Title Insurance

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Why should I opt for an Owner's Title Insurance Policy?

Title insurance is quite different than most other types of insurance in terms of the type of risk that it covers. Most insurance, such as homeowners (property) insurance, protects the policy holder from risks in the future, such as fire or storm damage. Title insurance, however, provides coverage for past problems or errors in the chain of title to the property, such as missing or forged signatures, missing discharges, probate issues and a host of other problems. Buyers sometimes view title insurance as unnecessary because the events that are being insured have already occurred. The most common query is – “if there’s a problem with the title, why are we closing?”

There are actually two separate forms of title insurance – one form that protects the mortgage lender and the other that protects the new owner. In most transactions, where there is a mortgage lender, the lender will require a policy of title insurance to protect their loan (the “Loan Policy”).  The buyer pays the premium as part of the closing costs for the transaction. A buyer has the option of purchasing a similar policy of protection for their own interest (the “Owner’s Policy”). The Owner’s policy requires an additional premium to be paid, but offers coverage in a greater amount and for the buyer’s direct benefit.

In answering the hypothetical buyer’s question, “why would the closing go forward if there was a problem with the title?” the simple answer is that title  insurance protects against unknown  past problems. Most title claims involve problems or disputes that existed at the time the property was purchased, but were uncovered in the future.

Possible Hidden Risks that may be protected against include:

  • Forgery

  • Fraud in connection with the execution of documents

  • Unsatisfied claims not shown on the record

  • Incorrect indexing at registries of deeds

  • Conveyance of a minor

  • Clerical errors in recording documents

  • Improperly discharged mortgages, or undischarged mortgages

If an owner who purchased title insurance discovers a defect or dispute (usually this is discovered when a new title examination is performed in connection with a sale) the policy gives two critical protections. First, the insurance company will hire a real estate lawyer at their sole expense to determine whether the dispute is really a title defect. An uninsured owner, however, would have to pay their own attorney. Second, if the issue truly represents a defect in title that is, in fact covered by the policy, then the title insurance policy will assure that the transaction goes forward.

Title insurance premiums are based on the value of the real estate at the time of the purchase. The amount of coverage automatically increases during the first five years of coverage up to 150% of the original coverage amount for 1-4 unit residential properties. For example, if the original coverage amount was $500,000.00, the coverage would increase by the end of the fifth year to $750,000.00. The premium for title insurance is paid once, at the closing, and is then effective for the entire time the buyer owns the property without the need to renew.

Is purchasing title insurance obligatory?

It is if you need a mortgage, because all mortgage lenders require such protection for an amount equal to the loan.  It lasts until the loan is repaid.  As with mortgage insurance, it protects the lender but you pay the premium, which is a single-payment made upfront. 

Does title insurance do anything for me?

The required insurance protects the lender up to the amount of the mortgage, but it doesn’t protect your equity in the property.  For that you need an owner’s title policy for the full value of the home. If the Buyer purchases an Owner’s Title Insurance Policy for a slightly higher premium, the Lender’s Title Insurance Policy is included for a “simultaneous issue” premium of only $175.

When does title insurance protection begin and end?

With the exception noted later, title insurance only protects against losses arising from events that occurred 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.

For how long is the property owner purchasing title insurance covered?

Indefinitely.  The owner’s protection lasts as long as the owner or any heirs have an interest in or any obligation with regard to the property.  When they sell, however, the lender will require the purchaser to obtain a new policy.  That protects the lender against any liens or other claims against the property that may have arisen since the date of the previous policy.

For example, if the contractor you failed to pay for remodeling your kitchen places a lien on your home, you are not protected by your title policy; the lien was placed after the date of the policy.  You will probably be required to get the lien removed before you can sell the property.  But in the event the lien hasn’t been removed and a search has failed to uncover it, the new lender will be protected by a new policy.

Will title insurance protect me against false claims that arose after I purchased the property?

The standard policy does not, which is a weakness.  Many events beyond your control can reduce the value of your house after you buy it.  Identity theft can result in a new mortgage you know nothing about.  A neighbor could build on your land without your knowledge, thereby adversely possessing and possibly eventually taking your land.  Or you may suddenly be told that you must correct a zoning violation of the previous owner.

To deal with these issues, a new policy with expanded coverage has been developed. Arlene Keating LLC is more than happy to offer its clients expanded protection through owner’s title insurance policies. Additional benefits may include protection for forced removal due to failure to obtain a building permit, subdivision violation, post-policy date encroachment onto insured property and other risks.  In addition you can insure that your coverage is maintained if you transfer the property to a trustee of a trust which you are the settler.

 Why do I need to purchase a new policy when I refinance?

You don’t need a new owner’s policy, but the lender will require you to purchase a new lender's policy.  Even if you refinance with the same lender, the existing lender’s policy terminates when you pay off the mortgage.  Furthermore, the lender is concerned about title issues that may have arisen since you purchased the property, such as the lien mentioned in an earlier question.  A new title search will uncover the lien, and you will have to pay it off as a condition for the refinance. 

As an added benefit to our clients, Arlene M. Keating LLC generally offers discounts on policies taken out within short periods after the preceding policy.  In some cases, discounts are available as far out as 6 years from the date of the previous policy. This discount is based on the old loan amount.

 

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 fire.  If a claim arises, you probably won’t be able to sell your property until the claim is settled by the title insurer.  The interest of the owner and the insurer may clash in such cases.  The owner usually wants settlement immediately, whereas the insurer wants to minimize the cost of settlement, which may require time-consuming negotiations with the claimant.