A lender completes its underwriting, finalizes loan terms, and is days from closing. At counsel’s recommendation, the lender has required a Lender’s ALTA title policy at 125% of the loan amount—a standard precaution designed to provide coverage headroom for protective advances, accrued unpaid interest, and other indebtedness that may accumulate above the original principal balance. Then title throws a complication: they will not issue coverage above the loan’s face value.
This situation is more common than it should be, and how a lender responds makes a significant difference to their risk exposure at closing.
Why 125% Coverage Matters
The amount owed under a loan does not always remain equal to its original principal balance. Protective advances—disbursements a lender makes to preserve collateral value or protect lien priority, such as paying property taxes or insurance premiums after a borrower default—can push the outstanding indebtedness above the loan amount. Accrued default interest and fees can have the same effect. A title policy capped at the original loan amount may leave a lender uninsured for exactly those amounts that accumulated because the borrower defaulted and the lender had to step in to protect its position.
Coverage at 125% of the loan amount creates a cushion that accounts for this potential growth in indebtedness. Many experienced private lenders treat it as a standard requirement rather than an optional enhancement.
The Title Company’s Perspective
Title companies are insurers. Insuring an amount in excess of the property’s appraised value or the loan’s face value is outside some companies’ standard underwriting guidelines. The hesitation is not necessarily irrational—insuring above the loan amount means the company is accepting exposure to amounts that may not be recoverable from the property in a foreclosure sale. Some title companies decline such requests categorically; others evaluate them on a case-by-case basis.
Understanding why a specific title company is declining helps determine the right response.
Do Your Homework Before the Transaction
The most effective way to avoid a closing-day coverage crisis is to select a title company known to accommodate 125% coverage requests before the transaction is under contract. Lenders who work regularly in a given market develop relationships with title companies whose guidelines align with their standard coverage requirements.
Equally important: if a borrower is selecting the title company, the lender should confirm in advance that the selected company will issue the requested coverage amount. If it will not, the lender should require substitution of a compliant title company while there is still time to make the change without delaying closing.
Discovering a coverage refusal at the closing table gives a lender very limited options.
Responding to a Denial
When a title company declines to issue coverage above the loan value, the first step is to obtain a clear explanation of the specific basis for the denial. The reason matters because it determines whether the denial is negotiable.
A refusal based on an identified title defect—an unresolved lien, a chain of title issue, or a recorded encumbrance that the title company has flagged—is a different problem than a refusal based solely on the company’s internal risk guidelines. Defect-based refusals require the underlying issue to be resolved before coverage can be expanded. Guideline-based refusals may be negotiable with proper documentation and escalation to the right underwriter.
Obtain a copy of the preliminary title report and review it carefully for any issues the title company has identified. Errors in the report—incorrect legal descriptions, missed releases, or outdated lien information—should be corrected. Legitimate defects require resolution through curative action: clearing outstanding encumbrances, obtaining subordination agreements, or addressing disputes affecting the chain of title.
If the refusal is based on the title company’s risk guidelines rather than a specific defect, request escalation to a senior underwriter. Senior underwriters often have more authority to approve non-standard coverage requests and a deeper understanding of commercial lending transactions. Present the underwriting rationale for the coverage request clearly, including the nature of potential protective advance exposure and the specific reasons the extended coverage amount is appropriate for this loan type.
Loan Type Affects the Analysis
The argument for 125% coverage is stronger for some loan structures than others, and framing the request in terms of loan type can improve the outcome of a negotiation with a reluctant title company.
Amortizing loans gradually reduce the principal balance over the loan term. Because the outstanding balance decreases steadily, a policy at 100% of the original loan amount is progressively more adequate as the loan amortizes. Title companies are generally more comfortable with 100% coverage on amortizing loans precisely because the coverage-to-balance ratio improves over time.
Interest-only loans carry a different risk profile. The principal balance does not decline during the loan term, and any protective advances or accrued default interest push the total indebtedness above the original loan amount. The argument for coverage above 100% of the loan amount is substantially stronger for interest-only structures. If a title company refuses extended coverage on a simple interest loan, finding a title company willing to provide it is usually preferable to accepting inadequate coverage.
Commercial loans may benefit from a conversation with the title company’s senior underwriting staff. Commercial lending professionals understand the protective advance dynamic in a way that standard residential underwriting staff may not. Requesting to speak with someone familiar with commercial transactions rather than standard residential policies often produces a more productive conversation.
Alternative Risk Mitigation Approaches
When extended primary coverage cannot be obtained and the lender cannot substitute a more accommodating title company, several alternatives provide partial mitigation.
Renegotiating loan terms to reduce the principal amount or structure protective advances differently may bring the total potential indebtedness within the title company’s coverage appetite without requiring extended coverage.
Supplemental title insurance from a secondary market can sometimes fill gaps between the primary policy’s coverage and the desired protection level. These arrangements are less standardized than primary title policies and require careful review of what they actually cover.
Alternative risk transfer mechanisms — such as environmental liability insurance or other specialty coverages addressing specific identified risks — may address particular coverage gaps even when aggregate extended coverage is not available.
Practical Checklist
- Identify your required coverage amount and confirm title company willingness to provide it before executing the purchase agreement or loan commitment
- Review the preliminary title report for defects that may explain any coverage hesitation
- If a denial is received, request a specific written explanation and evaluate whether it is defect-based or guideline-based
- Escalate to a senior underwriter with a clear commercial lending rationale for the coverage request
- If the title company will not accommodate the request, identify an alternative title company before the closing timeline is compromised
- For interest-only loans, be persistent—the risk profile justifies extended coverage and other title companies will often provide it
Geraci LLP’s Banking and Finance team advises lenders on title coverage requirements and closing strategy across a wide range of transaction types. If you have questions about navigating a coverage dispute or structuring your title requirements, contact us at (949) 403-3488 or visit our offices at 90 Discovery, Irvine, CA 92618.
