In many sales contracts, the seller may include a provision that the property is being sold “as is” without any warranties or representations as to conformity with building code requirements. While this provision will insulate the seller from liability, it does not preclude the title insurer’s liability if notice of a building code violation is disclosed in the public record.

Under Exclusion 3(a), ATG is not liable for 

                3. Defects, liens, encumbrances, adverse claims, or other matters.

1. Created, suffered, assumed, or agreed to by the Insured Claimant.

This exclusion has a strict standard, requiring the insured to have full knowledge of the defect in order for the coverage to be excluded. Courts have interpreted Exclusion 3(a) to require the insured to agree to a specific property condition rather than a broad condition. In Lawyers Title Inc. Corp. v. Doubletree Partners, 739 F.3d 848 (5th Cir. 2014), the Court held that “an insured does not suffer, assume, or agree to an encumbrance under this exclusion when it lacks knowledge of the true scope of the encumbrance.” Id. At 868. In Shamrock Bank of Florida v. First American Title Ins. Co., 2014 W.L. 1304694., *14 (S.D. Ill. 2014), the Court stated:

The cases discussing the applicability of the ‘created or suffered’ exclusion generally have stated that the insurer can escape liability only if it is established that the defect, lien or encumbrance resulted from some intentional misconduct or inequitable dealings by the insured or the insured either expressly or impliedly assumed or agreed to the defects or encumbrances in the course of purchasing the property involved. The courts have not permitted the insurer to avoid liability if the insured was innocent of any conduct causing the loss or was simply negligent in bringing about the loss.

Illinois Courts have applied a stricter rule that an insured would need to agree to the specific defect or encumbrance in the course of purchasing the property or to have intentionally brought about the defect or encumbrance. Therefore, a Court would likely find the “as is” provision in the contract too broad, unless it referenced specific violations. 

In cases where a notice of a building code violation is discoverable through a public record search, ATG Underwriting Guidelines require the violation to be raised as an exception on Schedule B. An exception to a recorded building code violation cannot be waived based upon the proposed insured’s willingness to sign a sales contract with an “as is” provision concerning the property’s conformity with building code.

If you have any questions about waiving recorded building code violations and Exclusion 3(a) or related issues, Contact an Underwriter.