The Texas Department of Insurance recently issued a bulletin regarding the practice of including blanket exceptions excluding the mineral estate from coverage on title policies. The purpose of the bulletin was to remind title companies that such blanket exclusions are contrary to the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas (the Basic Manual). 

Without being familiar with searching titles in Texas, I would imagine that there is a significant amount of activity with mineral rights that would make a thorough search of the title difficult if the search must account for all of the mineral interests.  We search a rural Ohio county that has seen a fair number of Oil & Gas Leases and fractional reservations of mineral rights.  Still, I imagine that pales in comparison to what must go on in Texas.

So, what exactly is Texas requiring with this rule prohibiting the use of blanket exceptions and how does that affect searching titles in the state?

Section IV of the Basic Manual contains procedural rules for writing title insurance.  Rule P-5 states:

Special Exceptions---With the knowledge of the Insured, it shall be permissible for the Company to insert such special exception(s) as shall develop from the examination of the title under consideration. Such special exception(s) shall in all cases specifically describe the particular item(s) excepted to, and shall not be general in its terms.

Obviously, it is much easier to add a blanket exception and not worry about the time and expense that would be required to conduct a more thorough search of the mineral estate. This is similar to the logic adopted in the context of short searches for refinance transactions - rather than performing a full search, it is easier to include blanket exceptions for covenants, conditions restrictions, easements, leases, and reservation of mineral rights. So, I have to wonder... does Texas allow the use of blanket exceptions on loan policies?

Rule P-5 makes no distinction between owner's and loan policies.  However, the bulletin issued by the Department of Insurance seems to be written in terms of owner's coverage.

The insured estate must be the same as the conveyed estate and any decrease in the estate description from the purchase contract to Schedule A of the title commitment constitutes a prohibited general exception.

This is a basic issue of the purpose of title insurance. The Basic Manual defines title insurance as “insuring, guaranteeing, or indemnifying owners or others of real property or others interested therein against damages suffered by reason of liens, encumbrances upon, or defects in the title to said property, or the invalidity or impairment of liens thereon....” The ownership interest is reflected in the property description of the instrument conveying title to the owner.

Although the bulletin uses terms like "purchase contract" and "instrument conveying title to the owner," it does make specific mention of "others interested therein."  That would seem to include a lender on a loan policy.

If the use of blanket exceptions (or general exceptions) is prohibited, even on loan policies, it would seem that in the state of Texas a full search would be required on all insured transactions.  Of course, that used to be the norm everywhere - if insurance was issued we always did a full search.  Short searches (current owners, 3-owners, PMMs, etc.) were only used in the equity market for uninsured property reports. 

Then came the refi-boom and nobody had the time or manpower to do full searches on all of those orders.  Besides, nobody cared about those items covered by the blanket exceptions anyway.  If they were found, they were going to be excepted from coverage, so why bother with the dusty old books?  The lenders just wanted to get their loans closed - faster.  If they were going to accept any specific exceptions for easements, restrictions, oil and gas leases, etc., why not just use a blanket exception and skip the more burdensome search?  So, we did.

Well... Texas is right.  This is a basic issue of the purpose of title insurance.  The refi-boom is over, but we are still doing short searches on loan policies.  Though the necessity that precipitated the practice is gone, we have become accustomed to it.  I think that had a tendency to make us a bit lazy.  If it is acceptable to use blanket exceptions for things like refinances, what else can we do with them?  Apparently, nobody wants to bother with mineral rights... let's use them there, too.  Here's an idea:

This policy excludes from coverage all documents of public record, except mortgages and liens first filed after the current owner took title.

Sarcasm - obviously - but that seems to be where we are headed.  With the short searches that seems to be the message that we are sending.  Some underwriters even allow some form of short searches on purchase transactions, or so I have heard.  Perhaps the refi-boom has created a slippery slope and we are all riding our way down like it was the newest ride at the amusement park.  Will the first one down please let me know what the landing was like?

Robert A. Franco
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