On November 26, 2008, just days after merger talks collapsed, LandAmerica Financial Group (LandAmerica) filed for protection under Chapter 11 of the United States Bankruptcy Code. The news of LandAmerica's bankruptcy – generally hailed as an unprecedented event in the industry – has sent a chill through the real estate market as parties to transactions and holders of current policies issued by LandAmerica's affiliates struggle to determine who is responsible for covering their title risk. A proposed stock sale and reinsurance may be the keys.
According to LandAmerica, losses from both the parent company and its 1031 exchange subsidiary precipitated the bankruptcy filing. When it filed its Chapter 11 proceeding, LandAmerica also announced that it had signed definitive agreements to sell its title insurance affiliates – Lawyers Title (Lawyers), Commonwealth Title (Commonwealth) and United Capital Title (United) – to Fidelity National Title Insurance Company (Fidelity) and Chicago Title Insurance Company (Chicago Title). In the meantime, their regulator, the Nebraska Department of Insurance, announced that Lawyers and Commonwealth have been put in a "rehabilitation" proceeding to prevent LandAmerica's failure from eroding the relative strength of the insurance companies' financial positions. While both LandAmerica and the Nebraska Department of Insurance repeatedly have assured policyholders that Lawyers, Commonwealth and United are solvent, owners and lenders alike remain skittish about the possible effect of LandAmerica's divestiture on both new and existing title insurance policies issued by Lawyers, Commonwealth and United.
Presently, parties to transactions and holders of current policies issued by LandAmerica's affiliates are trying to determine whether to accept policies written by Lawyers, Commonwealth and United and how best to protect their interests under existing policies. LandAmerica and the Nebraska Department of Insurance quickly assured policyholders that Lawyers, Commonwealth and United are solvent and that they continue to do business. The Nebraska Department also has assured the public that the rehabilitation does not impact the insurers' existing and ongoing business and that Lawyers, Commonwealth and United will pay all claims. (See informational release at http://www.doi.ne.gov/legal/lawyers/Q%20&%20A%202008.12.05.pdf).
To instill further confidence, Fidelity and Chicago Title have negotiated reinsurance treaties with Lawyers, Commonwealth and United. Chicago Title has also negotiated a reinsurance agreement with LandAmerica NJ Title Insurance Company. The reinsurance treaties (copies of which can be found at http://www.fntg.com/treaties.asp) are intended to ensure that all policies issued and escrow accounts held by Lawyers, Commonwealth, United and LandAmerica NJ remain fully protected pending the closing of the stock purchases. Therefore, the companies advise policyholders who have commitments from Lawyers, Commonwealth and United that they will enjoy uninterrupted coverage during the pre-closing period and will be protected after closing by virtue of the acquisitions.
Although the reinsurance agreements mitigate possible risk or instability associated with LandAmerica's bankruptcy and the rehabilitation of Lawyers, Commonwealth and United, they do not provide automatic coverage for risk over $10,000,000 or, where the policy covers extraordinary risk, over $5,000,000. In each case, we recommend that the insured obtain a written assurance from Fidelity or Chicago Title that it will cover risk for the entire insured amount.
Questions remain whether the reinsurance agreements cover existing policies modified during the transition period. Again, we recommend that insureds under those policies also obtain written assurance from Fidelity or Chicago Title that they will cover the policyholders' risk, as though reinsurance had been issued.
On December 16, 2008, the bankruptcy court will decide whether to approve the sales of Lawyers, Commonwealth and United to Fidelity and Chicago Title. If approved, the sales are likely to close by December 31, 2008, putting to rest some of the uncertainty that currently plagues the title insurance industry.
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