Is owner’s title insurance worth the cost?

Forgo coverage only if you can stomach 'random' risks

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DEAR BENNY: We are getting ready to close on a home and there is a settlement fee of $685 for lender’s title insurance and $683 for owner’s title insurance. Must we pay both fees? –Phyllis

DEAR PHYLLIS: This is a question that has plagued homeowners for many years: "Why do I need to purchase owner’s title insurance, especially when I know that my seller has owned and lived in the house I am about to buy for more than 25 years?"

I am sympathetic to this issue, especially because many years ago I was successful in winning a class action on behalf of a couple who were required by their lender to purchase the owner’s coverage in addition to the lender’s title insurance.

First, you have to understand that if you want to get a mortgage from a commercial lender, you will have to obtain lender’s title insurance. However, in many states, the prevailing custom may require the seller — and not the buyer — to pick up this cost.

Additionally, many builders will agree to pick up the cost of the title insurance if you, as buyer, agree to use the builder’s preferred lender and the preferred settlement (escrow) attorney or company.

But owner’s insurance is (or should always be) optional.

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Oversimplified, title insurance insures a homebuyer — and a mortgage lender — against loss resulting from title defects, whether these defects are known or unknown at the time of the sale or the refinance. In the language of the title industry, the insurance covers both "on record" and "off record" problems.

For example:

  • A person in bankruptcy who has no authority to sign the deed conveys property to a third party.
  • A grandson forges his grandmother’s name to a deed and conveys her property to a third party, or to himself.
  • A mortgage (deed of trust) is properly recorded on the land records, but there is no legal description identifying the property that is subject to the mortgage. As a result, creditors are not put on notice of the existence of this mortgage lien, and may make another loan, which will not have first-trust priority.
  • A deed (or other legal document) is improperly recorded with the wrong legal description.

The list, unfortunately, can go on and on. There are numerous instances where title to real estate has been found to be defective — either based on substantive grounds or technical, legal procedural reasons (such as improper indexing, misfiling or failure to comply with local recording requirements).

It should also be understood that title insurance is quite different from, say, your homeowners or auto insurance policy. With the latter, they cover future incidents — a fire in your home or an accident in your car.

But with title insurance, the coverage is limited to risks (defects) that are already in existence at the time the policy is issued.

Thus, when your seller purchased the house several years ago, his title insurance policy covered him — and his lender — for all risks (defects) that existed at time he took title; the policy did not cover future defects.

Several years have now passed. You and the seller believe that title is clear, subject only to any mortgage that will be paid off at settlement. However, are you really sure there are no title problems affecting title? Did a mechanic place a mechanic’s lien against the property?

Did a creditor obtain a judgment against the seller and have that judgment recorded? Did the home get sold at a tax sale, without the seller’s knowledge? Did someone forge the seller’s name to a deed and sell the property to a third party?

Or did someone accidentally place a lien against your property (Lot 657) when they really meant to place the lien on Lot 567?

Strange as it may sound, these things do happen. Your lender wants assurances that should you not be able to make the monthly mortgage payment, and the lender has to foreclose on your property, that you have clear title.

Your new lender probably trusts you, as it is willing to make you a loan. However, since you cannot categorically advise the lender that you have clear title, the lender will insist that you obtain a title insurance policy in favor of the lender.

Here is a real, factual situation:

Subject A sold property to B in 1982. In 1985, B sold to C, who then sold to D in 1996. B, C and D all obtained owner’s title insurance. In 1997, D’s neighbor sued D, claiming adverse possession of a small strip of land abutting both properties.

Because adverse possession in Maryland requires a 20-year vesting period, D’s neighbor had to argue that its right began at least as early as 1977. Thus, after D was sued, D brought C into the suit. Needless to say, C filed a claim against B, who in turn brought A into the litigation.

In this litigation, B advised its title insurance carrier of the claim, and the title insurance company picked up the extensive legal fees that were involved in the lawsuit. B was protected, even though he sold his property many years before the lawsuit was brought. (Full disclosure: I represented B).

Every homeowner must, however, carefully read the insurance policy. There are numerous coverage exclusions contained in an owner’s policy, such as:

  • Taking of the property by a government (called eminent domain);
  • Defects, liens or adverse claims not known to the insurance company but known to the insured and not disclosed in writing to the company prior to inception of the policy; and
  • Any law restricting or relating to the use or occupancy of the property based on environmental protection.

All homeowners should discuss these issues with their attorney before going to closing (or refinancing).

So do you really need to buy the owner’s title insurance policy? That’s your call! There are risks, as remote as they may seem.

Title insurance is a complex issue. However, it does give some peace of mind to homeowners, especially since we live in a litigious society.

DEAR BENNY: Now and then I run across families who have added to their home a comfortable independent living space with a small kitchen for a grandparent. Eventually these grandparents die. What then happens to those nice add-ons? Do you know of any search site for these kinds of living quarters? –Thelma

DEAR THELMA: That is perhaps the most interesting question I have ever received, especially since I really never thought of that. No, I do not know of any websites that address your question.

However, my guess is that when the grandparents die (or move to a retirement complex) the children will either use the space for their own purposes or consider renting out that space.

DEAR BENNY: I bought a Freddie Mac foreclosure for cash and they gave me a special warranty deed instead of a warranty deed. Is this a problem in the future if I want to sell? –Joy

DEAR JOY: You need not worry, and if you also obtain owner’s title insurance (as discussed above) you have additional protection.

Oversimplified, there are three forms of deeds:

  • quitclaim: If I own the property, you get what I own;
  • a general warranty deed: Here, I am warranting (i.e., guaranteeing) that the title I am giving you is good going back to when my state was established, or even earlier; and
  • special warranty deed: Here, I warrant that title is good from the day I bought it, but I will not guarantee anything earlier.

I practice law in Maryland and Washington, D.C. From my experience, we use special warranty deeds only.

DEAR READERS: Was your loan involved in a foreclosure process between Jan. 1, 2009, and Dec. 31, 2010? If so, you may be eligible for an independent foreclosure review.

Two federal agencies, the Federal Reserve Board and the Office of the Comptroller of the Currency, have required that an independent review be made to determine if homeowners have been financially injured due to errors, misrepresentations or other deficiencies in the foreclosure process.

Although this review does not involve every mortgage lender, there is a lengthy list of lenders who are required to participate.

Eligible homeowners, present or former, should have been mailed a letter by the end of last year explaining the process. A form must be completed and filed no later than April 30, 2012.

If you believe you should be a part of this review, go to www.independentforeclosurereview.com. You will find a complete list of cooperating lenders, plus additional information to assist you.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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