Client Alert
Title Insurance: Frequently Asked Questions (or that Should Be)
John C. Hickey
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Many real estate transactions, whether involving sales, financing, or leasing, involve title insurance. This form of insurance is significantly different from property and liability insurance policies, such as in how they are obtained and negotiated. Here are some questions and answers about title insurance that might not be asked frequently enough.
If I am buying real estate, when should I obtain an Owner’s Title Insurance Policy?
In most Midwestern states, the custom in a real estate purchase and sale contract is for the seller to pay for a title insurance policy for the buyer. Therefore, you should obtain a title policy when you purchase property. After all, the seller is paying for it.
Should I obtain an Owner’s Title Insurance Policy if I refinance my property?
The lender will require you to pay for a lender’s title insurance policy. You can get an owner’s title insurance policy for a modest additional charge if you ask the title company for one. Even if you already have an owner’s policy, you can get an updated policy that will cover any events occurring since the date of your previous policy. However, if the amount of the loan is less than the value of your property, you will not have full coverage unless you pay an extra premium for the additional coverage.
Why is the title company willing to simultaneously issue an owner’s policy for a modest additional charge? (Does the title company’s risk double?)
When both the lender and the owner hold title insurance, the owner’s title policy contains a provision that reduces the amount of the owner’s coverage if a title insurance claim is paid to the holder of a mortgage on the owner’s property. Therefore, the title company will not have to pay both the owner and the lender. The theory is that the owner benefits because its loan is reduced by the payment from the title company to the owner’s mortgage lender.
How do title insurance premiums work?
Title policies are unlike most insurance: The premium for the policy is paid when it is issued, and no further premiums are due in order for the coverage to continue indefinitely.
What do you mean “indefinitely”—when does my title policy expire?
Your owner’s title policy continues to provide insurance as long as you own the property. It does not provide coverage for someone who buys the property from you. However, you may have coverage even after you sell your property, if a subsequent owner makes a claim against you based upon a warranty in the deed you signed when you sold the property. Whether you will have coverage for breach of a deed warranty will depend upon whether your owner’s policy insured your title against the matter asserted as a breach. For example, if the breach of the deed warranty arises from an action by your predecessor in title, you will probably have coverage.
What about lender’s title polices—when do they expire?
The lender’s policy continues until the loan is paid and the mortgage is released or foreclosed. Even after foreclosure, the lender will have some title insurance coverage. If the loan is sold to a different lender, the new lender will be covered by the existing title policy, which follows the holder of the note secured by the mortgage loan.
What are “title exceptions” in the context of title insurance?
Title exceptions are matters that affect or encumber the title in any way. When a title company is preparing to issue a title policy, the title company will prepare a title report or a title insurance commitment. The title exceptions are matters that will appear in the title policy and for which the insured under the policy will not have title insurance coverage.
What is an example of title exception?
There are exceptions of all types, but one example would be a use restriction that prohibits using property for a restaurant. If the title company finds such a restriction in its search of the title records for the property, that exception will appear in the title policy and there would be no coverage for that matter. For this reason, it is important to review all the title exceptions in detail before buying or financing property.
Are there things that need to be negotiated with the title company when obtaining a title insurance policy?
Yes, the form title insurance policy contains so-called “standard exceptions” that can be modified or deleted if you arrange for appropriate assurances and documentation for the title company. However, if you don’t ask for these exceptions to be modified, the title company will probably leave them in your policy. One example is the mechanic’s lien exception. Because mechanic’s liens are effective as of the date when work commenced rather than the date on which the lien was filed, the title company has a risk that a mechanic’s lien filed after it insures your purchase of the property can still encumber your title. The title insurance company protects itself from this risk by having a standard exception in every title commitment for unfiled mechanic’s liens. The title company will usually agree to delete that exception, based upon assurances from the seller of the property that there are no unpaid bills that would constitute the basis for the filing of any mechanic’s liens. If you get the exception deleted, the title company will have to defend you against a mechanic’s lien that gets filed after your purchase and that relates to activities of your seller prior to the closing. Note that you will not be insured for liens arising from construction activities you undertake after you obtain title.
What are title policy endorsements?
Endorsements are additions to the title policy that provide additional coverage to the insured owner or lender. The title company will charge additional premiums for each endorsement. Some endorsements provide broader coverage for lenders than for owners, and other endorsements are only available to lenders. It is becoming common for real estate purchase and sale contracts to exclude the costs of title endorsements from the seller’s obligation to pay for the buyer’s title insurance policy. However, most lenders require endorsements.
