What Is Title Insurance and What Does It Cover?
Title insurance is protection against loss arising from problems concerning the title of your property. Title searches are completed on the property that provide a full history of the land. It will assist the examiner, or closing agent, to determine if there are fraudulent conveyances, unpaid taxes, unreleased liens against the property or problems with the legal description being conveyed. Title insurance covers the insured party for any claims and legal fees that arise from such problems.
There are two different types of title policies: lender policy and owner policy. If you take out a mortgage, most likely, the lender will require such protection for an amount equal to the loan. As with all mortgage insurance, it protects the lender but the borrower will pay the premium, which is a one time single payment made upfront, at the time of the purchase or refinance. The coverage will continue for the life of the loan but once the loan is paid in full and released, the coverage under the policy will stop. Although, sometimes the owner may indirectly benefit from the lender coverage, this required insurance protects the lender up to the amount of the mortgage, but it does not protect the owner’s equity in the property. For that protection, you will need an owner’s policy for the full value of the home. In many areas, sellers pay for owner policies as part of their obligation to deliver good title to the buyer. In other areas, borrowers must buy it as an add-on to the lender policy, under a simultaneous rate. It is advisable to do this because the additional cost above the cost of the lender policy is relatively small. However, there is no requirement to obtain owner policy as there is on the lender policy.
Owners often believe that since they have paid for the lender coverage that it protects them as well as the lender and there is no necessity for the additional owner policy. This is simply not the case. Title policies are indemnity policies that protect against loss and a lender policy would only cover the lender’s loss.
Unlike most insurance policies, title insurance, with a few exceptions, only protect against losses from claims that arose prior to the date of the policy. Coverage ends on the day the policy is issued and extends backward in time for an indefinite period. This is in marked contrast to property or life insurance, which protect against losses resulting from events that occur after the policy is issued, for a specified period into the future. However, these type policies also have ongoing premiums to insure the policy remains in place instead of the one time premium that is paid for title insurance.
Sometimes title problems occur that could not be found in the public records or are inadvertently missed in the title search process. To help protect the owner, in these events, it is recommended that the owner obtain an Owner’s Policy of Title Insurance to insure the owner against these unforeseen problems.
Owner’s Title Insurance is usually issued in the amount of the real estate purchased. It is purchased for a one-time fee at closing and lasts for as long as you or your heirs have an interest in the property.
You also have the option of purchasing a policy with expanded coverage. It’s called the Homeowner’s Policy or Enhanced Policy and it covers more things than the Standard Alta Owner’s Policy. First American Title Insurance Company’s Enhanced policy is commonly referred to as an Eagle Policy. It is only issued on one-to-four family residential properties, improved land and in cases where the insureds are individuals rather than an entity such as a corporation or partnership. We will go into greater comparison between the standard and enhanced policies later in this presentation.
Now that we have just covered the basics, let’s take a look at some of the common title issues that may arise which would be covered under a title insurance policy.
Fraud and Forgery
An innocent buyer purchases an attractive home through a realty company, accepting a notarized deed from the seller. Several months later, another couple, and the true owners of property who resided in another state, suddenly appear and initiate legal action to prove their interest in the real property is valid. Under the Owner’s Title Insurance policy, the title company provided a money settlement to protect against a financial loss being suffered by the insured owner. As it turned out, the forger spent time in the local court house, searching the public records to locate property, with out of town owners, who had been in possession for an extended period of time. The individual involved then forged and recorded a deed to a fictitious person and assumed the identity of that person before listing the property for sale to an innocent purchaser, handling most contacts through an answering service. Also, the identity of the notary appearing on the deeds was fictitious as well.
Fraud and forgery are examples of hidden title hazards that can remain undetected until after a closing despite the most careful precautions. Although emphasizing risk elimination, an Owner’s Policy protects you financially through negotiations by the insurer with third-parties, payment for defending against an attack on the title as insured, and payment of valid claims.
After purchasing a residence, the new owner was startled when a brother of the seller claimed an ownership interest and sought a substantial amount of money for his share. It seemed that their late mother had given the house to the son making the challenge, who placed the deed in his drawer without recording it at the court house. Some 20 years later, after the death of the mother, the deed was discovered and filed. Permission was granted in probate court to remove the property from the late mother’s estate, and the brother to whom the residence was originally given sold the house. However, the other brother appealed the probate court decision, claiming their mother really did not intend to give the house to his sibling. Ultimately, the appeal was upheld and the new owner faced a significant financial loss. Since the new owner had acquired an Owner’s Policy upon purchasing the real estate, the title company paid the claim, along with an additional amount in legal fees incurred during the defense.
A couple purchased a residence from a widow and her daughter, the only known heirs of the husband and father, who died without leaving a will. Soon after the sale, a man appeared claiming he was the son of the late owner by a former marriage. As it turned out, he indeed was the son of the late owner by a former marriage. This legal heir disapproved of his father’s remarriage and had vanished when the wedding took place. Nonetheless, the son was entitled to a share of the value of the home, which meant an expensive problem for the unwary couple purchasing the home.
Although the absence of a will hindered discovery of the missing heir in a title search of the public records, an Owner’s policy would financially protect the couple from the missing heir. Owner’s Policies will safeguard against problems including those even an exhaustive search will not reveal.
Prior Outstanding Liens
A single mother purchases a home for herself and her small child. At closing the title search shows that the seller has two outstanding trust deeds or mortgages on the property. He orders a payoff for both loans and payoffs the first mortgage in full but because of the bad economic times, the closing agent uses the funds, which were collected to pay off the second mortgage, to pay his office operating costs instead, hoping that next month profits will increase and he will replace the funds and payoff the loan. He completes the closing showing on the settlement statement that all prior liens were paid in full and the purchaser obtains an Owner’s Policy.
The economy continues to falter and the closing agent’s company eventually goes out of business. The loan, collateralized by the second mortgage that was never paid in full, goes into default and the lender begins foreclosure action on the insured owner’s property. The owner files a claim and the insurer pays for litigation and settles with prior lienholder to prevent foreclosure of the insured property.
There are many, many possible claim issues that can arise but the aforementioned issues gives you a sampling of claim issues that can arise on your property for which title insurance would protect the insured owner
Comparison between Standard Policy and Enhanced Policy
As previously mentioned, there are two different types of Owner’s Policies. The standard owner’s policy may be issued on both one-to-four family residential dwellings as well as commercial properties. It can be issued for both vacant and improved real estate and the Insured Owner may be either individuals or entities such as corporations or partnerships.
The Enhanced or Homeowner’s Policy, which First American issues as an Eagle Policy, provides the highest protection to homeowners. The Eagle policy premium is a 20% increase over the standard policy but that premium provides a much broader coverage. Some benefits that the owner will receive under the Eagle policy that are not provided under the Standard ALTA Policy are set forth below:
- Post policy forgery
- Post policy encroachments
- Post Policy Cloud on Title
- Post Policy Adverse Possession
- Post Policy Easement by Prescription
- Building Permit and Zoning Violation
- Expanded Access
- Encroachment of Improvements onto Easements and Setbacks
- Living Trust Coverage
- Encroachment of Boundary Walls and Fences
- Coverage amount increases over period of time
The Eagle Owner policy is the only title insurance policy that has deductibles for certain items due to the extension coverage it provides. These items are set forth on Schedule A in attached Exhibit B
What is Title Insurance?
Title insurance is protection against loss arising from problems or defects found in the title to your property.
Is Purchasing Title Insurance Obligatory?
It is if you need a mortgage, because almost all mortgage lenders require such protection for an amount equal to the loan. It lasts until the loan is repaid. Loan or Lender’s Insurance Policies protect the Lender but you pay the premium, which is a single payment made at the time the loan is taken out.
Does Title Insurance Do Anything for Me?
The required insurance protects the lender up to the amount of the mortgage, but it does not protect your equity in the property. For that you need an owner’s title policy for the full value of the home.
Doesn’t the Lender Policy Indirectly Protect Me?
No, title policies are indemnity policies. They protect against loss and a lender policy would only cover the lender’s loss.
When Does Title Insurance Protection Begin and End?
With the exception noted later, title insurance only protects against losses from claims that arose prior to the date of the policy. Coverage ends on the day the policy is issued and extends backward in time for an indefinite period.
For How Long Is the Property Owner Purchasing Title Insurance Covered?
Indefinitely. The owner’s protection lasts as long as the owner or any of his heirs have an interest or obligation with regard to the property.
Will Title Insurance Protect Me Against False Claims That Arose After I Purchased the Property?
The Standard Alta Policy does not. However, in many instances the Homeowner’s or Enhanced Policy will cover events that occur in the future.
Does Title Insurance Coverage Rise With Increases in the Value of My Property?
No. However, the Enhanced or Homeowner’s Policy increases by 10% a year for the first 5 years after issuance to 150% of the initial amount.
Why Do I Need to Purchase a New Policy When I Refinance?
You will not need a new owner’s policy but the lender may require you to purchase a new lender policy. Even if you refinance with the same lender, the existing lender’s policy terminates when you pay off the mortgage.
Does the Fact that Title Insurance Companies Pay Out Less in Claims Indicate That It Is Overpriced?
No. Because the title insurance protects against what may have happened in the past, most of the expense incurred by title companies or their agents is in loss reduction. They look to reduce losses by finding and fixing defects before the policy is issued.
Are Title Insurance Premiums Fair to Low-Income Borrowers?
Probably they are more than fair. Most title insurance costs arise in preventing loss rather than paying claims and prevention costs are not much different for a small policy than for a large one. Despite this, premiums are scaled to the amount of the mortgage or the value of the property, which suggests that smaller policies may even be under priced.
Does Title Insurance Guarantee Me That I Will Be Able To Sell My Property If an Unforeseen Claim Arises?
No. Title Insurance does not prevent loss of marketability due to a title claim, any more than fire insurance prevents a fire. If a claim arises, you probably won’t be able to sell your property until the claim is settled by the title insurer.
Why Are There Such Large Variations in the Cost of Title Insurance in Different Parts of the Country?
One major reason is that the services covered by the title insurance premium vary in different parts of the country. In some areas, the premium covers not only protection against loss but also the costs of search and exam.
Does the Borrower Have the Right to Select Which Underwriter Issues His Policy?
Yes, although few exercise this choice but are directed by one of the professionals with whom they deal such as the real estate agent, lender or attorney.