Title companies offer a variety of services and products to fit the individual needs of their customers. One such product is the Interim Binder. An Interim Binder is not a title insurance policy, but is instead a commitment to issue a title policy. Indeed, California Insurance Code 12340.11 makes it clear that an Interim Binder may not be relied upon as to the condition of title.

Under normal circumstances in California, the seller of real property pays for the buyer's title insurance; however, in certain circumstances, such as a foreclosure or development transaction, the obligation to obtain and pay for title insurance is often assumed by the buyer. Thus, in the typical foreclosure or development situation, the buyer is required to pay for two policies: a standard title policy to cover his acquisition and a policy covering his eventual buyer. The Interim Binder provides a method to avoid these duplicative costs. An Interim Binder gives its holder the option to obtain coverage during the period set forth in the Interim Binder, sell the property, and provide a title insurance policy for the buyer, all at the cost of a single owner's policy plus a "binder fee", usually 10% of the premium for the owner's policy. Accordingly, where a foreclosure sale buyer or developer intends to resell the property within a defined time period (usually two years), an Interim Binder may constitute a useful and cost effective alternative.

It is important to repeat, however, that an Interim Binder is not insurance, it is a commitment to issue an insurance policy. However, if a claim arises during the Interim Binder period, the person to whom the Interim Binder was issued may convert the Interim Binder to an owner's policy of title insurance naming him as insured and tender that claim pursuant to the policy.

These procedures should be contrasted with the operation of a "binder" in the general liability insurance industry, such as in the case of automobile insurance. When a consumer purchases a new car, he telephones his agent and by the end of the call, he is insured. Although the policy is not yet physically prepared or issued, the insurance company is "bound" immediately. The insured is entitled to be covered from the date his or her agent authorizes the policy. The insurer issues a Binder which will serve as a contract for temporary insurance until such time as the actual insurance policy is prepared, issued and delivered to the insured.

An Interim Binder, on the other hand, is merely a commitment to issue a title policy upon request of the purchaser. Unlike the example above, it is not insurance, nor is it temporary insurance until such time as the title company produces, issues and delivers the actual policy. By its terms, the Interim Binder allows the holder to request issuance of a policy to him or her or an appropriate designee as insured at any time within two years from the date of original issuance. Once the policy of insurance is issued, the Interim Binder is rendered null and void. A cautionary word is advised: If the Interim Binder is converted by the holder into an owner's policy for his buyer, the holder is not covered under any policy; and because the Interim Binder is no longer effective, the holder no longer has the right to obtain a policy. If a claim subsequently arises implicating the holder, he may find himself in a "bind."

The following are factual hypotheticals which demonstrate unanticipated situations which may arise in the context of an Interim Binder:

General Facts:
On January 1, 2000, an Investor purchases property at a foreclosure sale. Shortly thereafter, Investor purchases an Interim Binder from Title Company. Investor sells the property to Owner on March 1, 2000 (clearly within the two year period specified in the binder.) On March 1, 2000, Investor requests Title Company to issue the owner's policy contemplated in the Interim Binder to New Buyer, naming New Buyer as insured. On March 1, 2000, an ALTA Owner's Policy is issued to New Buyer.

Scenario One:
On June 1, 2000, New Buyer is notified that a junior lienor at the time of the foreclosure sale is claiming that the foreclosure was invalid and, therefore, Investor never acquired any interest in and to the real property. New Buyer passes this information to Title Company who, pursuant to the Owner's Policy issued, files suit in New Buyer's name to quiet title to the property. A necessary party is, of course, Investor.

Q: When Investor is served with the complaint as a defendant, is he an insured who may properly tender his defense to Title Company?A: Technically, no, but see Discussion below. Scenario Two: On June 1, 2000, Investor and New Buyer are each served with a complaint naming each of them as a defendant, filed by Third Party which claims, among other things, that Third Party is the owner of the property, having purchased it at a tax sale in 1999. Q: When Investor is served with the complaint, may he properly tender his defense to Title Company?

A: Technically, no, but see Discussion below.

Discussion:
The foregoing scenarios demonstrate the dangers surrounding the use of Insurance Binders. In both scenarios, the Interim Binder has already been converted to an Owner's Policy with New Buyer as insured. Accordingly, Investor is not an insured. It appears that the Title Company could technically and properly deny coverage to Investor on that basis. As previously noted, an Interim Binder is not a policy of title insurance. Much like a preliminary report, it is preliminary to the issuance of a title policy. (Insurance Code section 12340.11.) Accordingly, until such policy is issued there is no "insured." Once a policy has been issued, there is only one insured, either the person or entity to whom the Interim Binder was issued or his designee. As a practical matter, however, and although it requires the Title Company to provide coverage to two different "insureds", the prudent Title Company will often provide a defense to Investor and treat him as if he had converted the Interim Binder to an Owner's Policy in the interim. In the event that a claim arose "pre-conversion, "the purchaser of the Interim Binder (in our case, Investor) would simply notify Title Company that he wishes to convert the Interim Binder into the Owner's Policy contemplated to be issued by the Interim Binder and then make a claim as the insured. Even if Investor failed to convert, he would generally be treated as an insured and the Title Company would typically use the insuring provisions and exclusions from the policy contemplated to be issued in the Interim Binder in determining both coverage provisions and exclusions. Normally, there are no insuring clauses in an Interim Binder, but the policy that is anticipated to be issued applies from the effective date of the Interim Binder for the purposes of determining coverage and exclusions. (Title Insurance Practice [CEB 1998] Section 3.20; Metropolitan Title Guarantee Co. v. Gildenhorn (D.C. Cir. 1957) 249 Fed 933, 935 fn.5.)

Thankfully, these types of issues do not arise often, and these rules may not yet have been fully tested. Contributing to the lack of clarity in this area is the dearth of California law on this subject. In addition, some title companies and well known authors on the subject of title insurance refer to an Interim Binder as a "Binder Policy" thus assisting in the confusion. In conclusion, in certain circumstances, Insurance Binders can be a useful mechanism for bringing down the cost of acquiring and transferring real property. However, given the lack of clarity in this area, users must remain ever vigilant of the associated risks.