When it comes to title insurance, Texas is an anomalous state. Most states are “ALTA states” and use title insurance forms that the American Land Title Association — a trade association representing the title insurance industry — developed. Texas does not use ALTA forms, including ALTA forms of endorsements. So historically, certain title coverages that are available for energy projects in ALTA states have not been available for energy projects in Texas.
The Texas Department of Insurance recently adopted some of the “ALTA 36” series of title endorsements available for energy projects in ALTA states. The new endorsements give energy projects in Texas specific coverages previously unavailable on Texas title insurance policies.
1. Overview of the ALTA energy endorsements
The ALTA 36 series of endorsements provide energy-specific coverages not otherwise included under the base form of the title policy or under other ALTA endorsements. The primary endorsements in this series are “estate-specific endorsements,” ALTA 36/36.1, 36.2/36.3 and 36.7/36.8.The estate-specific endorsements provide similar coverages, but the availability of each depends on whether (a) leasehold interests, easement interests, fee interests or a combination of the three comprise the project’s real estate interests and (b) the policy at issue is an owner’s policy or loan policy.
2. Purposes of the estate-specific energy endorsements
The estate-specific endorsements modify the way the title company calculates loss or damage in the event of a claim under the title policy. There are two key components to the coverage in the endorsements:
First, the title company values the insured title interests as components of a broader, integrated project. If a title issue on one insured parcel arises, the title company will consider the fact that the issue could impact the value of the project as a whole. To illustrate, a wind project may have a gen-tie line crossing multiple land parcels, each covered by individual easement agreements. If one easement agreement becomes unenforceable due to a title defect, that defect may force the developer to remove the gen-tie line on that parcel. Without the estate-specific endorsements, the title company would calculate loss resulting from the title defect only with respect to the land and improvements subject to the easement at issue. However, the developer’s actual loss is far greater than the loss of the individual easement because the lack of that easement interest affects the project’s ability to deliver electricity. The estate-specific endorsements reconcile this mismatch. If the developer has a title policy with the estate-specific endorsements, the title company’s calculation of loss will include (a) the value of the easement interest for, and improvements on, that particular parcel and (b) the loss that the project incurs as a whole.
Second, the title company’s calculation of loss will account for the value of the energy project’s severable improvements: improvements that constitute personal property instead of real property. This is important because the base form of title policy only insures real property, not improvements that constitute personal property. Without the estate-specific endorsements, the developer bears the risk of not receiving title compensation for a large chunk of its investment in the event that some, or all, of the project improvements constitute personal property under applicable state law. The endorsements close the gap and mitigate this risk.
The estate-specific endorsements provide coverage for other losses as well, such as the cost of removing and relocating improvements under certain circumstances, but the two mentioned above are the key reasons to obtain these endorsements. Texas adopted the estate-specific endorsements under a new T-55 endorsement series: the T-55/55.1 (leasehold and easement), 55.2/55.3 (leasehold only) and 55.4/55.5 (fee estate only).
3. Limitations on energy endorsements Texas adopted
The ALTA 36 series includes three other endorsements available for energy projects:
- 36.4/36.5: covers loss or damage relating to violations of recorded covenants, conditions and restrictions that impact use of the land
- 36.6: covers, among other things, loss or damage resulting from project improvements encroaching into third-party easement areas
- 36.9: a very recent addition to the 36 series, covers loss or damage relating to future mineral development on the site
Texas did not adopt the 36.4, 36.5 or 36.6 endorsements. Therefore, developers should still seek Texas’ T-19/19.1 endorsements and express coverage for encroachments over certain easements in addition to the T-55 estate-specific endorsements. Texas did adopt its own version of the 36.9 endorsement in the form of the T-19.4 endorsement, which supplements coverage already available under the T-19/19.1 and 19.2 endorsements. The details of these endorsements will be covered in a separate post.
The adoption of some of the energy-specific title endorsements supports development of energy projects in Texas and brings Texas title policies more in line with the coverages available for energy projects in ALTA states. Energy project developers should start requesting the applicable endorsements discussed above to ensure that their title policies include these energy-specific coverages.