Title Insurance

Like most legal documents title insurance policies are boring to read and more or less guaranteed to induce somnolence.  Consequently, most everyone that has a title insurance policy has not read what it covers and has only a sketchy idea of what it is.

WHAT IT IS

When one purchases a home or other real estate, what one actually acquires is title to the property, rather than the land itself.  The title encompasses ownership, use, and possession of the land.  Thus, the purpose of title insurance is to assure owners that they are acquiring marketable title, in other words, that they’re getting something for their money when they buy real property.  Title insurance is broadly defined as a contract obligation whereby one party agrees to indemnify another party for loss or damage that may occur under the terms and provisions of their contract.  The contract referred to is called a policy.  Unlike casualty or life insurance which insures against the occurrence of future events, title insurance insures primarily against past events.  Title defects also threaten the security interest a mortgage lender holds in the property.  The policy not only insures the ownership of the property, but excepts from coverage in those matters to which said ownership is subject to.  These exceptions include matters like taxes, easements, and CC&Rs (Covenants, Conditions & Restrictions).  

There are two basic kinds of title insurance:  Owners coverage and Lenders (or mortgagee) protection.  An Owner’s policy serves to protect the new-owner’s equity and in So. Calif. this expense is normally borne by the seller.  Owner’s title insurance is ordinarily issued in the amount of the real estate purchase and may last forever, even after the insured has sold the property, depending on the type of owner’s policy.  Premiums for title insurance are based on the amount of liability assumed.  The liability on a transaction is usually determined by the sales price of the property.  The premium is a one-time charge and the policy will remain in effect for so long as the insured or their heirs retain their respective interest in the property.  One can also obtain an “inflation rider” with an owner’s policy so that as the value of the home goes up, so does the value of the owner’s title coverage. 

A Lender’s policy is for the protection of the Lender, against any loss or damage from defect or encumbrance that may affect the Lender’s enforcement of the deed of trust.  Just as they require fire insurance and other types of coverage as investor protection, lenders require mortgagee coverage to get a loan and the amount of coverage is generally in the amount of mortgage loan.  The amount of Lender’s title insurance necessarily decreases and eventually disappears as the loan is paid off.  If there’s a claim, the title insurer will fight on your behalf and if the claim is deemed valid, the policy will pay off the loan if necessary.

WHAT IT COVERS

Its purpose is to eliminate risk or loss caused by defects in title from the past.  It covers Fraud: false claims of ownership, forgeries, illegal acts of fiduciaries; Defective Documents:  deeds by minors or persons of unsound mind; Human Error: errors in copying, recording, or indexing, destruction of records; Liens and Other Rights: liens for unpaid property, income, inheritance, or estate taxes.  If you are not insured and you have to proceed against the seller for any defect in title or any breach of the purchase agreement, you yourself will have to pay the legal expenses prior to a judgment, and even if you do win a judgment, you might not be able to collect it, for you might not be able to locate the seller or he might not have the money to pay you.  You could be left holding worthless paper.  If on the other hand, you have a title insurance policy, it will pay your legal costs and provide you with coverage for any losses included in the policy.  Such insurance is essential to you as a property buyer.

TWO BASIC TYPES

There are two basic types of title coverage in California:  the CLTA (California Land Title Association) and ALTA (American Land Title Association).  Most lenders require the ALTA policy because it provides broader coverage for the lender than that usually afforded by the CLTA Standard Policy.  In addition to identifying the owner, the title company determines what and how various encumbrances, such as taxes, deeds of trust and easements affect the ownership of the property. 

TITLE SEARCH

The title company works to eliminate risks by performing a search of the public records.  An abstract of title is the chronological history of the property.  If the abstract of title cannot be obtained, a title report, which is a statement of the current condition of the title, may be used. Next, a title company researches the history of the property (commonly called the “chain of title”. These searches consist of public records, laws and court decisions pertaining to the property to determine the current recorded ownership, any recorded liens or encumbrances or any other matters of record which could affect the title to the property.

PRELIMS

When all of the examinations are complete, the data is compiled into a preliminary report also known as the prelim.  The prelim is a report prepared prior to issuing a policy of title insurance that contains the conditions under which the title company will issue a particular type of policy.  It lists in advance of purchase, title defects, liens and encumbrances which would be excepted as well as any exclusions from coverage.  There may also be restrictions which have been placed in a prior deed or contained in what are termed CC&Rs.  Third party interests are not uncommon and may include easements given by a prior owner which limit your use of the property.  When you buy property you may not wish to have these claims or restrictions on your property.  Thus, a prelim provided the opportunity to seek the removal of items referenced in the report which are objectionable to the buyer prior to purchase.  

WHAT IF YOU DON’T LIKE WHAT YOU SEE

Should the title to the property be “clouded” or have defects, you and your agents can work with the seller and the seller’s agents to clear the unwanted liens and encumbrances prior to taking title.

PRELIM vs. TITLE INSURANCE

A prelim is not the same as title insurance; it is an offer to insure.  It is not a report of a complete history of recorded documents relating to the property.  A preliminary report is a statement of terms and conditions of the offer to issue a title insurance policy, not a representation as to the condition of the title.

BINDERS AND TITLE INSURANCE COMMITMENTS

A binder is an agreement to issue insurance giving temporary coverage until such time as a formal policy is issued.  A title insurance commitment is a title insurer’s contractual obligation to insure title to real property once its stated requirements have been met. Commitments are divided into four sections.  The first, Schedule A, includes the Effective Date (this is the date the title report was pulled), a Definition of the Estate [the property is held either as Fee Simple (when the purchaser holds all right to the property)] or [Leasehold (when the purchaser holds limited rights for a fixed term)], Vesting (who owns the property and how title is held) Legal Description (the entire legal address, including tax ID or parcel number).  Schedule B, Part I covers taxes that are due and payable, mortgages and other lien holders and any other specific requirement to clear title.  Part II of Schedule B identifies standard exceptions, homestead or other marital rights of a spouse, and rights under eminent domain.

TIP

One thing to be mindful of is that a title insurance policy is issued to a particular insured person and is not transferable to another entity and others cannot claim the benefit of the policy.  Thus when one refinances it is incumbent that one purchase a new title insurance policy to protect the new lender from title risks such as delinquent property tax claims, that may have been recorded against one’s property since the previous title insurance policy was issued.  Be sure to ask the title insurance company if one may qualify for a refinance rate on a new policy.  Most firms will give a sizable rate reduction—up to 30 percent off their normal title insurance policy premium—if the policy was issued within five years of the new policy’s issue date. Also, on purchases, title insurers will usually charge less if they issue both the owner’s and the lender’s policies in a transaction at what is called the “concurrent” rate.

Copyright © 2020 Rod Haase.  All rights reserved.