One of the most misunderstood insurance policies is a title insurance policy. Most consumers regard it as a waste of money and just adding to the high closing fees on their purchase or sale.
This is far from true, as according to the American Land Title Association, about 25 percent of all residential real estate transactions have issues with the title. Most are resolved prior to closing; however, some claims and challenges can crop up after you have become the new owner. Examples include a mortgage which has been paid off but never released or a deed without a marital status.
There are two types of title insurance policies that you will be offered at your closing. The Lenders’ Policy protects the bank against possible title problems and you will be required to purchase this policy if you are financing your home. It does not, however, protect your interests. For your protection you will need to buy an Owner’s Policy.
Unlike other forms of insurance, title insurance covers what has happened in the past instead of the future. The current owner is liable for these past events through their equity and liability in the property and an Owner’s Title Insurance Policy will protect you. Title insurance is paid through a one-time premium, usually at closing. Given the cost of insurance in general, this single premium is relatively low cost while affording significant protection to the property owner. If a title claim arises, merely consulting a lawyer to defend the claim can cost a property owner more money than the policy premium. The policy continues as long as you have any interest in the property. This means if you warranty the title (file a Warranty Deed as opposed to a Quit Claim Deed) to a future purchaser, that Owners Policy covers you in the event that a previous issue affects their ownership interest. Almost all title insurance policies in the United States are issued on universal forms approved by the American Land Title Association, although some states have modified them.
Following are items that a Basic Owner’s Title Policy would cover, if not disclosed and listed as an exception:
- Documents recorded during the time period between title examination and closing
- Unrecorded documents that may give other individuals or entities an interest in the property
- Encroachments by fences, driveways or other structures
- Forged documents
- Invalid or fraudulent probate of wills and estates
- Improper foreclosure
- Incorrect marital status of owner
- Invalid or contested divorces
- Liens filed by contractors or others who have not been paid for labor, materials or services provided on the property
- Previously undisclosed heirs with claims to the property
- Tax liens
- Transfer of the property by a minor or mental incompetent
- Property line disagreement
- Mistakes in the public records
If you don’t understand an exception, ask your title agent or your attorney. Additional coverage may be negotiated for an additional fee, but remember, title insurance only covers past issues that may surface later. The title insurer has the right under the policy to either provide legal defense or pay you the amount of your loss, up to the amount of your policy, which should be the amount of your purchase price. Owners Title insurance does not cover matters that happen after you take title to the property or if you create the issue to the title. Examples would be if you don’t pay your contractor and he files a Mechanics Lien or you don’t pay your taxes and a tax lien is filed against you, title insurance will not cover actions you created or agreed to. It does also not cover anything your lender does as this event most likely occurred after you took title to the property. Unlike most other forms of insurance, title insurance is coverage for PAST matters.
A Lender’s policy which is sometimes called a loan policy is issued only to mortgage lenders. Generally speaking, it follows the assignment of the mortgage loan, meaning that the policy benefits the purchaser of the loan if the loan is sold. For this reason, these policies greatly facilitate the sale of mortgages into the secondary market. That market is made up of high volume purchasers such as Fannie Mae and the Federal Home Loan Mortgage Corporation as well as private institutions.
In general, the basic elements of insurance they provide to the lender cover losses from the following matters:
- The title to the property on which the mortgage is being made is either
- Not in the mortgage loan borrower,
- Subject to defects, liens or encumbrances, or
- There is no right of access to the land.
- The lien created by the mortgage:
- is invalid or unenforceable,
- is not prior to any other lien existing on the property on the date the policy is written, or
- Is subject to mechanic’s liens under certain circumstances.
As with all of the ALTA forms, the policy also can cover the cost of defending insured matters against attack.
Elements 1 and 2 are important to the lender because they cover its expectations of the title it will receive if it must foreclose its mortgage. Element 3 covers matters that will interfere with its foreclosure.
Of course, all of the policies except or exclude certain matters and are subject to various conditions.
Additionally, one of the most important exclusions is the policy excludes “matters agreed to or suffered by the lender”.
A lender’s policy only covers the lender and an owner is not covered which is why if you are purchasing you should always make sure to get an Owner’s Policy.
Most people don’t understand that you have right to shop around for title insurance (some states set the rates) and it is illegal for someone to tell you that they will not sell or give you the loan unless you use a specific title insurance company. In some areas you can request a discount if you have a copy of your recent title insurance policy.
It depends on what part of the country you are purchasing property who would pay for either title insurance policy. However, the final determination would be what you negotiate in your contract. In the case of a refinance, the borrower usually pays the premium but some lenders have programs where they pay the closing fees, including the cost of the Lender’s title insurance policy.
If you feel you have a title insurance claim, be sure to file it with o your title insurance company, not that of the individual claiming the title to your property. First, get your owner title insurance policy in front of you. Make a copy of it to submit with the claim. If you can’t find your policy, make a copy of your HUD-1 Settlement Statement. The HUD-1 is proof that you paid for an owner policy.
Look for the name and address of the actual title underwriter, not the agent. Some but not all policy jackets will have this information prominently posted, some will not. If you can’t find it, look for a large office of the title underwriter in the closest metropolitan area. You can find it on-line if you Google their name. In many cases the underwriter will have a form on their web page to file a claim with explanations. Included in a title insurance claim is a written document explaining what your claim is about, and forms provided by your insurance company. Any additional information, such as letters back and forth regarding the dispute, receipts for the title to your property, and demands for payment should be included with your title insurance claim.
The company that ensures your title to property will usually respond to you within a few days of receiving your claim. Any further information or instructions will be included in this response. By law, title insurance companies are usually required to respond to your claim in a timely fashion, and issue an acceptance or denial of your claim along with any appertaining information. Many times, however, losses incurred due to title disputes are not covered under title insurance. If you feel as though your title insurance claim did not adequately cover you in the event of a title issue, you can contact a lawyer who will advise you as to how to continue claim proceedings.
The opinions stated in this blog are those of the author, and should not be construed to be a statement of fact or conclusion of law. Any statements herein should not be relied upon in any litigation, arbitration or mediation. Statements herein have not been approved by the American Land Title Association, its officers or members.