Although title insurance is purchased in nearly every real estate transaction, few Sellers, Buyers, or Lenders really understand what they are purchasing. The following questions and answers will provide information regarding title insurance and identify and highlight some of the intricacies of title insurance coverage.
In real estate transactions, buyers generally seek evidence that the title they propose to acquire is marketable. Lenders seek evidence of the priority of their mortgage. In both cases, this evidence has historically taken many forms, such as a title certificate from a government office, or an abstract of title and attorney’s title opinion. In almost all real estate transactions today, title insurance is the most commonly used evidence of title, because it is faster, cheaper, and provides broader protection (insuring over such things as fraud and lack of capacity) than other forms of title evidence.
A title insurance policy insures the status of the state of title to a specific parcel of real property. The policy is a statement by a title insurance company that, in exchange for a premium paid, it is willing to assume the risk that title to a parcel of real estate is as it is stated to be in the policy. A title insurance policy indemnifies the insured party (the Buyer or Lender) against losses suffered if title to the property is not as the policy states it to be. A policy of title insurance may be purchased from a title insurance company, which typically must have been licensed by the state body having jurisdiction over insurance companies, to underwrite this form of insurance. The purchase price for the policy is called the “premium.” In Florida, the “premium” for title insurance is regulated by the State.
A title insurance “commitment” is a document in which a title insurance company promises to issue its title insurance policy in the form and as of the date set forth in the commitment upon payment of its premium and recording of certain documents. A title insurance commitment is not considered a “policy of insurance.” A title company has no obligation under a commitment except to issue a policy when the premium is paid on a timely basis. A title insurance policy policy should be purchased at or following the closing.
A title insurance commitment contains a description of the property to be insured, the name of the proposed insured, and the coverage limits of the policy to be issued. It identifies the current owner of the property and the specific policy form that the company will use to insure title. A commitment also contains a list of requirements that are conditions to the issuance of a title policy and a statement of any standard and non-standard exceptions to title that exist and for which no insurance coverage will be provided.
The title company’s obligation to insure exists only as of the date the commitment was issued. Significant changes in title to the property could occur between the date the commitment is issued and the date the transaction in question actually closes. For example, during this period, the property could be sold or mortgaged or a tax, mechanic’s, or construction lien could be asserted. It is, therefore, extremely critical that a title insurance commitment be updated to the exact time of the closing in order that the title policy issued will neither be obsolete nor contain any unanticipated problems for the parties involved. This is called covering the “gap.”
A title search is a description of matters affecting title to a parcel of real estate that have occurred within a stated time frame. A title search is sometimes ordered by those having an interest in the history of title to a parcel of property (such as environmental engineers), but it is of limited value because it provides no contractual guarantee of accuracy or statement or assurance concerning the condition of title.
Although the matter is subject to negotiation between the parties, in Florida, the custom varies from county to county. In Broward and Maimi-Dade Counties, the buyer generally pays the title insurance premium for the owner’s policy and the lender’s policy. In Palm Beach County, the seller generally pays the title insurance premium due for the buyer’s owner’s policy, but the buyer pays the costs of the lender’s policy.
A Lender’s policy of title insurance provides the Lender with assurance that, at the time of the loan closing, the borrower held clear title to the real property collateral used to secure the loan and that the mortgage taken by the Lender has the priority required by the Lender. Title insurance for a lender is often required by applicable federal regulations. In addition, a Lender’s title policy must be in the lender’s loan file when the originator of a mortgage sells the mortgage on the secondary market.
Like other forms of insurance, title insurance insures only the party named as the insured party in the policy. A lender’s policy insures only the mortgagee and, in fact, the amount of coverage given decreases over time as the mortgage is paid down. An owner’s policy protects the owner. The title insurance industry customarily issues separate policies to both the owner and the Lender. If both are issued at the same time, the premium charged is often a “simultaneous issue” rate, which results in some cost savings to the buyer and Lender.
No, a title insurance company will often include in its policy exceptions to coverage dealing with matters affecting title that its search of public records has disclosed. Also, as discussed below, there are a number of standard exclusions and exceptions to coverage. In addition, although title insurance companies generally review title carefully and genuinely believe it to be in the state described in their policy, they also sometimes insure over risks that they consider to be insignificant or unlikely to cause a problem.
A standard owner’s policy covers:
-Failure of title to the property;
-Defects in or liens or encumbrances against title to the property;
-Lack of a right of access to and from the property; and
-Unmarketability of title to the property.
A standard lender’s policy may add coverage pertaining to the invalidity or unenforceability of the lien of the insured mortgage; the priority of any lien or encumbrance over the lien of the insured mortgage; and certain mechanics’ or construction liens.
In general, governmental matters, such as laws, ordinances, regulations (including those pertaining to environmental protection and giving the state a priority claim to real property), and rights of eminent domain are excluded. A title policy does not insure over claims arising out of creditors’ rights laws. Matters known by the insured, not known to the title insurer, and not disclosed by the public records are excluded, as are those resulting in no loss to the insured. Anything arising after the date of the policy, or resulting in a loss that would not have been sustained if value had been paid for the property, are also excluded from coverage. This means that title insurance will not cover property received by gift or donation, absent a special endorsement. In addition, claims of parties in possession of the property, unrecorded easements, mineral claims, mechanics’ or construction liens not of record, homestead rights, boundary disputes, survey matters, and building and use restrictions not appearing in the chain of title are excepted from coverage in a standard title insurance policy.
Yes, because these exceptions could affect not only the purchaser’s or Lender’s ownership or lien rights, but also the extent to which the insured property can be used and enjoyed.
Such exceptions might relate to prior mortgages, competing claims to ownership, or the existence of easements, use restrictions, or reservations, such as mineral reservations. Thus, the value of the property to the purchaser or the priority of a Lender’s mortgage and the extent to which the mortgaged property has value in the hands of a third party if the Lender must foreclose on and resell it could be affected by the existence of such exceptions. Therefore, a prudent purchaser or lender will have the documentation pertaining to non-standard exceptions carefully examined before the closing. Efforts may have to be undertaken to cure one or more of these exceptions. Purchasers and lenders should keep in mind that an appraiser often does not consider title exceptions when evaluating a parcel of property for mortgage purposes.
Like any form of insurance, title insurance is offered and subject to the terms and conditions of the policy, which are contained in the “fine print.” That fine print describes when and how claims must be made, sets forth the insurance company’s duty to defend, and describes the limits of coverage. Any purchaser of title insurance should be aware of two particularly important terms. First is the standard arbitration provision, which requires any dispute arising under the policy to be submitted to binding arbitration unless the amount of the original policy is in excess of $1 million. Second is a “co-insurance” provision stating that if the insured property is improved, the Owner of the property must apply for and receive increased coverage under the title policy or, in the case of a loss, be faced with coverage that is reduced from the original face amount of the policy in a proportion roughly equal to the ratio the value of the property as improved bears to the acquisition cost of the property.
Ordinarily, no, a title insurance policy need only be purchased once. After that, it continues in force in accordance with its terms, and no further premium must be paid. An owner’s title insurance policy even covers the owner, so long as he or she continues to hold the policy, if a claim is made against the owner based on a warranty she or he gives in a deed conveying out the property covered by the title policy. However, some owners’ policies contain the co-insurance provision described above under which the owner must purchase additional coverage if significant improvements are made to the insured property or be subject to a proportionate reduction in coverage if a claim is made. A lender’s policy of title insurance even covers the lender, so long as it holds the policy, if it succeeds to ownership of the property because of foreclosure or conveyance in lieu of foreclosure. Thus, in an ordinary mortgage loan, a title insurance policy once purchased protects the lender until the loan is paid in full. Coverage does decrease, however, as payments are made on the loan. The use of more sophisticated lending practices, such as revolving credit loans, variable interest loans, can, however, result in an unanticipated reduction in, or even elimination of, a Lender’s title insurance coverage if special steps are not taken.
Learn The Truth Before Closing
6 Key to a Successful Real Estate Closing
Let’s Work Together!
Call us for a free personalized quote today
Call us for a free personalized quote today and get knowledgeable answers to your contract questions now.