Andy Brownstein is CFO & General Counsel at GRS Group
We’ve talked about leaseholds and leasehold title insurance on this blog before. I refer you to Janice Carpi’s entry from last year: https://grs-global.com/title-insurance-101-leasehold-coverage/ for background. I recently came across an article that illustrates why leasehold title insurance, or perhaps better stated, why title due diligence, matters so much.
In 2010, a Houston- based oil and gas exploration called Orca Assets G.P. LLC leased a tract of land from a trust, whose trustee was an employee of J.P. Morgan. Before any drilling actually took place, however, Orca discovered that the Trustee had already leased the same tract of land to another party five months earlier. Orca is now suing J.P. Morgan for upwards of $400 million of lost profits. Details are in this article from the Wall Street Journal: http://online.wsj.com/news/articles/SB10001424052702304470504579163762167036126
What’s interesting to me is not so much how this could have happened, but what didn’t happen. J.P. Morgan has admitted the mistake, but contends that Orca had the burden to do its due diligence on the property. While I don’t know all the facts, based on what little I know, I tend to agree. Leasehold title insurance would not have paid out on a claim in this instance, because Orca could never have obtained a policy on this tract of land! Why? When Orca or its attorneys placed an order for such a policy, the title company would have searched the records, and discovered the previous lease, if it were properly recorded. Orca would then be having a very different conversation with the trustee than the one it is now having in court.
In some respects, the lesson here is that the search is what matters, not the insurance. Sure, you would want title insurance to protect you against issues unknowable at the time of issuance or a mistake by the title company, but what a party really wants is not to have a claim or a loss in the first place! To me, that is what title insurance really does, it backs up the due diligence that has been done in order to issue the policy. In this instance, the work would have prevented the loss in another way, but no matter, that’s why you use a title company’s services.