What You Need to Know

• Title Marketability vs. Economic Marketability: Title insurance covers defects affecting title (legal rights and incidents of ownership), not defects affecting the physical condition or use of property (economic marketability).
• Physical Defects Are Not Title Defects: Without purchasing additional specific endorsements to a title policy, issues like lack of sewer line access, inability to obtain building permits, or other physical property conditions do not constitute unmarketability of title, even if they significantly impact the property's value or intended use.
• Policy Language Matters: The court interpreted "unmarketable title" narrowly based on the policy's specific definition, focusing on matters that would release a buyer from their contractual obligation when there is a condition requiring marketable title, not just any defect that might make a buyer unwilling to purchase.
• Transferability Test: The determining factor in determining whether title is unmarketable is whether the defect would prevent the owner from transferring title to another purchaser. Physical defects that do not affect the ability to convey legal ownership don't render title unmarketable.

Introduction

In Luster v. Investors Title Insurance Company, No. 1:25-cv-00791, 2025 U.S. Dist. LEXIS 188119 (N.D. Ga. Sept. 12, 2025), the United States District Court for the Northern District of Georgia considered whether defects in the physical condition of real property affect marketability of title under Georgia law. The court ultimately found that they did not and granted the title company’s motion to dismiss a claim for coverage.

Background

In January 2024, plaintiff Reginald Luster (“Luster”) purchased a title insurance policy (the “Policy”) from Investors Title Insurance Company (“Investors”) in connection with his purchase of real property in Fulton County, Georgia (the “Property”). In relevant part, the Policy stated that it insured against “loss or damage . . . sustained or incurred by the Insured by reason of” unmarketable title. Unmarketable title was defined in the Policy as “[t]itle affected by an alleged or apparent matter that would permit a prospective purchaser or lessee of the Title or lender on the Title to be released from the obligation to purchase, lease, or lend if there is a contractual condition requiring the delivery of marketable title.”

In February 2024, Luster applied for a septic tank permit for the Property. That application was denied because, unbeknownst to Luster at the time he purchased the Property, the subdivision in which the Property was located had access to sewer lines across the street, but the developer of the subdivision had not connected them. Luster was therefore unable to subsequently obtain a residential building permit. As a result, Luster submitted a claim for coverage to Investors. Investors denied coverage.

Luster filed a complaint against Investors seeking coverage under the policy. The instant case came before the court as a result of Investors’ motion to dismiss the complaint for failure to state a claim and Luster’s motion for summary judgment.

Decision

In support of his claim, Luster argued that title would be unmarketable because, had he known that he would be unable to obtain a residential building permit, he would have demanded to be released from the obligation to purchase the Property. However, the court rejected this argument and found that the policy definition of “unmarketable title” did not cover every matter that would release an objective, prospective purchaser from their obligation to purchase; rather, it covered only matters that would release a prospective purchaser if there was a contractual condition requiring the delivery of marketable title.

In reviewing prior case law, the court found that Georgia courts had distinguished between title and property, and that defects in the physical condition of a property do not constitute unmarketability of title. Said another way, there is a legal distinction between economic unmarketability — which affects physical conditions affecting the use of real property — and title marketability — which affects legal rights and incidents of ownership.

As to Luster’s claims, neither the defect in the Property’s sewer line access nor his inability to use the Property for a particular use would prevent Luster from transferring title to another purchaser. They would also not release a would-be buyer from the contractual obligation to purchase the Property. For these reasons, the court granted Investors’ motion, denied Luster’s motion, and found that Luster had not suffered a covered loss under the Policy.

Takeaway

This case reinforces the distinction between physical defects to real property and defects to an owner’s title. In a typical title insurance policy, only the latter would require coverage. Additional coverage can be obtained by purchasing specific endorsements that cover zoning (ALTA endorsements 3-06 to 3.4-06), utility access (ALTA endorsement 17.2-06), easements and encroachments (ALTA endorsements 28-06 to 28.3-06), and identified risks (ALTA endorsement 34-06), among other issues.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Associate Matthews A. Florez at mflorez@riker.com.