December 17, 2024
Gaithersburg, MD--Recently, we have seen a small number of Buyers who are declining owner’s title insurance coverage on what is likely the largest transaction of their lives. While custom may vary in different States, generally, it is the Buyer who decides if they want owners title insurance. In some cases, when a Buyer was trying to reduce the funds necessary to bring to settlement, their Realtor or lender suggested that the owner’s title insurance was not necessary. In other cases, Buyers were simply told by their Realtor or lender that they just did not need owner’s title insurance. By this assertion, the Realtor or lender may have saved their client or customer a few dollars at closing, but they have also just represented that title is and will always be clear. In effect, the Realtor or lender may have accidentally offered their client a free lifetime guarantee as to title. Because if something goes wrong with the title, it is the Realtor or lender who said that the owner “did not need it “and thus, that Realtor or lender is on the hook for the rest of their lives. In other words, the Realtor or Lender just became the title insurance company for life.
It is important to keep in mind that nearly all lenders require that a borrower purchase a lender’s title insurance policy, thus insuring the lender’s interest in the property against title defects in the borrower’s property. Keep in mind that the lender’s interest may be substantially different than the owner’s interest. For example, if there is a boundary line dispute, the lender’s policy doesn’t really offer much protection for the owner because this dispute isn’t going to affect the lender’s mortgage against the property. Boundary dispute or not, the owner still must make their monthly payment.
It is interesting to note that if the lender requires a policy as a condition of the loan, why wouldn’t the fear of a claim be of equal importance to the Buyer? In fact, as mentioned above, an owner’s interest in the property may be different than a lender. The lender is concerned about their mortgage being a valid lien against the property. They really are not too concerned about the same issues that the owner might be confronted with.
Often, when debating whether to obtain an owner’s title policy, we will hear the Realtor or lender or Buyer claim that it is a new home, so how could there be any problems? Or they will mention that the land has been in the same family for generations. Inevitably, someone will ask, “what could possibly go wrong?” The short answer is that I have a treatise on my bookshelf that is about 2 inches thick. The title of this book is “The Law of Title Insurance.” The brief summary of the book is this: There is plenty that can go wrong.
When deciding on whether to buy owner’s title insurance, the Buyer should understand the process that takes place before a real estate settlement. A title search is performed, which is usually a sixty-year history of the title to the property. This report is called a title abstract, and it is a summary of the various documents and findings affecting the property. It can include
mortgages, deeds reflecting the history of ownership, easements, rights of way, covenants, and certain agreements. This search leads to the inevitable question as to why title insurance would be necessary if the land records are searched. Very simply, if the title abstract reveals an issue, then it is addressed. But the whole point of title insurance is to protect the insured against issues that could not be discovered from the search of the land records. If the search revealed a problem, then the problem would be addressed. It is the problems that the search doesn’t reveal that we worry about.
By way of analogy, if the Buyer were meeting with their State Farm or Allstate agent and while looking at the house, they noticed it was on fire, there is a pretty good chance that the agent would not insure the house against a fire. Likewise, if the title abstract reveals a defect, the title insurance policy is not going to protect against a defect that is discovered during the title search. The policy might actually “take exception” to this very problem. Or perhaps there is a problem that can’t even be discovered during the title search. It is that problem that leads to the necessity of obtaining an owner’s title insurance policy.
Indeed, the earth, and thus the land that the house sits on has been there for a very long time. Also, the land may have had many previous owners. Claims against any of these persons, missing heirs, mistakes in the land records, forgery, fraud, mis-filed liens and judgments can all surface after settlement, and even after a thorough title search is performed. Unfortunately, no examination of the title, no matter how complete or how expertly accomplished, can protect a purchaser against hidden defects which are not a part of the records. Also, it is possible that a claim could be made against ownership which is invalid.Without title insurance, it is the property owner who gets to pay an attorney to defend their right to the title. With a title insurance policy, it is the title insurance company who will pay the attorneys to defend against a covered claim.
Below is a short list of some of the more common “hidden defects” which occur in title insurance claims:
FORGERY: Forgery, often expertly done, when revealed, has clouded title to thousands of properties. It happens with alarming regularity and quite often involves the most unlikely people, which is why it is often undetected for a long time. A forged deed conveys no valid title to the home.
THE MISSING SPOUSE: Many people have innocently bought homes from a man or woman they thought was “single,” only to have an estranged, separated, or missing spouse later reappear to claim his or her ownership rights in the home.
THE MINOR OR MENTAL INCOMPETENT: A deed from a minor or mentally incompetent person will cloud the title to a home, although this could not be detected from a title examination.
MISSING HEIRS: Missing heirs and vague or incorrectly drawn wills are a fruitful source of headaches for innocent home Buyers. A person thought to have no living relatives may die and have their property sold in a seemingly legal manner, only to have a long-lost relative turn up years later to claim a whole or part interest in the home.
SIMILARITY OF NAMES: There are thousands of Johnsons in any given community, many with identical first names or initials, and when there are judgments, liens, or divorces involving dozens of people by the same name, the title search is no easy matter. To make it still harder, members of the same family may spell their names differently or one may use several spellings in his or her lifetime. A wife and husband may divorce, and the husband may marry another woman with the same first name as the first spouse. The second wife’s signature might then appear to dispose of the first wife’s legal rights, although, of course, it could not do so. Two members of the same family often have the same name, as in the case of father and son, and title may be held by one, while the Deed is executed by the other, who has no ownership interest.
IMPROPER DEEDS: A deed may have been delivered without consent of the owner or after the owner’s death. A document may have been executed under an expired or improperly drafted power of attorney. The name of the grantee may have been inserted in the deed after its delivery. The officer of a corporation may not have been properly empowered to act. In any case, the action may result in loss of title.
MISTAKE: One of the most common title claims results from a simple mistake in the Courthouse land records. A lien may be improperly filed, or a judgment may have been incorrectly indexed.
Title insurance premiums vary by State. Many States require that the title insurance company must file their rates with the State and the rates are non-negotiable. Also, most States prohibit a title insurance or settlement company from giving a rebate, discount, or credit that reduces the premium paid or offering any valuable consideration or inducement to encourage a Buyer to purchase owner’s title insurance. The rates are based, in part, on the purchase price of the property and loan amount (if any). Unlike other insurance, the owner’s title insurance premium is paid once (and only once) at the time of settlement, as part of the Buyer’s closing costs. The policy is issued by the title company, who is typically an agent of the title insurer. An estimate of an owner’s title policy premium can be found on the Village Settlements/Kriss Law-Atlantic Closing and Escrow websites. Also, may States allow for a discounted or re-issue rate on the title insurance premium if evidence of the current owner’s policy is presented to the settlement company.
In the end, the ultimate decision as to whether it is a good idea to obtain title insurance should be made by the Buyer. It is unwise for a Realtor or lender to suggest to the Buyer that title insurance is unnecessary. While the purchase of an owner’s title insurance policy may indeed be optional, it is the only way for purchasers to protect their investment, and thus, their ownership of property against claims that arise after settlement. In fact, many of the new Enhanced Owner’s polices even provide coverage against forgery or fraud that occurs AFTER the settlement has taken place and title has transferred.
In today’s sophisticated technological society, along with artificial intelligence, forgery and fraud can be rather easy for an unscrupulous criminal to undertake.
For the many reasons stated above, and perhaps for the most important reason that has been left unstated, that is, the peace of mind that a one-time purchase of owner’s title insurance gives to the Buyer, the Buyer should undoubtedly obtain a policy. To be blunt, the cost of a policy is equal to about two or three hours of an attorney’s time. Clearing up a title claim can take hundreds of hours of attorney’s fees and time. Given that choice, the decision seems rather obvious.
David Parker is an attorney and the Managing Director of Village Settlements-an Atlantic Closing and Escrow Company. His columns have appeared regularly in local newspapers, magazines, and newsletters. He is the co-author of the book, “Real Estate Practice in DC, Maryland and Virginia.” If you have a topic that you would like him to write about, he can be reached at dparker@villagesettlements.com
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