Title agents and real estate attorneys play an integral role in protecting the property interests of homebuyers, real estate investors, and lenders. In order to issue a sound title insurance policy, the title company or law firm must ensure that all encumbrances are resolved before closing or refinancing. Every title agent knows the frustration of closing on a property that’s missing an unsatisfied judgment or lien.
There are countless reasons why a mortgage lien release or other instruments may be missing from the county record. Oftentimes, the liens have been satisfied, and there is evidence to prove this, like a payoff verification letter, but due to clerical errors or negligence, the release hasn’t been properly recorded. A mutual indemnity agreement (MIA) between underwriters allows a buyer or homeowner to purchase or refinance without delaying the transaction for the title defects to be resolved officially in the public record.
This agreement can be a deal saver, but it comes with certain caveats that every title and real estate professional should be aware of.
What is an underwriters’ mutual indemnity agreement?
A mutual indemnity agreement, also known as a mutual indemnity treaty, is an agreement (not a legally binding contract) between specific underwriters within a state to indemnify or hold one another harmless for some loss or damage for specific actions that may cause damage or loss related to a potential title claim.
Not every state has such an agreement and its scope of exempt defects is limited. The indemnification also only applies to certain types of title defect that the previous policy didn’t include as an exception.
While these agreements aid an underwriter’s agent in issuing a clean title quickly, they aren’t a substitute for thorough release tracking after closing.
What is the purpose of mutual indemnity agreements between title underwriters?
These treaties exist to increase the efficiency of operations and expedite the closing process and issuance of title insurance policies. Since many common title defects are a result of clerical issues and can be resolved after closing, they are unlikely to become a claim. Before such treaties, agents were required to obtain individual indemnity letters from underwriters for every transaction involving those types of defects. If a title agent closing on a new deal has a participating underwriter’s prior policy and the issue is covered under the terms of their state’s MIA, obtaining a specific letter of indemnity from the underwriter isn’t necessary.
Unfortunately, we’ve heard some claims in the industry that certain post-closing due diligence isn’t needed thanks to these treaties. This is simply not the case, and agents should be wary of advice that encourages bad practices and may damage their reputation with their underwriter or clients.
Why can’t a title agent always rely on these treaties?
If you work as a title agent in a region where such an agreement exists, there are several reasons why you can’t rely on them under certain circumstances.
- The agreement is between underwriters, not their agents
- Not all underwriters are part of the agreement and it isn’t a legally binding contract
- The treaty doesn’t cover all title defects
- It may damage your relationship with your underwriter
When dealing with instruments that are years or even decades old, tracking down the right party to record and release the mortgage can be a nightmare for an agent on a time crunch. Even if there is proof that the mortgage is paid in full, if it isn’t recorded properly it will remain a cloud on that title until it’s cured, further inhibiting future transfers of title. While some underwriters may be comfortable with letting such defects remain unresolved with the understanding that a title claim will never be filed, the problem is passed off to the next agent.
This creates a domino effect of title defects. Eventually, the recorded property history will need to be rectified and relying on one indemnification after another will only mean more title curative work in the future. Regardless of the indemnification by the underwriters, it's still the responsibility of the agent to ensure these instruments are properly recorded. Should the next agent to close on the property work with an underwriter who isn’t a part of the agreement, the issue will need to be resolved officially in the public record.
The agreement is between underwriters, not their agents
The agreement is to hold the participating underwriters harmless should any loss occur. This means that the agents who work for them and issue policies should be careful to follow the instructions of their underwriters when executing a title policy under this agreement. Independent agents may be held accountable for issuing a policy that doesn’t reflect the conditions of the agreement.
Not all underwriters are a part of the agreement
If you’re ever considering a change or update in your daily operations, we always recommend reaching out to your underwriter first and foremost to ensure the new procedure is approved. Not all underwriters are a part of these agreements. For instance, this WFG Bulletin states that they aren’t a participant of the New York Treaty.
Most treaties have a clause that allows underwriters to renege on the terms of the treaty within a certain time period. So, if you have a copy of the treaty and have at one time been notified that your underwriter is a participant, this doesn’t mean that their participation is in perpetuity.
The Treaty doesn’t cover all title defects
Be sure to thoroughly read and understand your state’s agreement. If there is any confusion over the details of the treaty, reach out to your underwriter. Typically, these treaties will cover a mortgage lien missing a release or satisfaction as long as there is no equity line of credit tied into the loan as well as some types of judgments and federal and state tax liens.
It may damage your relationship with your underwriter
As stated previously, this agreement is intended to help agents issue a title policy quickly when there is little likelihood for a common defect to become a claim. It is in no way meant to be a reason to skip post-closing due diligence in hopes that these agreements will cover a missed mortgage satisfaction or other instrument listed in the title commitment that required a subsequent release.
If you or your title company continue to write policies without ensuring all the satisfactions and releases are recorded within your state’s required timeframe, forcing your underwriter to indemnify your past policies at a high rate, they may not want to continue working with you.
What are the conditions under which a title agent can apply a mutual indemnity agreement?
Real estate matters are regulated on the state level, as a result, these treaties may vary slightly from state to state. If your state has a such an agreement, you’ll probably find that the language contained within it is similar to other state’s agreements.
Some common conditions and requirements of coverage found in MIAs include*:
- The Indemnitor’s policy must be at least one year old and contain no exception for the subject title objection in question
- The liability of the Indemnitor is limited to the face amount and terms of the Indemnitor’s Policy or $500,000, whichever is less.
- The agreement is only applicable to policies issued within that state
- The mortgage cannot secure revolving credit or an equity line of credit
- There has been no notice of proceedings to collect the lien on record
*Not all state MIAs are identical, so be sure to check your state’s agreement for specific requirements and contact your underwriter for further clarification.
More than a quarter (27%) of homeowners have opened a home equity line of credit. Under the conditions listed above, those mortgages wouldn’t qualify for indemnification. To resolve the matter, an agent must either obtain a specific letter of indemnity from the prior underwriter or try to cure the title defect before closing.
The best way to avoid having to utilize mutual indemnity agreement for missed liens and time-consuming title curative work is to track all the instruments in a title commitment after closing. If you or your company need help, release tracking is an easy and affordable option to ensure this work is done in a timely manner, every time. There are several reasons why a title agent needs release tracking, but one of the most important is that it helps maintain a high rate of complete real estate due diligence.