Title Insurance 101: A Summary Guide By: William Robinson, President of Attorneys Title Agency
Every summary of title insurance begins with an attempt to define it. This is difficult because title insurance is an insurance product unlike almost any other. It is an agreement to pay the insured’s financial loss if his or her ownership interest in land is different than as stated in the policy. In other words, the policy will define what the insured owns and then protect the insured against loss if that declaration is not correct.
To better understand this definition, it might help to explain what title insurance is not.
Title Insurance Protects Against Loss/It Does Not Promise To Fix Defects
If a purchaser buys a house and later discovers that the local telephone company has an undisclosed easement across the middle of the property’s back yard, the title insurer must pay for the reduction in the property’s value because of the easement. The insurer does not have to pay to eliminate the easement.
Title Insurance Only Insures Ownership
Title insurance does not assure a buyer that the property to be sold is fit for any particular purpose. It may be swampland in Florida. Title insurance simply confirms ownership.
Title Insurance Helps To Avoid Risk-Not To Assume It
The key to a title insurance commitment or policy is that it discloses risk. Most insurance policies simply assume risk. If a house burns down, the fire insurance policy should pay for the cost to rebuild it. Its insurance premiums are based upon determining the cost of the risk and spreading that cost among all policyholders.
Title insurance is different. It attempts to discover all of the limitations and defects in the ownership of property and to disclose them so that they can be eliminated prior to closing. Its insurance premiums are based upon the cost of researching the property’s title. This product makes the assumption that people want assurance that they own their homes, not simply the opportunity to collect a check if they discover that they do not.
By way of example, assume a property is subject to an undischarged mortgage. A title insurance policy will not automatically insure against that mortgage. Instead, it will disclose the mortgage and, thus, give the buyer an opportunity to make sure the mortgage is paid and discharged before the property is sold.
For this reason, it cannot be stressed enough that A BUYER MUST READ HIS OR HER TITLE INSURANCE COMMITMENT BEFORE CLOSING. This leads very nicely into the topic of Title Insurance Forms.
Title Insurance Forms
Many title insurance summaries devote considerable space to discussing different policy forms. For real ever, the policy is rarely an issue. The document that discloses title defects and must, therefore, be reviewed is a Commitment For Title Insurance.
A Commitment is just that: it commits to issue a policy provided certain requirements are met. These typically include that the buyer or lender acquires a deed or mortgage, has it recorded and pays the insurance premium. Other requirements may be listed, but the policy will still be issued, even if they are not fulfilled. Instead, additional exceptions from coverage may be added.
In general, a title insurance commitment is divided into four parts: 1) the cover or jacket, which describes its terms and conditions; 2) Schedule A, which is a declaration page describing who and what is insured; 3) Schedule B-I, which lists the requirements for coverage; and 4) Schedule B-II, which lists the exceptions from coverage.
The Commitment Jacket
This section is standardized for each insurance company. It merely confirms that the company is committing to provide coverage. In some cases, that jacket may also list standard requirements and exceptions from coverage, which will be described in later sections.
This schedule lists the type of policy or policies to be issued; the current owner of the land; and, the property’s official or “legal” description. Most importantly, however, Schedule A lists the commitment’s “Effective Date.” This is the time through which the property’s title has been examined. Any defects that are recorded after the Effective Date are not automatically insured against. Unlike other forms of insurance, title insurance protects against matters that have already happened. It does not insure against what may happen in the future.
As stated, this schedule lists the requirements that must be met before a policy will be issued. Many of these items are standard. For example, the commitment will require that a deed or mortgage be delivered and recorded; that the premium be paid; and that the parties to the closing be disclosed to the company. Schedule B-I will also usually disclose taxes that affect the property and must be paid. In addition, it will often list mortgages that must be paid and discharged for the buyer or lender to obtain “clear title.” Special attention must be paid to all of these items because if these requirements are not met, additional exceptions will be added to the policy when it is issued.
This is the schedule that lists all of the limitations to title, which will appear as “exceptions” to the policy coverage. This list must be reviewed very carefully. Generally, exceptions fall into two categories: standard and special. Standard exceptions appear on all commitments. While they differ somewhat from company to company, they typically include: 1) rights of parties in possession, such as tenants, if any; 2) unrecorded easements; 3) encroachments, overlaps or other matters that an accurate survey would disclose; and 4) unrecorded construction liens. All of these items can affect a property’s title even though no evidence of them has been recorded in the public land records. Typically a buyer can request “extended coverage.” In that case, these exceptions will be deleted if a satisfactory affidavit and survey or mortgage report are supplied to the company. Based upon what is disclosed, however, a title company may still raise a special exception to cover these items. For instance, if an affidavit discloses that a tenant occupies the property to be sold, the standard exception for parties in possession may be deleted, but a special exception for that tenant’s rights may be added.
Special exceptions, therefore, are those items that are unique to the particular property being sold. They may cover items one would expect, such as building and use restrictions or utility easements. They might also disclose problems, however, such as mortgages or tax liens, which should have been paid and discharged. This list needs to be thoroughly reviewed by a prospective buyer and he or she must be comfortable with all of the items included.
Can I Rely On My Title Insurance?
Yes, but be aware of its limitations. Title insurance coverage is regulated by state insurance agencies and it has been dependably sound. With all of the problems among financial service companies, title insurance companies have stood out as stable and solvent. Their policies’ coverage, however, may not always meet a buyer’s needs.
In the introduction, a situation in which a utility easement ran through the middle of a property’s back yard was outlined. Title insurance would only pay for the reduction in that property’s value because that easement exists. That reduction in value could be nominal. Title insurance will not pay to remove the easement. Suppose, however, that a buyer specifically purchased that home with the dream of installing an in-ground pool. That buyer’s title insurance policy would not make him or her whole.
Property information is only as good as the company providing it. Not all title insurance is the same. As with most services, it pays to know the reputation and ability of the company providing them. A buyer’s best protection is to do business with a title insurance provider that he or she can trust.