Fidelity National Title Group, a subsidiary of Fidelity National Financial, the largest title insurer in the world, has issued an underwriting bulletin to its agents in 28 states to not insure any land used “for the production or distribution of marijuana.”
According to the memo issued June 29, 2017 by Fidelity National Title, the company’s Chief Underwriting Counsel said that properties in the 28 states “that have in some capacity legalized cultivation, distribution, manufacture or sale of marijuana products” will not be insured by Fidelity.
The bulletin instructs its agents and people in company operations to include the following language in every title commitment that the company issues in the 28 states. This underwriting bulletin (coded as Fidelity National Title Insurance bulletin 2017 RC-05) states:
“Please be aware that due to the conflict between federal and state laws concerning the cultivation, distribution, manufacture or sale of marijuana, the Company (Fidelity) is not able to close or insure any transaction involving Land that is associated with these activities.”
On its web site, Fidelity National Financial describes itself as “the nation’s largest title insurance company through its title insurance underwriters – Fidelity National Title, Chicago Title, Commonwealth Land Title, Alamo Title and National Title of New York – that collectively issue more title insurance policies than any other title company in the United States.”
The bulletin recommends that if a title company sends out a “welcome” package or instructions before closing that it should include a similar statement saying the land will not insured. The bulletin also says “the sooner we indicate our unwillingness to insure, the better all around.”
In effect, the bulletin can affect the purchase and sale of undeveloped land, commercial properties, retail stores, and houses, where marijuana has been used even in states where it is legal. In effect, the bulletin and denial of title insurance means that many properties will not be financeable in a real estate transaction.
When a commitment letter is sent to a purchaser, the Fidelity underwriting bulletin means a seller and buyer of real estate have to sign an affidavit attesting that the property was not used for any purposes related to cannabis activities.
The bulletin was issued because the company said it did not want to discover at the actual closing event that the property “is used or intended for such purposes,” which would then resulting declining the title insurance coverage. If the statement is sent to buyers before the closing Fidelity said “it should make it easier to decline earlier in the transaction and put the burden of disclosure on the parties to the transaction.”
Impact on Cannabis-Related Real Estate
Reaction to the Fidelity underwriting bulletin was strong. One title insurance executive said the memo “sounds like a game changer” in terms of how cannabis-related properties can be bought and sold.
He also speculated that the company may have been acting in response to federal pressure to stop the expansion of the cannabis industry in states where it has become decriminalized.
The title insurance executive said “this can be a way to shunt this title insurance business to a subsidiary or the re-insurance industry at a much higher cost for title insurance or to use an indemnity policy.
In a LinkedIn post on March 2017, prior to the issuance of the Fidelity underwriting bulletin, attorney Michael J. Moore, citing an earlier 2016 article written by Vince Sliwoski, wrote “in states that have legalized the plant so far, title insurance companies set up a specific exception in their policies which excludes coverage over governmental actions, such as civil and criminal forfeiture of property under the federal Controlled Substance Act. Failure of the purchaser to disclose its intended use of the property may result in the title insurance company denying liability on a claim relating to property forfeiture because of the marijuana activity on the property. It is recommended that a buyer disclose their intended use of the land. Otherwise, the title company has an argument not to pay on claims.”
Moore also said “many title insurance companies have refused to act as an escrow agent for those transactions, because of the uncertain legalities involved. They have refused to handle the transfer of funds and closing documents. Some companies will not get involved in any aspect of the closing process, while others may provide a facility for the settlement of the transaction and issue a title insurance policy. Without title companies providing escrow services, the parties to a transaction must locate neutral third parties to perform the service.”
While the insurance industry, including life, auto, home, have addressed claims and procedures in states where cannabis is legal or decriminalized, the real estate title insurance directive has more significant and expensive implications.
The Fidelity underwriting directive, however, takes the decision to not insure title for cannabis-related properties to a new level and one that may have been developed at the behest of federal authorities.