Title Insurance: Four Important Things You Need To Know
As suggested by its name, title insurance is an insurance policy. But what does it cover, and what doesn’t it cover? And why is it important? Let’s get into some details and identify a few things you should know in this area.
1. Title Insurance Provides Coverage Against Certain Real Estate Risks.
In general, a title policy is an agreement by which a title insurance company takes on specific risks and agrees to indemnify the insured party for matters related to a piece of real estate as of the date of the policy.
The covered risks include title being vested differently than as outlined in the policy or title defects exist, as well as other defects such as encumbrances, obligations, or restrictions on the real estate. Say you bought a house and later find out the neighbor has a right to drive across your yard to access their property. If the title insurance policy doesn’t exclude coverage for the driveway, you might have a claim against the title insurance company.
Or, perhaps you bought a lakefront property and later find that an old agreement obligates you, as the lucky property owner, to pay part of the costs of the dam maintaining the lake. Again, you might have a claim against the title insurance company.
More extreme situations involving outright real estate fraud also occur. For example, assume ABC Company bought a piece of property from John Smith, and the title company issued an owner’s policy to ABC Company saying that it, ABC Company, is the owner of the property. If, however, it turns out John Smith was a fraud, then ABC Company could file a claim on the title policy for its damages (i.e., the money it paid for the property).
Title policies also provide insurance against several other risks, including unmarketable title, certain real estate tax liens, lack of access to and from the property, and some rights of eminent domain, governmental takings, and violations or enforcement of laws.
2. There Are Two Kinds Of Title Insurance.
There are two kinds of title policies – owner’s policies and lender’s policies, and they insure different interests in the real estate.
A real estate buyer obtains an owner’s policy as extra peace of mind that it will be the legal owner of the property upon closing. In many purchase and sale transactions, the purchase agreement will make the seller responsible for paying the cost of the insurance policy premium (by way of a deduction from its closing proceeds). That is a negotiable item, however, and the parties’ respective needs and bargaining power could result in them splitting the cost or shifting the premium to the buyer.
A lender obtains a lender’s policy of title insurance (usually at the borrower’s cost), which ensures that its mortgage will be the primary lien upon the property and paid first following a foreclosure sale
3. Exceptions, Conditions, And Limitations.
Like other types of insurance policies, title insurance policies come with many limitations, conditions, and exceptions to coverage.
a. Exceptions to Coverage.
A title company will always exclude coverage for certain standard risks (the so-called “standard exceptions”) under the title policy unless the title company receives a satisfactory owner’s affidavit and an ALTA survey.
Also, the title company will except – i.e., carve out from coverage – any specific matters of record. Schedule B to the policy lists these exceptions. For example, the title company will list any easements of record. Or, if your property is in a condominium, the title company will include the master deed or the rights of co-owners as an exception. As a result, even if the easements or master deed otherwise constituted a covered risk under the policy, the title insurance company would deny a claim by the insured party arising from those instruments because they were excepted from coverage.
b. Conditions and Limitations to Coverage.
Conditions under title insurance policies include requirements that the insured party must satisfy, such as promptly notifying the insurance company of claim, providing proof of loss, and cooperating with the title company in connection with its prosecuting or defending a proceeding. The insured party’s failure to satisfy conditions under the policy could delay action by the insurance company or result in denial of the claim.
The most important limitation is the amount of insurance, which is the maximum aggregate amount the title company will pay under the policy. Generally, it will be equal to the purchase price paid for the property (for an owner’s policy) or the amount of the loan (for a lender’s policy). Note that all payments (except for payments of costs, attorney fees, and expenses) reduce the amount of insurance available for subsequent claims.
4. Cost and Payment of Title Insurance Premium.
Like other insurance products, each state regulates the cost of title insurance sold within its borders. So, the cost of an owner’s or lender’s policy in one state will be different than similar policies in another state. Unlike other insurance products, however, the title insurance premium is a one-time payment, paid to the title company at the closing of the real estate purchase or loan transaction.
A title insurance policy comprises pages and pages of details, terms, and conditions, but everyone involved in a real estate transaction benefits by having at least a general understanding of its purpose. Reach out to your insurance agent or attorney if you have questions or need more insight regarding your title insurance policy.
All information and other content on this site is for informational purposes only. It is not legal advice. You should not rely in any manner upon the information on this site or otherwise construe it as a legal opinion or legal advice. Consult with your lawyer regarding your particular issues and circumstances.
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