                             March 9,,1948,


Rau, J. P. Gibbs,        Gemmissioner
Casualty    Insurance     Division
l)oard, of ,Inaumgcs      CUmZssi~ners
Au&in    14, Texas
GAttention:     Bon. Ned ~Price,       Director     *
                Title Seotion.

                           Opinion     No. v-517

                           Re:    Authority    of title     insurance
                                  aompanies, to’ is,sue a~ binder
                                  obligating     them t8 isaud,~ at
                                  the option    of the,, insured,     8
                                  mortgagee’s     tit&    poli,oy ink-,
                                  ,euring the lien ‘for advancea
                                  rar construction      .prior    to the
                                   COmpletiOn Qf the idprOVOlXCitd;,
                                  and   whether dn additiomal        rate
                                   should be. prraulgated       for the       ”‘: _
                                   issuance‘ of such a bin&e.r.

Dear sir:
              Yeur. letter    or Deoember 2 ~bubmits frrour               con-
sideration     ,8 rim   ar binder praposed:for             the use of title
insuranoe     oompaaies,     designed    to’obligate        the title     in-
sursnoe company to:issue          a, mortgageeta       title    policy.    Suoh
polioy    would insure the lien for construction                 ldv8nces,
and wauld be i8~sued upon oampletion              rf.the      impnvements,
or at say tima prior         thereto    d.uring ‘6he couree~ of COP-’
struation,~    at the    option of ~the;‘,inaurea.          You ask whether
the ‘add$tidna& risk asaumed~,~by :the binder iS within                   the
corporate     power8 of title       insuranor :companies         oper8ting
under Artrole, 1302a, V. C, S., ,You.Plao                request    our opi.n-
ion as, Cog the, necessity       of an, addi~tional, premium or higher
ra;%en     view of the, adaitiinal.        prateationafforded           by the
        .                                    i
            You indicatethat       a. question is .raiaed,  as to
the authority    of titlr    insurahoa. cqapiu~l~s to a.asume the
risks  contemplated    by tha binder -in view of the proteot-
ion afforded   thereby    being “tr a limited     degrees somewhat


                                  .’
Hon. J.    P.    Gibbs,       Page 2,   V-517.



similar     to s completion,bond”,         You advise that “a
number of title        company officials     have expressed       doubt
as to #a validity          of the binder,    contending     that the
protartlon     oftordrd     by tha binder     is in effeotWt      ;urzty-
ship rather      than a titb      &Iarsnty   uovorage”.
also been furnished         oomprebrnsive    bt&8Pe presenting        some
objootiono,    to such a binder.         As to your s000na      question,
you observe     thst there sight       be s question     of,unfair     di,a-
criainstion      if a title    ins’uranoe   company should issue the
bFnder and the subsequent          policy   at the aaae rate OhMgOd
for a policy       without   the binder.
            Neither    the policy     in question    nor the binder
is a suretyship     contract,     but they definitely     constitute
an insurance    Contract,     being an agreement to indermrify
the insured    against    loss rather     than a contract    to per-
form any of the obligations         of any third parties.        The
insuring   agreement in the standard form policy            promul-
gated by the Board, whioh the title           insurer   would bind
itself   to issue,   provides     that the company will      pay to
the assured,    as interestmay        appear,
                “all   loss
                          or damage not exceeding
                       dollars    which the assured z
   1   the executor,    administrators,     sucoeasor s
       or assigns    of the assured aej sustain        or
       suffer   by reason of the failure       of, defects
       in, enoumbrances      upon or liens   or charges
       against   the title    of the mortgagors      or grant-
       ors . . e existing       at or prior  to the date of
       this policy,    including    mechanic * s end jm ter-
       ialmen’s   liens now having priority        or now ex-
       is ting but inoomple te , which msy Itsreafter        be
       oompleted    80 as to gain priority,       over the
       lien of the assuredW.

The binder simply obligates   the insurance  company to is-
sue such a policy  at a future date,   in an amount equal
to such advances,  made up ta that date under the lien in-
denture,  as are approved by the insurer.

             Whether or not the coverage                oontemplated     and
the obligations         assumed by the title          insuranoe     company
constitute     ‘It itle    insurance”    is the primary question.
If the coverage         is other than title         insurance,      it WOUld
not falls under the control            and supervision         of the Board
es to rules,       regulations,      forms of policies          and unaor-
writing    contracts,       and  premiums      therefor     by  virtue   of
Article 1302a,        Set  tlon  3,  nor  wiiuia    UI   insurance     company
 Hon.   J. P.   Gibbs,    Page 3,      V-517.


 authorized,  solely to write title    insurance   be author-
 ized to incur the obligations     contained    in the binder
 and the policy.

             The statutory     conception   of title    insurance
 is contained   in Article     1302a, Section    1, Subsection
 (11, which authorize      a, rporations  created    thereunder


                “to insure     titles   to lands or intsr-
        ests    therein    . . . ana indemnify     the owners
        Of Such l&k?,        or the holders     of interests
        in or liens      on such lands, against       loss’ or
        damage on accaunt of encumbrances           upon or
        defects     in title     to such lands or interests
        thare in”.

 It is necessary,   of course,   in all casea that the in-
 sured have a title    to, or lien on, the land upon which
 the improvements   are to be msde, aa otherwise   a title
 company would not have power under the above statute      to
 issue it.
                We have found no cases which decide               the ques-
  tion presented,        nor for that matter,        which attempt to
  prescribe      the limits     beyond which insurance         contracta
  oease to be “title         insurance”.       In the brief      submitted,
 we are referred         to Trenton Potteries        Company v. Title
 Guarantee & Trust Company, 68 N. E:. 132, 134, 176 N.Y.
 65; Mayers vi Van Schaick,             Superintendent       of Insurance,
,197 N. E. 296, 297, 268 N. Y. 320; Foehrenbach                     v. German
 American Title B Trust Company, 217 Pa. 331, 66 A. 561,
 12 L. R. A. (N. S.) 465, 118 Am. St. Rep. 916; State of
 Minnesota      ex rel.    Sohaefer,      Public Examiner v. Minnesota
 Title    Insurance      & ~Trust Company, 104 Minn. 447, 116 N.W.
 944, 19 L. B. A. (N. S.) 639, 124 Am. St. Re,p. 633; and
 Title    Insurance      & Trust Company v. City of Loa Angeles,
 2l4 Pac. 667, 6l~Cal.           App. 232.      These oases a&rely dis-
  ouas the natures of title          insurance     in passing     upon other
 pointa,      The la      uage of those case8 describes            title    in-
  aurance aa ass uz ng the risk of presently                existing      de-
 fects    and encumbrances        at the date of the policy           or at
 tha date of the closin            of the .title ‘transfer.
 ative an intention         to &sure       against    aa title     i.ZZagf-
 the riaka of failure           of tttla    or encimbranoes       thereon ha;-
 ing their      inception     subsequent     to such dates.        Butthe
 risk of the subsequent           attaching     of mechanic’s      and mater-
 ialmen’s     liens    is a risk of presently         existing     defects
 and encumbrances,         since the basis of the priority              of sub-
 sequently      perfected     Irechanic’a    and materialmen’s        liens    is
Hon. 3.     P, Gibbs,   Page 4,   V-517.



the thoory Uat they ralats     kook tr tho b@ghaLag ,S the
improvsmaat              Sao OrLentoL Rots1 Camps
fiths,  88 Tox.      33 s. WY.652, 30 L, R. A. %5v*5?%
St. Rep. 790; Saogulnott    & Starti   v. CoUra&o Sal4 Coa-
pang, 150 5. W. 490; Guggoaheim      v* Dallas Plumblag Corn-’
pany,    59 S. No (24)    105; Sullfvan    vb Texas Brlqurtto      aid
Coal’ Company, 94 %sx. 541, 63 9, iv. 307; D. Juao and Cam-
 pany v, Bake , 20 S. W, 402 ; Seymour Opera-Haua e v. Thora-
ton, 45 So Mf, 815; Dtlworth & Orera ve Ihi Steve8 & S0ns,
169 S. W. 630, error llsnissrd,            197 ‘Pox. 73, 174 5. W.
279; Southern Building       & Loan Aaooeiation        0, Bean, 49 S.W.
910; Fritz hIotor company V@ aabort,            41 S. W, (2d)    72; and
Article    5459, V, C. S, At least,           umber a21 r0 these 08888,
the poasibllity       of 8uWisqusntly     a@trrhhg     Mchanio’s      and
materia&ueh’a      liens ,heving priority over the lien for ad-
vanoamehts ia a presently exiatlng'defeot              or possibility
of encumbrance rppsrsnt         upon tho f@aa ip the lien for aa-
vmoemehts      by re8sOn OS i,ts very nsturee          l&e lender for
improvements makes advances charged with notice               of this
inolpient    risk0     The insurer    is .lllcawire   charged WI th such
notloe and malear a decision        to aooept the risk upon the
ciroumstanoes      which exist    at .the tinm.      ft is true that
the ‘failure    of priorl@y    may depend u on future        acts of
third   parties    over which it has no d i!r oot oogtrol,        but
such is true of the r&k OS a first.             lion mWtgagse’a       pol-
icy without     tha prior ,issuanoe      of o b&&or, a8 o&n be
seen from the insuring        clause above-quoted,         Tha a tanaard
Texas title     insurance contract       ao oontrmplrtas     by its ex-
press language V

           St appears    then, that the substantial      objec-
tion to the binder,   !.S the objection    lee aound, would also
lodge against  the issuance    of sny title    insurance  policy
during the oourae OS &y construction.

            I‘t cannot be said that the rick of non-completicn
of improvements    ia net known t0 title    inauranoe,    68 re-
flected  by reported oases dealing      with title   insurance.
The opinion    in the aase of Pennsylvania     company etc.     v.
Central Trust &. Savings Company, 99 AtI.* 910, describes
a title  insurance   policy,  as foll0ws:

              “The policy  issued    in this oaae is the
        form of an ordinary    title   insuranoo  policy
        with appropriate   provisions     to Cover loss  or
        damage sustained   by reason of non-oompletion
        of the premises”.
Hon.   J.   P. Gibbs,   Page   5,   v- 517.



              In the case of Wheeler v, Real-Estate            Title
Insurance     and Guaranty Company, 28 Atl. 849 (Po.J,             the
 insurer   assumed a risk identical       in nature to the risk
contemplated      by the binder in this case.          The poli~cy
was issued upon a mortgage during the progress                of im-
provements     on the mortgaged premises,        there being the
risk of the possibility       of the perfection       of mechanic's
liens    which would obtain priority       over the mortgage and
the resultant      risk of a deficiency      in the security       for
the loan.      While the insurer    declined     to assume the risk
of loss to the owner, because of unmarketability                of the
title , it did insure against       actual    losses    by reason of
such possible      liens.   The Court there recognized          that
such liens     are such as have a present        possibility.

            We cannot say, therefore,      that such a risk is
beyond the corporate    powers of a title       insurance    company,
in connection   with its insurance      of titles    and first   liens,
in the absence of express     statutory    prohibitions.

              We feel    that the binder would be construed            sim-
ilarly,     in connection     with the policy,      as insuring     only
against     those encumbrances       that have their inception         at
or prior     to the date of the binder.           It is the usual prac-
tice    that an insurance      policy   whiah closes     a binder has
as its inception        date the inception      of the binder.       If
there is doubt in this regard,           the binder may be made more
specific     in that respect.       We are not attempting        to pass
upon the sufficiency         of the binder to prevent a broader
coverage     than contemplated,       but confine     our considerations
to the legality       of issuing     the type of insurance       contract
which assumes the risk of loss due to attachment                 of sub-
sequent mechanic's        and materialmen's      liens   arising   out of
the improvements       for which advances are made under a mort-
gage.
             The statutory      conception    of title    insurance    in-
dicated    in Article    1302a contains      no express    limitations
which would exclude        the risk of subsequently        attaching
mechanic's    and materialmen's       liens.    The regular     first
lien mortgagee's      policy    promulgated    by the Board recog-
nizes   as an insurable      risk the possibility       of future     per-
fection    of such liens.

            Finally,  considerations    suggested    regarding
either   the legality  Or propriety   of liens    for improve-
ments on a homestead would not affect        the legality     of
insurance   of such liens   on other property.       Even if in-
surance of such liens     on homesteads   is in fact illegal,
*II.    if, I.   Oibbn,    Irga 4,~ V4l7.~


we o*uld nat aw that tie fez* ib’ ille’gal              meroll      booruae
it nigkt ba usd am suoh~a suRI)Joct,
             Yeu are, therefare,   @dvisod that the Beti     -3
premlgate      lr ,~)preVe suck 0 Unaer.     We do net, Of OOUPLa,
infer    that ,tko BurQ.$e ro@roil    rr’cupelle&    tie Pa 8oW

             Your &&end question,       ‘as t6 the m&&@tq            ‘et fix-
 $p~: a highor ‘ro.ts of pm&J&        where queh ~8 L &a&! b is-
&oil,    thar the regular     sc&sUule~ charge ,now,, I”n effort         $W
rmertga BQ’B tttb       ireU~?loa@e ap arps to be a questi-             Sop
Qetorm f nntfon Iy the Boa@ lf !z s~rnce        ”      Comi.ssi?nrPg     Wilor
 ~~h&rotisiens     of Sect2on    3 ef Artlclp       ,‘1302@, whioh @MI
       :
                                                                 ;
                                                                  \,
             “The Board of Insurance          COm¶is~im~era
       e.hall karo .tke right ml it skaLL be ‘its lUtp
       te fix d,     *romtigate,~ the rite8 ,t,@~ be ,olrrg#d
        by   owp*retioas      &reatoQ   or ~operating    hwreunbr
        for pre*iums •a~ joliqi.es   or’ certirieatee        an4
        unaerwriting  contracts,     The.rate     fixed     by tko
        Board shall .bs reasonable    to’ the public         and
        am-conf Wx$*ry      to t,&3 comp8ng” >,

             It appeqg  ti ,us’ that,    if the .k a r l  df Iu8ur&%oo
Couiseio&ers     in the proper way,.lotor~$1o,a      ,tka t the rlrk
t.maer the binder ,is sufficiently      aero  'hnzarlous    thaa the
newel   risk of a mortgagee’s      pOlicy,   it i,s authrriz64     by
the statute    te give a11 suoh risks a sep@rPtF cb.UifiO@-
tion aaQ 8 separate    anQ $i&er      rate.   We cansLet, ef oourae,
advise you, aa to the propriety       of mtters     which Pro niti-
in your fact finding -authority.




               The Board of Insurance        Cea&sie~~ro
        is authorized    to ,prorulgate      a binil6r fern
        Iesigaei   te obligate     title,inaurers       to is-
        me, et the option       of tke insurd,         a fir&.
        lien mortgagee’s     title    policy    insuring ~a
        lien for advances for conntruction             prier
Hon. J.   P. Gibbs,   Page 7,    v-517.



     to the dompletion   of the improvements.     The
     Board my,   by proper classification,     promul-
     gate the rate for insurance     under such binder.

                                Yours     very   truly,

                          ATTORNEYGWBAL            OF TEXAS




                                             Ned MoDanlel
                                                Assistant



                          APPBOWD:




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