What is Title Insurance?
What You Should Know
Real estate title insurance very simply is an insured statement of the conditions of one's title or ownership rights to a certain piece of real estate. The policy guarantees that the property being purchased or mortgaged is free from undisclosed liens or rights and it guarantees additionally that any confusion as to rights of ownership will be resolved in favor of the party owning the real estate or the title insurance company will be liable for loss in value to the policyholder up to the policy limits.
A buyer purchasing real estate is offered the opportunity to purchase an owner's policy of title insurance by the settlement agent, attorney, escrow company or title agent conducting the real estate closing. For example, you decide to purchase a house in Boston and are obtaining a mortgage to help you finance the purchase from a bank or mortgage company. That institution will require an examination of the title to the property and have party reviewing the title issue to them a lender's policy of title insurance insuring that the property is or will be owned by the purchaser, that there are no defects, liens or encumbrances on the property which would adversely affect the marketability of its title and that the mortgage is recorded properly and secures the property for the repayment of the loan.
Since the settlement agent, attorney, escrow agent or title agent is already issuing a lender's policy of title insurance the buyer has the opportunity at that time to obtain an owner's policy of title insurance at a cost substantially less than the buyer would pay if the policy was not written simultaneously with the lender's policy.
The owner's policy of title insurance insures that the owner has good marketable title to the property free of any encumbrances or liens that would adversely affect the property, except those made known to the buyer, and insures to the owner that if any such liens, encumbrances, defects or other title problems become known the title insurer will defend the buyer's title to the property.
In many instances we are asked whether or not title insurance is necessary or advisable for the owner to purchase. We recommend the purchase of the title insurance for some very simple reasons.
First, the premium for purchase of the title insurance policy is a one time charge. Since the purchaser is usually borrowing money to finance the purchase, the majority of the cost of the title insurance policy that the owner would receive has been paid through the premiums for the lender's policy which is required by the loan. Usually for a few hundred dollars or less the owner can insure against a variety of problems which may have occurred in the chain of title or history of the property.
These items include forged documents in the chain of title, signatures of mentally incompetent persons or minors which are unknown to the party reviewing the title, mistakes or inaccuracies in recording of legal documents of title at the appropriate place or recording or registration of title, fraud in the execution or in the handling of the recording or indexing of recorded documents, undisclosed or missing heirs, fraud in the execution or in the handling of a transaction in the prior chain of title, invalid divorces or misrepresentation of marital status of the parties signing the documents, and most importantly clerical errors in the public records and claims of parties unknown because their claims have not been filed in any indices of public record.
Even though the buyer may be asked to pay for the lender's title insurance protection, the lender's policy of title insurance does not protect the buyer and a claim can only be made if the lender suffers a financial loss because of a title defect that adversely affects a foreclosure of the buyer's mortgage. There are many defects in titles which are not revealed by an examination of the public records. These defects usually arise at a time after the transaction has taken place and purchasers can suffer significant losses as a result of them. That is why owner's title insurance makes a great deal of sense.
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Why Title Insurance
The question is often asked by Buyers as to why they should require title insurance for any real estate they purchase. For Buyers of residential property their purchase often represents their largest and most important investment, a home. For a modest one-time premium paid at closing, Buyers obtain the security that hey are now covered for the rest of their lives against any claim against their title to their property that arose prior to their purchase. Examples of such issues include forgery in a deed in the chain of title, missing or omitted heirs in prior deeds, and easements across property that are not mentioned in current deeds.
For Buyers of commercial or investment property obtaining an owners policy of title insurance is simply part of a sound business practice.
A related second question is whether an attorney's title opinion protects a Buyer from all the types of claims covered by title insurance. The answer simply is "no." An owner's policy of title insurance provides coverage against claims and encumbrances against title that may arise regardless of whether or not the title to the property was correctly searched pursuant to Maine State Bar Association Standards. In an increasingly technology-driven age most title examinations are done over the internet. Errors in data entry result in name index errors and incomplete or erroneous title exam results. Undischarged mortgages or liens go unnoticed resulting in claims against title. These and many other bases for claims are covered by owner's title insurance policies.
Finally, at such time as an owner desires to sell their property, providing a copy of an owner's title insurance policy to their broker for disclosure to prospective purchasers simply helps to effectively market their property.
For any further questions as to real estate and/or title insurance please contact Scott Ladd at (207) 582-3650 or at jsladd@farrislaw.com.
No Title Too Small
January 2012
I recently met with a client who owns some property up north with a couple of his brothers. He had contacted me with the intent of having me prepare a deed and a simple settlement statement with which to buy out his brothers' interest in their land. I asked whether the client would like for me to search the title to the property he was buying. The client (we'll call him "Jim") stated that his father had owned the property for some time prior to gifting it to his sons a couple of years ago. I replied that he was about to pay his brothers for the property and that $300 spent on a title search was a small expense in relation to the thousands of dollars he was about to pay. Jim agreed and I conducted a title examination of the property.
The following week I completed the title examination for Jim and gave him a call. It turned out that he and his brothers did not have good, clear title to their property. There was a deed into Jim's father decades ago from the widow of a former co-owner of the property with Jim's father. The widow had conveyed whatever interest she had acquired from her deceased husband, however, it was not clear whether or not there were any children or other parties who also may have had an interest in her husband's estate. Making resolution of this issue more difficult, there is no evidence that the late husband's estate was probated in the county where the property is located.
The lesson learned from Jim's situation is that no title to real estate is too simple to have searched by a knowledgeable attorney or title company. The title search fee paid to Farris Law and Black Bear Title is small in relation to the knowledge that Jim now possesses as to the quality of title to the property. Jim is now utilizing this information to reconsider whether or not to buy out his brothers' interest and at what price.
Should you be interested in purchasing any real estate, borrowing money secured by real estate, or have any other real estate related issues, do not hesitate to contact Scott Ladd at Farris Law (582-3650 or jsladd@farrislaw.com).
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