• Legislative Update: What Minerals Coverage is Left Under Texas Title Insurance Policies?
  • February 16, 2012 | Author: David J. Weiner
  • Law Firm: Liskow & Lewis A Professional Law Corporation - Houston Office
  • Beginning in 2012, Texas title insurance companies no longer have to provide any minerals coverage whatsoever in the title policies they issue. Specifically:

    • Title companies are expressly authorized by statute to generally except or exclude the entire mineral estate from their policies;
    • Title companies are no longer required to issue a Minerals and Surface Damage Endorsement, even if they have generally excepted or excluded the mineral estate from their policies; and
    • Reductions or credits to title insurance premiums due to a general or special exception of minerals will not be permitted.

    Background

    The Texas Department of Insurance (TDI) promulgates various rules, rates and forms for the Texas title insurance industry. In August 2009, Mike Geeslin, the Texas Department of Insurance Commissioner, in Commissioner’s Order No. 09-0650, adopted certain amendments to the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas (Basic Manual) that addressed such rules, rates and forms relating to mineral interests. These amendments authorized title companies (a) to generally except or exclude minerals from their policies and (b) in connection with any such exception or exclusion, to issue, upon the request of the insured, such title companies were required to issue a newly-promulgated Minerals and Surface Damage Endorsement for a fixed additional premium of $50.00.

    The TDI Commissioner went a step further in November 2010, when he issued an order adopting a new rate rule to the Basic Manual (Rate Rule R-36) requiring that title companies issue a two percent (2%) credit against the base premium rate of any title policy that includes a general exclusion or exception as to minerals.

    In 2011, the Texas legislature took action to amend the Texas Insurance Code in order to streamline the TDI’s ratemaking process for title rates, to address various administrative procedures for title insurance hearings, licensing and enforcement, and to address by statute certain changes to title insurance coverage for minerals and surface damage resulting from mineral extraction and development. The Texas Land Title Association (TLTA) sought to have such legislation carry over the substance of many of the amendments in Commissioner’s Order No. 09-0650 but to eliminate any rate reductions based on general exceptions as to minerals.

    House Bill No. 2408

    On June 17, 2011, Governor Perry signed into law House Bill No. 2408, which amends and adds several statutes to the Texas Insurance Code, most notably those relating to title insurance. Of particular relevance are the following:

    No Insurance of Minerals; No Reductions in Coverage for Mineral Exceptions

    Texas Insurance Code Section 2703.055 has been added, pursuant to which the TDI Commissioner cannot require title companies to insure the ownership of minerals or to insure against losses caused by any severance of the minerals from the surface estate.

    Also added was Texas Insurance Code Section 2703.056, pursuant to which title companies are expressly permitted to generally or specially except minerals from title, without creating coverage as to the condition or ownership of the mineral estate. This statute also expressly prohibits any reductions to title insurance premiums based on the exclusion or exception of minerals from coverage, effectively repealing Rate Rule R-36.

    These additions—which were the primary focus of the TLTA in its discussions with the legislature—appear to make sense. It is not the intent of title companies to insure the value of one’s mineral estate. The right of title companies to generally except to minerals simply codifies the ruling of the Commissioner in 2009. The prohibition on premium reductions for general exceptions to minerals is not an unfair result either ... under the system in place prior to the passage of House Bill No. 2408. Unfortunately, another provision of the Bill has greatly frustrated the purpose of this system.

    Minerals Coverage Endorsement No Longer Required

    Texas Insurance Code Section 2703.0515 expressly permits title companies to generally except or exclude minerals from title policies without any requirement to issue an endorsement insuring any loss from damage to the surface estate of real property due to the exercise of mineral rights affecting the property.

    The effect of Section 2703.0515 is that an insured can be forced to take a title insurance policy that generally excepts or excludes all minerals without any protection whatsoever contained therein from surface damage due to the extraction or development of minerals. A title company not only can delete the relevant insuring provisions for minerals coverage from a T-19 or T-19.1 Restrictions, Encroachments, Minerals Endorsement but also can simply refuse to issue to the insured a T-19.2 or T-19.3 Minerals and Surface Damage Endorsement.

    A provision was added to Section 2703.0515 that prohibits title companies from charging for T-19.2 and T-19.3 Minerals and Surface Damage Endorsements to loan policies (but not owner policies). However, pursuant to this very statute, title companies have no obligation to even offer such endorsements in the first place. (This provision was likely included in response to many lenders’ practice in recent years of requesting that their borrowers obtain these endorsements—and pay the $50 premium associated therewith—for all loan policies.)

    The primary argument used by legislators to justify the passage of Section 2703.0515 was that surface damages could be insured against by obtaining casualty insurance. Regardless, the insured is now essentially subjecting itself to potential future casualties that it may otherwise be able to avoid (by not proceeding to close on its acquisition of real property or its loan) or at least plan for with the (much more cost-effective) $50 payment for a Minerals and Surface Damage Endorsement to its title policy.

    Also, by eliminating the requirement that title companies issue a Minerals and Surface Damage Endorsement (for a $50 premium) for title policies generally excepting or excluding minerals, title companies may be able to force the much more expensive Restrictions, Encroachments, Minerals Endorsements upon its insureds, who would then be forced to pay between 10% and 15% of the entire base premium rate of their title policy for such an endorsement in order to obtain coverage for surface damage due to the exercise of mineral rights. In larger transactions, this additional premium may be several thousands of dollars or more. Even then, the title company can delete the relevant insuring provisions for minerals coverage from the Restrictions, Encroachments, Minerals Endorsement. If an insured (or its counsel) is not careful in its review of such endorsements, it may be paying a hefty price for no minerals coverage at all.

    See Sections 8, 9, 16 and 17 for the relevant provisions.

    Conclusion

    In the wake of House Bill No. 2408 (specifically the addition of Section 2703.0515), seemingly the only hope for the insured now is to shop for a title company willing to avoid general exceptions or exclusions for minerals (preferably only including specific exceptions for actual mineral reservations of record, if any) and willing to issue the requested endorsements for minerals coverage. Practitioners may wish to seek this information from title companies early on in the transaction process. If a title company is unwilling to give the coverage that the insured requires, then one may need to seek out a different title company. However, in an age of consolidation of title insurance underwriters, the number of real options is fairly limited. This situation is even worse in many rural areas, in which there may be only one title company in the area. At that point, the insured may be left to rely on an anti-drilling ordinance or a Railroad Commission ruling.

    So, ladies and gentlemen, enjoy the latest “innovation” in title insurance coverage!