Not So Harmless? The Arizona Bill Amending A.R.S. § 20-1591 and Its Impact on Title Company Indemnities (2024)

By David A. Sprentall, Amanda M. Manke, and Alexandra K. Wogan

Sellers and borrowers involved in real estate transactions are customarily asked to sign indemnity agreements in favor of the title insurer. In April 2024, the Arizona legislature amended A.R.S. § 20-1591, which will impact the scope of such indemnity agreements.

The Interplay of Title Insurance and Indemnity Agreements Generally

Indemnity agreements are an undertaking by one party (the indemnitor) to compensate the other party (the indemnitee) for certain liabilities. Often, these liabilities come in the form of third-party claims. In the context of title insurance, indemnity agreements are used to assist title companies in determining the insurability of title to real property and in issuing policies of title insurance without taking exception for certain matters (e.g., unfiled mechanic’s liens, off-record easem*nts, parties in possession, etc.). Under such agreements, sellers or borrowers, as “indemnitors,” may indemnify the title insurer against certain risks that the title company takes when it issues the title policy. While an indemnity may cover title matters that the title company cannot find through the public records, what if the title company simply misses a recorded title exception in its search? Would the indemnitor be obligated to cover claims that arise because of the missed exception? While such a result may seem surprising, Arizona courts have held that indemnification for an indemnitee’s own acts and negligence is not a public policy violation.1 Accordingly, under Arizona law, it appears an indemnity could cover the title company’s own acts.

2024 Amendment to A.R.S. § 20-1591

Seemingly to address the issue of an indemnitor covering the title company’s own acts and negligence, the Arizona legislature recently passed, and the Governor has signed, S.B. 1042, which amends the relevant Arizona statute A.R.S. § 20-1591 relating to the enforceability of indemnity agreements in title insurance. This bill clarifies that an indemnitor is not liable to indemnify a title company unless the acts covered by an indemnity agreement fall within certain parameters. In essence, it creates a limited exception to Arizona’s typical law on indemnities by not allowing the title company to be indemnified for passively missing certain recorded title exceptions.

Under this amendment, an agreement that indemnifies from risks that arise from an instrument that is or becomes properly recorded, is only enforceable if it (a) is in writing and (b) indemnifies for matters that fall within at least one of the following categories:

1. An instrument that was not of record at the time the indemnity agreement was executed.
2. An instrument that is specifically described in the indemnity agreement.
3. An instrument that is shown as an exception from coverage in the title insurance policy.
4. The instrument is or secures a monetary obligation of the person and remains an outstanding and enforceable debt. Note that an improvement district assessment is not a monetary obligation that falls within this category.
5. The indemnity agreement indemnifies for or against unfiled mechanics liens that arise from work or labor done or professional services, materials, machinery, fixtures, or tools furnished on the insured property.

In other words, if the title company simply misses a recorded document such as an easem*nt, the resulting liability will not be covered by the indemnity agreement.

Key Takeaways from the Amendment

1. Arizona’s practice that has allowed indemnification for an indemnitee’s own acts and negligence faces a narrow exception through this amendment.
2. This amendment appears to clarify that except for deeds of trust and mortgages, if the title company misses a recorded document and does not include it as an exception on the title policy, the person signing an indemnity will not be obligated to indemnify the title company for that matter.
3. Title companies may benefit from exercising increased vigilance in ensuring all pre-closing title searches are complete and all exceptions are accurately disclosed.

Effective Date of the Amendment

This amendment will become effective 90 days after the end of the current Arizona Legislative Session.

Footnotes

1. See, e.g., Washington Elementary School District v. Baglino Corp., 169 Ariz. 58, 817 P.2d 3 (1991). [Back]