definitional issue of who is insured, but will not address problems arising from the passage of time since issuance of the original policy.
Some lawyers may be tempted to execute and deliver deeds accomplishing estate planning transfers, but then not to record them immediately, to avoid transfer taxes and increased property tax assessments and to protect confidentiality of the transaction. Failure to record may enable the parties to attempt to unwind a transaction privately. In the event of a title insurance claim, the title company may never become aware of the transfer or its reversal, and so may never assert the coverage issue in defense of such a claim. This approach is not recommended; it is an intentional attempt to mislead, and would subject the parties to defenses and exposure for concealment of material facts relating to the claim, not to mention possible tax fraud.
Id. at 18 - 19.
 For example, a form of Inter Vivos Trust Endorsement reportedly is available in New Jersey, for a fee of fifty dollars.
 As stated in the text supra, the same issues may arise and the same techniques may be appropriate when an insured owner transfers property to a family limited partnership, limited liability company or Subchapter S corporation in which family members are given interests in the property or the transferee. Id. at 15.
 Id. at 16.
 See at Joyce Palomar, Title Insurance Law, Appendix D, ALTA Owner’s Policy, Conditions & Stipulations ¶ 2 (Revised 10/17/92) and at Appendix E, ALTA Loan Policy, Conditions & Stipulations ¶ 2(b) (Revised 10/17/92). See also discussion of this continuing “warranty coverage” infra at § 4.04[b].
 Again, this same technique may be utilized when an insured owner transfers interests in land to a family limited partnership, limited liability company or Subchapter S corporation and family members are given interests in the property or the transferee.
 See Jonathan Rivin, Thomas J. Stikker, Title Insurance For Estate Planning Transfers, p. 17, Probate and Property (May/June 1998).